The Leaky Tire Economy

Perhaps you have had the problem that I recently had. I noticed that one of my tires was quite low, so I went to the gas station and for a dollar put air in the tire. About a month later, the same tire was nearly flat again, so I filled it again. Clearly there was some kind of slow leak in the tire. A couple of weeks later, the same thing happened. I could keep putting air in so the car would drive okay, but obviously I needed to change the tire. It was tempting to keep paying a dollar once every week or so, but my trips to put air in the tire would become more frequent and futile. I did not enjoy incurring the cost of replacing the tire, but it was a necessity.

That is our fiscal situation. It has been reported widely that the first quarter economic numbers were not impressive, and many economists blame this on the withdrawal of stimulus funding. They are right. The disappearance of this money does slow the economy down in the short term. However, this does not mean we need to keep putting up short term stimuli.

The massive stimulus measures didn't do much to create growth, and the backslide has continued. Clearly, the economy has some structural problems that go well beyond fiscal stimulus. Namely, the growth of the last decade was built largely on debt. We borrowed from the future, and now that is catching up to us.

In the long run, it is obvious that several structural changes will be necessary to the economy. Spending, particularly in the area of social insurance, will have to be curtailed. The government will probably need to raise revenue as well. In addition, for environmental and national security reasons, an increase in the gasoline tax may be appropriate as well. In the short run, none of these measure will help the economy. In the long run, they are vital.

Looking at short term stimulus is like putting air in a leaky tire. You can make things adequate for a while, but eventually you can't cover over the problem. Sometimes you just have to replace the tire, incur the hit, and improve your situation beyond the immediate horizon. We can keep trying stimulus, worsen our long term problems, and settle for sputtering and sporadic growth over the next decade. Or, we can take an economic hit now, suffer for a year or two, but lay the groundwork for strong growth going forward. The latter occurred in 1981-82 when Paul Volcker engineered a recession to rid the economy of inflation, and that's the kind of idea we need to think about now.

What are the odds elected officials will take short term economic pain? Take a wild guess.This is the rest of the post