TJP

Gross domestic product (GDP) is the summation of spending on consumption, investment, government, and net export. Net export is the difference between exports and imports. GDP, therefore, is the income earned by Americans. Clearly, a reduction in any of the components of GDP would reduce national income.

A reduction in national income diminishes aggregate demand and causes inventory accumulation and layoffs. Additionally, since consumption is a function of income (C = C₀ + cY), as income (Y) diminishes consumption also diminishes. Furthermore, when investors and businesses perceive diminished consumption they are less likely to hire. Thus, the effect of less spending is clearly less employment.

The Republicans, however, in a period of economic slump brought on by a Republican administration, are now arguing for less government spending and for maintaining the Bush tax cut for the wealthiest Americans.

Less government spending, however, will reduce income and employment. Additionally, maintaining the tax reduction for the wealthiest Americans increases the government deficit.

When economic systems are disrupted to the point where consumption and investment are insufficient to generate full unemployment, the government often becomes the employer of last resort. However, fiscal policy must be combined with monetary policy to expand the economy.

If the Republicans are arguing that fiscal policy by itself could not lead to full employment and that more aggressive monetary policy is necessary, then they would be on the right track. However, their argument is about contracting rather than expanding the economy.

Thus, neither the Democrats nor the Republicans have a viable solution for creating full employment. And, the main reason is because politicians and pundits, in general, misdiagnosed the true cause of the economic crisis, which was an income crisis created by the Federal Reserve (Fed) restricting the money supply from 2003 to the fourth quarter of 2008 combined with an exogenous energy shock (rising crude oil price).

And, even when the Fed increased excess reserves at the end of 2008, it was not for the benefit of the public and investors; it was to allow financial institutions to profit from funds deposited into their account at the Fed.

The bait and switch was paying interest on the funds that loaned by the Fed to the banks. Interest payment on reserves provided a disincentive to the banks for loaning excess reserves to the public. Thus, the expanding the excess reserves by the Fed was tantamount to a mirage; funds in banks' account at the Fed would not be made fully available to the public, and hence would not increase the money supply in circulation at a rate necessary to create full employment.

If the money supply is not available to the public and investors, demand for residential construction will not occur, funds for creating new business would not be readily available and hence the rate of new job creation would be low or non existent.

The problem with our government appears to be lack of administrative capacity; the inability of officials to anticipate and develop models that capture the nature of critical challenges and the sources of ineffectiveness. One reason is that many government officials view government as an impediment to economic development, therefore they do no place a premium on cultivating government or self capacity.

“Professor Howell, however, in “Reflections of the Chinese State,” indicates that the ideal-typical Asian developmental state has a political and policy elite committed to economic growth and transformation, with the power, authority and legitimacy to promote developmental agenda.

If Asian developmental states are promoting economic agendas and politicians in the United States are promoting only political agendas, the future does not bode well for the United States.

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