J. T. Young
If Washington isn’t humbled by last week’s market performance, it’s not paying attention. The day after Washington resolved its long debt-limit stalemate, the market was down — despite the administration’s contention that it was hurting the markets. The day after Congress passed the deal by a large margin and Obama signed it, the market fell even more. The real kicker was Thursday’s dramatic drop.
Even Friday’s initial rally (on what constitutes good news today: 117,000 new jobs in July and the unemployment rate’s 0.1 percent drop) reinforces this: Markets move on economic fundamentals, which mercifully remain largely beyond Washington’s control.
That’s sobering for politicians accustomed to taking credit for positive economic performances. Particularly so considering constraints on further Washington action. The debt-limit deal locked in a decade of lower spending — so Keynesians’ spending route is closed. Two rounds of “quantitative easing” in monetary policy and a stimulus bill in early 2009 seemingly had little positive affect.
Washington needs to step back from “governmental economics” to fundamental economics. Rather than layering on more spending (with Washington already spending roughly a quarter of America’s GDP, how much of a boost could it add?), it should “layer off” elsewhere.
Washington should look to its regulatory burden. Reducing that is a costless tax cut. It should also look to at least keeping the overall tax burden where it is — removing tax-hike anxiety at 2012’s end — and reform the tax code.
Finally, rather than propping up the prices of overvalued assets, government should allow markets to adjust.
With Washington’s prevailing split political personality, it’s hard to expect dramatic improvement before 2013.
— J. T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.