The Tea Party and the U.S. Macro Economy

Putting finances and the world economy in order will require immediate sacrifices.

Economic authorities and policymakers of every country in the world are on the edge of their seats, waiting by the minute to see what will happen in the more advanced economies, particularly those of the United States and the eurozone, whose problems are so serious that any action they take will have an uncomfortable social cost. Considering this, it makes political sense to choose the less painful option and organize changes to take place over the mid to long term.

In short, the fact is that the PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) face problems including high public debt, fiscal debt, and high unemployment. Their levels of unemployment are double and triple that of Costa Rica, and in Spain’s case, where one in every five people able to work cannot find employment, the situation is tragic.

These countries got to where they are on their own. By taking advantage of the cheap credit available when they joined the European Union and by adopting the euro they consumed beyond their means. Today they require the assistance of the International Monetary Fund and other eurozone partners, particularly Germany, the strongest economy of the area and one that has acted with exemplary caution.

On the other side of the Atlantic, the United States shows macro indicators (e.g. fiscal deficit, public debt and unemployment rates) similar to those of the PIIGS and recent market trends. For a while, the U.S. gave themselves the benefit of the doubt and described their debt positively. However, others describe the situation more negatively, saying that if the indicators do not improve soon, the U.S. credit rating could be lowered.

Conscious of this, both major parties (Republicans and Democrats) have stiffly come to an agreement that allowed the debt ceiling to be raised in exchange for the adoption of concrete and credible measures to reduce the fiscal debt over a period of several years.

This political pulse played a key role in the movement known as the tea party. The group was essentially formed by a subset of Republicans who believed that recent economic problems in the U.S. are due to an excessive increase in public spending; they therefore believe that public spending must immediately and firmly be lowered.

Tea party members are highly critical and unwilling to let the deficit be reduced by raising taxes, as this would give a green light to greater government involvement and control. They detest more taxes because they believe that Americans already pay too much. Remember that the name was not chosen for nothing: TEA means “Taxed Enough Already.” It is certain that any method of restricting spending (public or private) is, in the short term, recessive; but to maintain runaway spending is more complicated because, as far as we know, we do not live in a world that will end tomorrow. When someone hits the spending limit on their credit card and is left with no means to make the monthly payments, it would be irresponsible for the card issuer to double the balance limit. The exact same idea should be implemented for countries.

Should we return to Keynesian economics?

Some, including Ottón Solís, believe that what the world needs today is more buying power and more credit cards with higher limits. This is also what the Keynesian doctrine recommends. But what Lord Keynes recommended was high spending, reversible in nature, during lean times, in exchange for lowering spending during times of prosperity. But many left wing politicians and intellectuals are in favor of a permanent increase, contrary to Keynes’ suggestion, in state initiated spending. If it were that easy to produce manna, there would not be any poor left in the world! [In such a system] where would we fit the divine mandate that followed mankind’s fall, “by the sweat of your brow you shall eat bread?”

According to some, the actual problem is that Germany and other ordered countries do not spend enough, the proof being that they save a fair amount and operate with a positive balance of payments.

They should imitate the Greeks and Portuguese and party 11 months out of the year. This is the same as saying that the problem in a rum factory is that there are not enough drunks in the world.

Restoring finances and the world economy will require immediate sacrifices. In the case of Greece and Portugal, for example, it will be necessary to sacrifice their creditors and be granted forgiveness for their large debt. Other countries must also serve as guarantors to make sure that the remaining debt cost is not too high. There is no other way for their economies to take off.

In the case of the U.S., our major trading partner, it will be necessary to convince the political and financial players that they will be able to lower the skyrocketing deficit and public debt in a reasonable time period of eight to 10 years.

To do this one needs to recover the path of growth. This will be possible by raising taxes, even though that will penalize entrepreneurship. However it will not be easy; many Americans have already begun to voice their opinions, and have even taken to shouting at Obama, “We are taxed enough already, Mr. President. No more taxes!”