Short Term Pain Is Better Than Long Term Bust

The best way out of an economic crisis and national debt is long-lasting economic growth. With more economic growth, tax revenues increase since people are making more money. Demands for government entitlements go down, so government spending goes down. The combination of higher tax revenues (without even necessitating higher rates) and less expenses allows the deficit to contract.

Also, since GDP is growing, the debt/GDP is less, so bond investors have less to worry about in terms of interest payments.

The Obama administration seems to cavalierly assume we will have roaring economic growth in 2010 and 2011, so roaring, that the government can also raise taxes on businesses and we will still have 3% growth.

Please.

Never before has increased taxes, more government beaurocracies, and increased governmental regulation produced economic growth. The best we can hope for is European-style growth of 0-2% a year. I may add that if our economy is modeled after a Western European social welfare state, our average GDP per capita still has about 20-25% to drop, meaning some sort of lasting recession or weakened dollar.

If Obama's economic prescription is our future, we have to expect this sort of scenario. The administration's proposals and economic ideas have been tried before and we see the results in Japan and Western Europe. We will ultimately end up in the same place.

The thing is....how do we get there? If it's a slow bleed, as it has been over 2009, it will happen. Our economy will be meager for the forseeable future, but nothing downright terrible. We can expect the S&P 500 to not reach 1500 again until 2020. We can expect a lower quality of life for all, at least compared to what we could have been.

However, if it is violent change downwards, then the public will likely wake up and rally against these changes. Furthremore, if the way we get there is through inflation, which effectively will wipe away a lot of the government debt, it will give us a cleaner state with which to start.

By having 10% inflation or so for a few years, not CPI inflation mind you but including energy/food, people will begin to see the effects of these policies quicker. I believe this sort of inflation would occur through a weakened dollar, so wages would remain static for most, services would cost about the same, but costs for commodity items, like food and oil, would rocket higher. We will all be a bit poorer, but at least we will see what is happening.

The public will rally against the big government spending and will demand massive decreases in government beaucracy. This will pave the way for tax cuts and more economic growth in the future.

In short, if the pain is slow, it will continue. If it is swift, then the public will rally against the failed policies, and we do indeed have hope for remaining the economic powerhouse of the world.