http://www.pennlive.com/editorials/index.ssf/2011/08/is_politics_pushing_us_into_an.html

Is politics pushing us into another recession?

By Hamid Zangeneh

The new slash and burn paradigm of American politics is going to be costly for the U.S. economy, and time is running out to put an end to the madness. The recent drama of our nation’s debt/deficit “crisis” is a prime example of politics pushing our economy to the brink of economic disaster.

Mike Keefe of The Denver Post

The manufactured “crisis” is mired in many economic misconceptions fueled by the political posturing of our elected officials. While we expected rivalry among Republicans, tea party Republicans, and Democrats leading up to the presidential election, it’s doubtful that any of us were prepared to see an all-out war that could drive the U.S. into deeper recession. The recession that we are struggling to come out of today is too fragile to withstand another blow created by the intransigence of politicians. Unfortunately, the bill passed by Congress and signed by President Obama is just one more quick fix. While the legislation does help us avoid default today, it does not adhere to sound economic principles that will help sustain our country’s economy tomorrow.
To follow such principles, politicians need to understand the economic repercussions of “spending cuts” and “taxing the rich” and stop simply using them as buzzwords to rally support within their parties for or against a misguided plan.
The economy is comprised of what we privately spend, what government spends, what businesses spend and what we sell to foreigners minus what we buy from foreigners. If any of these four participants in the market spends less, the economy shrinks.

In other words, we cannot cut our spending on our way to prosperity; we cannot cut our deficit on our way to prosperity; and we cannot shrink our debt on our way to prosperity. A penny saved is not a penny earned when talking about the U.S. economy unless we expect that the saved penny is borrowed and spent by someone else immediately, which is not a certainty.

Contrary to what our politicians say, when the government cuts spending, the economy will shrink — not expand — unless you or businesses or foreigners step up and fill the gap left by a reduction in government spending more than dollar for dollar. Any cut in government spending results in smaller government/economy and, if the cut is large enough, a recession.
So, what’s the solution? The most prudent policy is not to shrink the government or raise revenues in the next 12 to 18 months until, hopefully, the economy gets out of the current hole. Unfortunately, the new legislation is designed to cut, cut, cut, which will only shrink, shrink, shrink the economy.
The new agreement initially cuts spending by only $22 billion, which is negligible for the U.S. government budget. And most of the cuts, as they are currently designed, are in years to come when the economy will hopefully be at a higher level of growth and able to sustain significant blows. If pressed to find the positive in the deal, this is it.
If we do not come up with new expansionary measures for the economy in the short run, we will have recessionary growth similar to Japan in the ¤’90s.
To spur consumer and business spending right now, the government must undertake real “shovel-ready” grand projects on the scale of the Work Projects Administration in 1939. It means giving an investment tax credit to businesses to start new projects and jobs, not wasteful general tax cuts similar to the $350 billion in the 2009 stimulus package.
We cannot expect our elected officials to develop real solutions to grow our economy if they continue to cling for dear life to their obsolete ideologies. We, as voters, need to send them the message to stop seeking solutions routed in politics and start seeking ones routed in economics.
Hamid Zangeneh is professor and head of the economics department at Widener University in Chester.