James Pethokoukis

Politics and policy from inside Washington

Breaking the U.S. economy’s viscious cycle …

June 26, 2009

From the great David Goldman:

The negative multiplier occasioned by the retrenching of consumers (lower spending, more unemployment, lower incomes, lower spending in a vicious cycle) is stronger than the Keynesian multiplier from government spending (more government boondoggles for construction unions, more spending).

There are ways to break the vicious cycle:

1) encourage entrepreneurs to dive in and take risks

2) encourage foreign investors to put more money into the US economy

3) attract skilled and talented immigrants who bring in human capital.

The trouble is that entrepreneurs at this stage of the cycle appear as vultures, speculating in human misery, buying foreclosed houses and distressed bonds. … Alternative number two would work if the US government allowed the Chinese and others to come in as partners and buy significant parts of the US economy at discounted prices. That’s not going to happen, either, for the same stupid political reasons. … Alternative number three isn’t even on the agenda.

That means we are stuck in a vicious cycle in which the recession lasts indefinitely, equities chop sideways forever, and the Obama administration sets the stage for a potential dollar collapse some time down the road.

My spin:  If you are looking for a second “stimulus package,” one that would address these points, particularly #1 would be helpful. A pro-entrepreneur package …

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