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Friday, February 29, 2008

Populism and the economy

Fears of a recession or slowing economic growth have, apparently, been ringing over the air waves like some grim reaper for over a year. The federal reserve chairman, Ben Bernanke, cut the interest rate by half a percent between cessions and continued cutting after that. About the error of the cuts I will not discuss here, but instead I would like to put towards another interesting bit of news: tax cuts or tax stimulus packages or tax rebates or whatever they are called.
President Bush raised to the pulpit about a month ago with fire and brimstone about a tax cut needing to reach the people to stave off this horrid recession and return us on to the road of economic growth again. Quite a heroic charge; the people, through their president and public sentiment put full force upon the congress to act quickly to resolve the presidents request and bring money to their pockets, and, as could be expected, the congress railed and the tax rebate passed. All well and good the federal government saw an economic downturn, as reported by one of its agents, and responded in a Keynesian fashion. But what’s happening behind the scenes? what are the assumptions the assumptions the government is making?
Is the economy heading toward a recession, possibly, but that is not what interests this economist. Why did we possible go into a recession? And are our actions (at the federal level) hurting or helping? Why is an interesting question. Certainly there have been problems from the sub-prime mortgage mess but that is such a small part of the economy. What is really happening. I far as I can tell fear and inflation. The “credit crunch”, as reported on Fox and CNN, is not causing the economy to collapse as they are predicting; they, the major news media, are causing the recession. I think it is a simple premise. If one is surrounded by the news media stating over and over that the country is plugging into recession I believe that this mentality simply becomes part of your thought process. You are told a recession is occurring and therefore you cut spending to survive through the recession. The recession then the news media was predicting now comes to fruition, but they claim it was because of this or that.
This recession rhetoric, as far as I can see, actually causes the recession. But now lets look at the actions and response of the government towards the “impending doom” now upon us. The feds actions of lower interest rates pushed more money into the economy. The federal government then passed a tax credit through adding further money to the market. The federal reserve, by lowering interest rates so quickly and so low has little more room to maneuver. Also by all of this money entering into the market inflationary pressure could force the federal reserve to then raise interest rates. But more to the point, the federal government actions have the problem of coming within the next 6 months possible right as the economy is coming around from the federal reserve action. This could further lead to inflationary pressure and cause the federal reserve to increase interest rates even more.
This is what I draw from the situation, Populism isn’t the necessarily the correct policy making device.

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