The first job for the new Congress is rapid enactment of a major economic reconstruction program. Bold action is required by the potential depth of this crisis and the lessons of last year’s inequitable and ineffective “stimulus package.”
Economic events are not like solar eclipses. They are affected by policy choices as well as by mercurial swings in consumer and business sentiment. Nonetheless, there are ample reasons to infer the likelihood of a very deep recession that will likely induce unemployment in excess of the early Reagan era double-digit figure.
The economy is in the midst of the collapse of “history’s greatest asset bubble.” The housing industry, long a major driver of the economy, is in major retrenchment. Declining housing values also leave many consumers feeling less wealthy. States are engaged in draconian job cuts. In such a climate business is reluctant to invest even when banks have money to lend and interest rates have reached historic lows.
Reluctance to spend now threatens the US economy with literal deflation. Deflation in turn leads to further consumer retrenchment. Consumer debt becomes more burdensome and even those not disabled by debt hold off on shopping in the expectation that prices will fall further.
To break this vicious circle the Federal Government must become the spender of last resort. The greatest risk today lies not in government action but rather in slow and overly restrained action. Conventional wisdom recommends a package of $500-700 billion. Nonetheless, given the shortfall in consumer and investment spending, the need, as American Prospect editor Robert Kuttner suggests, is likely to be closer to $1 trillion a year for the next two years. If Congress takes forever to enact a modest package, more workers will face layoffs, confidence will decline further, more homes and factories will deteriorate, and skills erode.
One must anticipate the usual objections: fears of escalating national debt, an overheating economy, an eventual spike in interest rates and a precipitous flight from the dollar. Each of these objections is vastly overblown.
The reluctance of FDR—who distrusted Keynes and never fully endorsed deficit spending—to move boldly enough prolonged the Depression. Only deficits on a scale of close to 30% of GNP during WWII pulled this economy out of the Depression.
Inflation worries are premature. In any case government can address inflation far more easily than deflation. Once a recovery gains steam, Congress can and should raise taxes on those who have benefited from Bush-era preferential treatment and the Paulson bailout. Even if Congress fails to act, the Fed can raise interest rates to cool inflation. International financial markets correctly trust the Fed’s anti-inflation credentials.
There are fewer risks of inflation or a precipitous dollar decline if the US economy regains its soundness and productivity. Economic reconstruction should emphasize revenue sharing for states, infrastructure spending, improved unemployment compensation, and increased food stamp and energy assistance.
Many of the most severe state budget cuts both have damaged poor and working-class citizens. Grants to state governments for immediate restoration of such programs will employ citizens who will spend it quickly. Much of their spending, for food and insulation as well as outlays for domestic infrastructure will in turn create more jobs, reduce energy costs, and take some strain off the balance of trade deficit.
Congress should resist calls for more capital gains tax reductions. Capital gains tax favoritism has rewarded the speculative excesses—including the raft of complex and deceptive derivatives— that threaten this economy.
Some federal programs will not be optimally efficient, but almost anything is better than leaving workers and plants idle.
John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@prexar.com.
From The Progressive Populist, Feb. 1, 2009
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