'Zombie Economics' and Undersized Stimulus
CHARLESTON, W.Va. -- It's starting to look as if the United States, like Dante at the beginning of The Divine Comedy, is finding itself in a dark wood, having lost the true path.
Nearly four years after the worst economic decline since the Great Depression, we seem headed down a path that will only lead to more misery for ordinary Americans.
And, as another poem put it, it seems that these days the best lack all conviction while the worst are full of passionate intensity.
How did we get into this mess? Here's how it looks to me:
1. The Great Recession, which began in 2007, whacked the nation in 2008 and hit West Virginia in 2009, was facilitated by 30 years of deregulation, supply side economics, and the undermining of policies that promoted shared prosperity in the decades since World War II.
And, strange as it may seem, the ideas that led to it and which should have been permanently discredited are being asserted louder than ever.
I mean, think about it. If tax cuts paid for themselves, there would be no deficit. If they created jobs, there would be less unemployment. And if they were good for everybody, we wouldn't have unprecedented inequality. And if unregulated financial capitalism were the key to prosperity, we wouldn't have had a recession to start with.
No wonder such ideas have been referred to as "zombie economics." Instead of staying dead and buried where they belong, they keep slouching out of the graveyard and (metaphorically) eating brains.
2. The policy responses to the Great Recession were inadequate.
Congress passed the TARP program, aka the Wall Street bailout, with bipartisan support in 2008 on President Bush's watch. Most people hated it, including those who voted for it, since it seemed to reward the high rollers who got us into this mess to start with.
I was no fan either, although it's only fair to note that it wound up costing much less than expected and some economists, including Mark Zandi of Moody's Economy.com, credit it with helping to stop an even worse meltdown.
The second response, the American Recovery and Reinvestment Act, aka the stimulus, was passed early in 2009. Its goal was to boost the economy through public spending and investments to make up for a collapse in consumer demand and business investment, which in good times drive most of the economy.
It was a mixed bag, with some parts that really helped people and jolted the economy and some parts that weren't as effective. The most effective parts were things like bolstering unemployment insurance, food stamps, COBRA subsidies to cover insurance for people who got laid off, and fiscal aid to states. Other parts, such as tax cuts, fell under the not-so-much category.
The problem, as many economists argued then and now, was that it wasn't big enough and didn't place enough focus on direct job creation the way New Deal programs in the 1930s did. At the time, the Obama administration underestimated the recession, projecting unemployment to peak at 8 percent. Today, nearly four years from the start of the recession, a national unemployment rate of 8 percent sounds pretty good.
Love them or hate them, these policy responses probably did help end the recession -- or its first dip -- at least in the purely technical sense of helping GDP to stop falling. And millions of Americans would have been much worse off if nothing had been done. Now, as the Recovery Act trickles to a halt, we're likely to see more and more layoffs at the state and local level and more cuts to needed programs and services.
3. This inadequate policy response to the Great Recession gave opponents the chance to brand it as a failure with considerable success and shift the agenda to deficits and cutting programs.
Republicans rode a wave of public anger over slow job growth to victory in the 2010 congressional elections. But when the dust settled, all that supposed concern about jobs disappeared and dealing with debt and deficits became the order of the day.
As someone said, elections have consequences.
4. And there's the rub: while the country has a long-term debt problem, it has a more immediate jobs crisis, both of which will only get worse if austerity trumps job creation.
There are more than 25 million unemployed and under-employed Americans and recent Census reports show a growth in poverty rates. This means fewer people paying taxes and fewer paying customers for business. And that means either a very slow and weak recovery or else a double dip recession, both of which will make the long-term debt problem worse.
5. There are serious hypocrisies with the current federal deficit debate.
If the deficit hawks were really serious about the debt as such, there wouldn't be much of a problem. The obvious thing to do is increase revenue by eliminating the Bush tax cuts, a major driver of the deficit. There is also a major aversion to looking at other factors that drove up the deficit, such as the wars in Iraq and Afghanistan, other increases in military related spending, the industry-friendly prescription drug Medicare benefit, and rising health care costs.
There are realistic solutions to these deficits drivers: Raise revenues, end wars, cut Pentagon spending, redo the drug benefit law and implement health care reform. But don't count on the deficit hawks to support any of those.
6. Serious federal action on the jobs crisis will be an uphill struggle unless ordinary Americans make it a priority.
The American Jobs Act, as proposed by President Obama, has some provisions that would probably help things out, such as infrastructure investments, fiscal aid to states, and reforming unemployment insurance. Based on past experience, I expect less of a bang from its proposed tax cuts, but taken as a whole, it's a step forward.
However, any such legislation faces serious obstacles in Congress, while hard times continue for many Americans.
Which brings us back to Dante's dark woods where we began. In his case, it took divine intervention to make it out, the evidence for which in our case is underwhelming at the moment. I just hope we don't have to go through hell like he did before we get to a better place.
© 2011 Rick Wilson