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Campaign Rhetoric to Face Reality

12:00 AM, Oct 20, 2012 • By IRWIN M. STELZER
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Then there are the real world’s reactions to the plans of the candidates. Obama says he is willing to go over the fiscal cliff into recession, although what good that would do for the middle class for which he purports to bleed is unclear, as is the reaction of financial markets to this news of an increase in revenue to the Treasury (lower deficits) and decreased incentives for business investment and therefor slower growth (higher deficits). Obama’s proof of his credentials as a genuine class warrior would have a worse effect on the economy than Romney’s plan to take an ax to spending. But if Europe’s experience is any guide, the Republican candidate would do better to use a scalpel. In Europe, spending cuts are part of what is called “austerity,” which is producing a downward spiral of higher deficits, more austerity and taxes, still higher deficits and on until the streets fill with the disgruntled and politicians decide that we are all Keynesians now. At that point the bond vigilantes would saddle up, drive up interest rates on Uncle Sam’s IOUs, and make a hash of both candidate’s plans. That will be a consequential “event,” and also provide a test of whether the governing mechanisms put in place by our Founding Fathers are more supple and responsive to economic crisis than those crafted by the bureaucrats and politicians who created the eurozone. Good for future Ph.D. candidates, not so good for the rest of us.

Add to the mix an Israeli decision to take the small matter of its survival into its own hands, and not depend on the kindness of strangers as it once did, with calamitous results. Whether or not the Iranians succeed in closing the Strait of Hormuz, a large quantity of oil will be withdrawn from world supply in the resulting chaos in Iran, and until that loss can be made up—the Saudis will give it a good try—we can expect that our economy, growing slowly if at all, will feel the impact of higher prices, especially since gasoline prices are starting from a much higher level than existed when prior oil shocks hit, and most consumers’ incomes are hardly buoyant.

All in all, campaign promises might mean little, and flexibility and the ability to fashion compromises mean a great deal once reality gets its teeth into the next president of the United States.

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