Government reaction to the S&P downgrade of US debt took a negative psychological factor and made it even worse. It did this by showing just how far governments were from addressing their problems.
The Obama Administration blamed the messenger and suggested it wants to spend even more money in an effort to create jobs. In Europe, the head of the European Central Bank (ECB) said it would do “everything possible” to prevent a crisis. He then explained how the ECB’s first step would be to buy large amounts of Europe’s bad debt.
These are the worst possible reactions to current problems. They simply indicate the inmates are running the asylum and S&P’s move was the right one.
What governments should do is solve their basic problems. For the US the solution involves repealing Dodd-Frank, repealing Obamacare and furloughing all those at the EPA until further notice. These three moves would cut business expenses by $500 billion a year, enough to support 7 million new full-time jobs. Just for good measure, the Administration should also announce plans to reform tax policy so no one pays a tax rate in excess of 25 percent. It should also announce plans to reduce spending on all nonessential federal programs by at least 50 percent.
Simply announcing these moves would send stock prices rocketing higher. The economy would soon soar and the current crisis atmosphere would come to an end.
Until there is some recognition of the underlying problems and the means to solve them, the crisis atmosphere is likely to continue. I’m inclined to remain at a maximum defensive position with respect to stocks.
Robert Genetski ([email protected]) is an economist, principal at ClassicalPrinciples.com, and a policy adviser to The Heartland Institute.