"In short, it is not difficult to find ways to boost the economy — the problem is that politics prevent them from being discussed. Instead we get silliness about taxes and regulation."

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No: Gripes are political posturing unbased in reality
By Dean Baker, November 23, 2014

In the last couple of months we have seen the country whipped up into near hysteria over the virtually nonexistent threat of Ebola.

While the only people who contracted the disease in this country were those who treated a man who died of the disease, tens of millions of people became convinced they were in danger on airplanes and public buses and even routine visits to the supermarket.

Politicians have sought to exploit the same sort of fears with their rants about regulations and high taxes sinking the economy. These complaints have as much foundation in reality as the Ebola threat.

The regulation screed usually focuses on the number of pages in bills like the Affordable Care Act and the Dodd-Frank financial reform bill. While lengthy bills are unfortunate from the standpoint of the trees cut down for the paper, the length bears no relationship to the amount of regulation.

To take one example: the Volcker Rule, which prohibits banks with government-insured deposits from engaging in risky speculation. It ended up more than three times its original length as the industry carved out an array of exceptions. The greater length was associated with less regulation, not more.

Dodd-Frank was about curbing the sorts of abuses that gave us the financial crisis. Is the argument that we need corrupt banks to foster growth?

The screams over the ACA are equally misguided. The rules have little impact on large firms, the vast majority of which already offered insurance that met ACA requirements. It might have been expected to affect mid-sized firms that did not previously offer insurance, but none of the complainers have yet presented any evidence that these mid-sized firms have been especially hard-hit in the last few years.

The tax complaints require some serious amnesia. Tax rates were higher for most people in the 1990s, when we saw the strongest growth in almost three decades. We then lowered taxes in 2001 and saw a weak recovery followed by the collapse in 2008.

The explanation for the continuing weakness is not a surprise to those of us who warned of the housing bubble before the crisis. The bubble had been driving the economy both directly through its impact on construction and indirectly through the impact that $8 trillion of housing bubble wealth had on consumption. When the bubble burst, the economy lost its driving force.

The building boom of the bubble years led to enormous overbuilding of housing. When the bubble burst, construction didn’t just fall back to normal. It fell to the lowest levels in 50 years, costing the economy more than four percentage points of GDP, amounting to $700 billion annually in lost demand. The loss of housing wealth meant that consumption fell back to more normal levels.

While both housing and construction are up from their low points in the recession, they are not going to return to bubble peaks, at least not without another bubble. This means that the economy continues to have a huge shortfall in demand. Cutting taxes and reducing regulation will not magically fill this gap in demand.

There are essentially two ways to increase demand. One is directly through more government spending. This is currently taboo in Washington since we are all supposed to hate budget deficits.

The other is by reducing the trade deficit. The way to reduce the trade deficit is to make U.S. goods more competitive with a lower-valued dollar. Talk of a lower dollar is also taboo in political circles.

In short, it is not difficult to find ways to boost the economy — the problem is that politics prevent them from being discussed. Instead we get silliness about taxes and regulation.
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