Are we Taking the Best Medicine?

If you look back on recent economic history, you see it is filled with a lot of countries which spent more then they could tax and experienced debt crisises. Lets see how they dealt with them.

The Washington Consensus

Over the past few decades, the best recipe for recovery when a government is embroiled in a debt crisis is to follow the following sets of guidelines issued by the IMF and the World Bank called the Washington Consensus, they are as follows:

Impose fiscal discipline
Reform taxation
Liberalize interest rates
Raise spending on health and education
Secure property rights
Privatize state run industries
Deregulate markets
Adopt a competitive exchange rate
Remove barriers to trade
Remove barriers to foreign direct investment

I would guess that if that is the best advice given from the IMF and the worlds best economists, over and over again, paired with a record of success, that the U.S. would surely want to take a dose of the best medicine.

But are we?

Impose Fiscal Discipline
Not even close, we have chosen to reflate via ZIRP on the monetary side and deficit spend on the fiscal side. In fact, Mark Thoma, Reagan/Bush advisor has come out and said, it is politically impossible to cut spending. The only way is to cut taxes and hope that reduction results in increased economic growth to shrink the debt to GDP ratio. So the number 1 recommendation is not possible in the U.S., it is impossible to administer such bitter medicine to ourselves.

Reform Taxation
This usually means to lower tax rates and promote growth, in spite of what the right claims I don’t think we can reduce tax receipts without risking a serious problem with the government flooding the market with government debt.

Liberalize Interest Rates
Market set not artificially set by the government. Well that means they go up and that squelches the economy and the U.S. is aiming for recovery, full employment, so it is ZIRP all the way.

Raise spending on health and education
The U.S. does spending a lot on these at least in gross dollar terms, we probably don’t get the benefits from these expenditures.

Secure Property Rights
Clearly other countries would nationalize foreign assets instead of servicing debts, in the U.S., when push comes to shove property rights are being skirted by various means.

Privatize State Run Industries
Well, this complicated, the financial industry had to be nationalized or supported by the U.S. government or it would have collapsed. This wasn’t done in any thought out manner it was carte blanche and inevitable included a lot of wasted tax payer dollars.

Deregulate Markets
The U.S. has gone a long way down this road. Many claim that government regulations are strangling businesses at all levels, it appears poor management of businesses has caused more harm to businesses then any regulation.

Adopt a Competitive Exchange Rate
The U.S. but China pegs to the USD and that surely needs to be changed.

Remove Barriers to Trade
I think this really applies to countries which were very protective of their industries. The massive amount of aid provided from the Fed and Treasury to the financial industry was basically a form of protectionism. Hundreds if not thousands of these institutions showed themselves to be poorly managed and would have gone bankrupt if we let the market choose the winners and losers. At this point in the cycle the field would be wide open for better suited firms to grab market share. Unfortunately, we have the same bad players in business.

Remove barriers to foreign direct investment
This would really apply to allowing foreign countries to exchange their holding of U.S. Government debt for other assets, such as whole companies. No wanted China to buy Unocal, so no one will want to see any other investments by China or petro dollars. This is a problem.


So, there are alot of angles to this, are we following the best medicine?