Thursday, May 31, 2007

Cleaning up George’s Mess—Part 6: The Economy

In this part of the Harper’s Magazine article, “Undoing Bush,” Dean Baker tells us that one of George’s “economic calamities” isn’t entirely his fault. He inherited an overvalued dollar, which has made American goods uncompetitive abroad, and hasn’t done nearly enough to solve the problem which has led to the growth in the trade deficit and to losses of manufacturing jobs. Baker points to the housing bubble as another “economic calamity,” owing in part to historically low interest rates.

How can Bush’s successor solve these problems? Unfortunately, a slow fix will only make the problem worse as new home buyers add their expectations to the bubble. The same is true for fixing the value of the dollar which, if it were to decline slowly, would keep interest rates (which have moved higher, exacerbating the housing problem) too high. In the case of housing, Baker suggests both talking the bubble down (warning new buyers that at unrealistic prices their investments are risky) and regulating risky mortgage products. (It isn’t clear that these steps will be necessary, given what is already happening in the housing market.) In the case of the dollar, a public commitment to seeking a lower value by a specific date will prompt the market to follow suit.

Baker also believes that the Federal Reserve Board should be forced to concern themselves with more than just inflation, that they should take steps to avoid the formation of future bubbles. Lastly, the Bush tax cuts need to be rolled back. That, combined with an end to the war expenses, will go a long way toward eliminating deficits and relieving that pressure on the economy.

Something Baker doesn't talk about is the growing gap between rich and poor, and the risks that the inequitible health care system puts on the poor. With downward pressure on wages, this is another vulnerable aspect of the economy the next President will have to address.

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