Realpolitik and Economic Policy

In thinking about the debate about the correct government policy to follow in an economic environment characterized by high unemployment, large budget deficits, slow growth, and economic and financial problems in the Eurozone which, if not adequately addressed by European officials, could aggravate problems in the U.S., the school of international relations known as “Realpolitik” came to mind. As a way of conducting international relations based on a country’s national interests, Realpolitik can be viewed as cynical, but an important point is that, in order to conduct a foreign policy based on its tenets, one must correctly understand what the national interest is.

I wonder if those who are currently advocating shrinking government and, even in some cases, reducing taxes, correctly understand where their interest lie. After all, a reduction in joblessness and a return of economic growth as quickly as possible will benefit everyone, including the rich and businesses.

There are some who believe that any attempt to increase economic growth through budget stimulus is doomed to failure, because of the hangover the economy will suffer when the stimulus comes to an end. According to this view, there seems nothing the government can do but to shrink and let the private market solve the problem. The trouble with this view is that it may be a very long wait before the economy resumes adequate growth to reduce unemployment, and the wait may prove to be politically intolerable.

Also, those who hold this view need to address why the deficit spending accompanying World War II., which resulted in a public debt in excess of GDP, put an end to the Depression once and for all, and the debt as a percentage of GDP fell markedly in the years after the war. In other words, sustained stimulus can work.

Perhaps those who oppose further stimulus know this but either believe that a sustained federal effort is not politically possible or fear that a multi-year spending program not the result of a war would be difficult to end. If that is what they believe, then there could be a healthy debate about the issue and what the government should do. The prerequisite is that thoughtful conservatives admit that this is what they think.

For liberals, the stimulus enacted under the Obama Administration demonstrates that to get out of the current slump there needs to be larger effort of longer duration with less reliance on tax cuts. The conservative view, which may be correct, is that this is not politically possible, though the political difficulty may in fact be due to conservatives. They may also be right that federal spending may be difficult to stop, though infrastructure projects do have obvious termination points.

Conservatives, though, may need to reassess their contingency plans if the economy worsens or the current slump shows no sign of ending. It may not be in their interest, correctly understood, nor in the national interest for the government to be seen standing idly by while the economy struggles.