Tuesday, October 19, 2010

Political Upheaval

Those of you who know me know that I am not a fan of politics. This is mainly because of two reasons: 1) Politics is full of bitter arguing and personal, ad hominem attacks. 2) Our largely bipartisan system does not adequately represent my opinions or values. I cannot vote for a candidate who does because in order to be elected he must receive funding from the Party who must first be assured of his Partisan support and neither major party fully represents my values.

However, it is our duty to be active in politics and exercise our right to vote to bring about the common good not just for our nation or state, but for all people around the world. So, in spirit of the coming elections (just 2 weeks away), I thought I would write a post on economic issues, which are the focus of these midterm elections.

It is well known that Democrats favor government intervention and Republicans don't. Catholic Social Teaching tells us to adhere to the principle of subsidiarity, which says that larger institutions should only operate in the areas where smaller institutions are unable or unwilling. (The federal government should only take care of what states can't, which should only take care of what counties, cities, and families cannot).

Democrats generally feel that lower institutions don't do their job, the federal government can, and so the federal government should. Republicans feel that the federal government is very inefficient at best and only messes things up for the more efficient individuals and smaller governments. Neither view here is necessarily inconsistent with the principle of subsidiarity.

In the economy, Democrats see the probability of widespread market failure or the failure of capitalism to bring about the optimal social good because markets are imperfect and externalities are more pervasive. They believe unemployment and income inequality to be the worst economic evils. They see the possibility of improvement using government policy to cure these problems. They also see taxes as having smaller deadweight losses.

Republicans believe the government only makes things worse. Markets, in general, work well at allocating efficiently, and governments only distort the process. They see minor externalities and market failures that some government may help, but not cure. Republicans generally believe that unemployment isn't good, but is a part of capitalism. If the government stays out, the economy will soon get back to full employment. Income inequality is more a result of hard work and ingenuity and is a necessary part of capitalism, not an evil. They are more concerned with the ill effects of taxes, government deficits, and inflation.

In economics theories, Democrats are more in-line with Keynes, and Republicans are more in-line with New-Classical approaches. Though, there is a lot of wiggle room here.

For more on how the Left and Right differ in economics

Recently, Republicans and Democrats together attempted to save the economy in Bush's Stimulus Bill of 2008. Obama and the Democrats then furthered this stimulus with a much larger one in 2009 which the Republicans ferociously opposed. Republicans continuously state that the stimulus was unsuccessful and are very concerned with the growing deficit. Left economists argue it wasn't nearly enough and that government stimulus wasn't even really tried. Republicans, in general, weren't concerned with growing spending and deficits while Bush was in office, but are now that Obama and the Democrats are running the show.

Evidence has shown that spending didn't increase at a greater rate than it was already increasing before the recession. The increase in deficits is due mainly to a drop in tax revenue because of lower output and incomes. Monetary policy hasn't been able to do much because the interest rate is as low as it can go.

Looking ahead, we are facing growing and historically large deficits in the midst of high unemployment, threatening deflation, and extremely limited monetary policy effectiveness.

Republicans will almost certainly regain control of Congress and will move toward austerity by decreasing spending. This will certainly retract the economy and could cause higher unemployment, but their hope is that by reducing the deficit, businesses will re-enter the market by increasing their spending again. If they don't, then incomes will decline again, causing government revenues to decline which perpetuates the problem of the deficits, and this process will continue for a long time unless businesses pick up spending. If they also lower taxes and businesses and/or households don't spend it, then this will only exacerbate the problem.

Democrats have mostly conceded that their stimulus failed and see the need to decrease the deficits, but have not really offered an alternative to the Republicans. They are more likely to raise taxes in order to achieve lower deficits than they are to decrease spending.

So who do you vote for? That is not an easy answer. For one, you cannot consider economic policies alone, the common good must be considered as a whole. For two, it may not matter in the realm of economics, because it appears that we are headed for austerity either way. It will be interesting to see the outcome.

In the meantime, it is very important to continue to strive for the common good by first and foremost preaching the Gospel at all times. St. Luke reminds us that our material goods are merely means to a greater end and are potentially a great distraction from this end. No matter our income or material condition, we can always live as faithful disciples. We can and must strive for the material welfare of the common good through charity and political participation, but our priority and focus must always be on the spiritual welfare of the common good.

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