Fareed Zakaria: More Arithmetic Problems at the Washington Post

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Monday, 29 November 2010 06:01

Where is Michelle Rhee when we need her? That's what readers of Fareed Zakaria's column on the economy must have been asking.

Mr. Zakaria comments that the stimulus was helpful, but then says that it is not the right medicine to boost the economy. He tells readers:

"In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement."

This strikes me as the common-sense view of economics. We can push and pull fiscal and monetary policy all we want, but long-term growth depends on these broader and deeper factors.

Ironically, one policymaker who seemed to understand this was Barack Obama. Twelve weeks into his presidency he gave a speech at Georgetown University making the case for the long-term rebuilding of the American economy, away from an overreliance on debt and consumption and toward productive investment. Obama should have given 25 versions of that speech by now and relentlessly offered policies that expand on its basic focus on long-term growth."

Okay, Zakaria's wants more investment. That sounds good, but how much more does he think that President Obama's 25 versions of his Georgetown speech would prompt. In 2007, before the recession, investment in equipment and software were slightly less than 8 percent of GDP.

Private sector demand has fallen by close to 9 percent of GDP as a result of the collapse of the bubbles in residential and non-residential real estate. Roughly half of this decline is due to the end of the bubble driven construction booms and the other half is due to the loss of consumption that followed the destruction of close to $8 trillion of housing bubble wealth.

Does Mr. Zakaria really think that investment will double as a share of GDP in an environment where demand has collapsed. Mr. Obama can be a great speaker, but I think this one would exceed even his capabilities.

If only the people who wrote about economic policy for major news outlets had to know 3rd grade arithmetic we could be saved from having to deal with such arguments.