Friday, December 3, 2010

Will the Economy Have to Get Worse Before It Gets Better?

Assume the following facts are true. First, the economy is not going to just get better on its own, at least not in a reasonable time period. Second, even if the economy worsens to a large degree over time, there will not be sufficient political support to do anything about the economy as long as that worsening is gradual. Finally, if unemployment simply stays around 10%, there will be no political support for action to change the situation, especially since the pain of unemployment is concentrated among lower income workers who do not vote.

If these facts are true, it follows that Democrats should not worry too much about the expiration of tax cuts for everyone or whether unemployment benefits are extended. Going back to the point of the previous post, in fact such events might even be positive, in that it would create pressure for action to actually change the situation. Our political system is currently in a dysfunctional state where there is insufficient pressure for action in the form of fiscal stimulus to get the economy going again. What is needed is a shock to the system; as long as unemployment remains steady and primarily impacts lower income workers (along with a few unlucky others) perpetually persistent high unemployment will seem to be politically acceptable.

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