A Double Dip Recession for 2012?

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Robert Kuttner, co-founder and co-editor of The American Prospect magazine recently (4/24/11) published a post in the Huffington Post under this title.  In my view, as I will explain, Kuttner’s analysis falls short.

Noting that “economists are painting a pretty bleak picture of the economic outlook between now and the November 2012 election,” he addresses whether the poor economy will hurt President Obama’s re-election chances or whether voters will blame “the Party of No.”  That, he suggests, “partly depends on what kind of campaign Obama runs and partly on the Republicans.”  He correctly paints a rather bleak picture of the prospect for economic stimulation through federal monetary and fiscal policy before the election:

“The Federal Reserve has been buying up lots of bonds to keep interest rates very low. The Fed disguises what it’s doing with the antiseptic and mystifying term, “quantitative easing,” or QE for short. This is the second time the central bank has tried this trick, hence the coy nickname, QE 2. The problem is that very low interest rates only take you so far in a depressed economy.

“For the most part the Fed’s policy has been good for large banks and good for the stock market. Ordinary borrowers, businesses and homebuyers have trouble getting credit.  But other factors are starting to limit the effectiveness of very low interest rates.     For one, the very low rates in the US are depressing confidence in the dollar. That means we start importing inflation. For another, rising commodity prices worldwide — partly the result of the Fed’s policy, partly due to rising demand in India and China — means increasing prices of consumer goods at home.

“Five-dollar-a-gallon gas is not good for President Obama. Nor is the practice of food processing companies shrinking the size of standard packages to disguise price increases. And in the one part of the economy that might benefit from a little inflation, low interest rates have not worked to levitate depressed housing values.

“The time-tested remedy, when cheap money ceases working, is expansive fiscal policy — government deficits and public investment. Now there’s an idea.

“Oops.  Forget it.

“There is, of course, huge pressure from the nation’s opinion elites to cut the deficit, long before the economy is out of the woods. It comes from four potent sources.  Wall Street deficit hawks have been banging these drums for three decades, even during the late 1990s when the budget was in surplus.

“The elite media buys this story, hook, line, and sinker. Big deficits are seen as proof of partisan gridlock and government irresponsibility. The six bipartisan horsemen of budget apocalypse, Senators Warner, Chambliss et. al. are widely depicted as fiscal heroes. The pundits seem to forget where these deficits came from.

Republicans since Ronald Reagan have pursued a strategy of cutting taxes and then expressing shock at the ensuing deficit and demanding program cuts accordingly. We were already having historically high deficits when the recession began, because of the Bush tax cuts of 2001 and 2003.  [Emphasis added].  Today’s even more extreme Republicans would cut taxes further, slash outlays to their lowest level since before FDR, invoking the gods of deficit reduction.

“President Obama, for his part, has fanned these flames with his appointment of the Bowles-Simpson commission, and his premature shift, as early as the 2010 State of the Union Address, from the theme of economic recovery and job creation to that of deficit reduction. His recent address at George Washington University was terrific at holding the line on Medicare, Medicaid and Social Security, but bought into the premise that we need deficit reduction more than we need job creation.

“Why is Obama pursuing this strategy? Partly because his conservative economic advisers buy it, and partly because his political advisers look at polls that tell them voters care about deficits, especially political independents. But that current of public opinion exists only because opinion leaders — including Obama himself — have made such a fetish of deficits.

“There is a whole politics that just isn’t on the table: massive public investment to create jobs and growth — which then increase revenues and bring down the deficit. The political scientist Walter Dean Burnham refers to this sort of dynamic as ‘a politics of excluded of alternatives.’

“But wait, isn’t the deficit a real problem? Yes, and no. Eventually, deficits at the 2011 level are not sustainable. However, the current accumulated debt held by the public of about 60 percent of GDP is not dire.

“We could have two or three years of bigger deficits, very major public investment, let the debt ratio peak at 100% of GDP; and then stronger recovery, lower unemployment, and higher taxes on the wealthy would bring the debt ratio slowly down, as occurred after WW II.

“Japan’s debt ratio, for comparative purposes, is over 200 % of GDP– and Japan is increasing government outlay to repair the damage of the earthquake and tsunami. Britain’s, after World War II, was over 250 percent, and Britain went on to enjoy a postwar recovery.  Why can’t we have massive public reparation with war or natural disaster? Because politicians lack the vision and nerve.

“Austerity will only slow down the recovery. The idea that a steeper path to deficit reduction will somehow restore business confidence and thus more than offset the hit to purchasing power is just blarney. And with both parties committed to some version of austerity, we could easily have the worst of both worlds — increasing inflation coupled with persistent stagnation.”

However much the Republicans are at fault–for creating the financial collapse, blocking a stronger stimulus in 2009, and looting the Treasury with tax cuts for the rich, causing much of the deficit problem in the first place [emphasis added] — an incumbent president tends to take the blame for hard economic times. Obama’s talk of having a kinder, gentler brand of deficit reduction is no match for rising fuel and food prices and persistent worries about basic economic security.

“Can the president shift to a rhetoric and policy that emphasizes the need for more jobs and a stronger recovery, and soon? Let’s hope so. There is nothing like an election hanging to concentrate a politician’s mind.”

_______

          This is a sobering assessment, one that in my view goes to the heart of America’s chances for economic survival.  The 2010 elections reminded us of just how fatal the public’s lack of focus on issues and understanding of economics can be.  Obama was blamed in 2010 for economic woes that Republican policies created and Republican opposition to his policies perpetuated.  A repeat of 2010 would be catastrophic for Americans.

The President and his supporters do indeed need to emphasize the need for jobs and growth, but they also need to emphasize how his political opponents have been blocking recovery.  The Administration should avoid the political strategy of accepting responsibility for the economy while trying to argue that Obama should be credited for the paltry progress to date.  It should instead be condemning his opposition for the continuing slide toward depression.

Kuttner’s analysis, however, does not get to the heart of the issue.  Kuttner argues that stretching the deficit/debt envelope with fiscal policy could provide still more economic recovery – but the choices are not as limited as he suggests, and the optimal choice is one he doesn’t even discuss.   The central problem behind recession/depression economics and the disappearance of the middle class in America is a problem merely alluded to by Kuttner here:  For three decades taxes on the income and capital gains of the richest Americans and corporations have been far too low.   The overwhelming debt and deficit problems we face today were created through low taxes enabling the rich to get excessively richer.  Increasing tax revenues from these sources now would eliminate need for Obama to choose between growth or deficit reduction, as the additional revenues would ameliorate both of these problems.

Of course the Republicans won’t let that happen now, and for that ever to happen they need to be voted out of office.  In the face of a worsening economy, to win against Republicans in 2012 the Obama administration and liberal congressional candidates will need to engage directly in the class warfare waged by the rich, and fight hard for higher taxes on corporations, the highest incomes, and capital gains.  The sad truth is that until the rich are properly taxed no real headway can be made either on reducing deficits or securing growth and jobs; deficits will continue to grow and money for investment in jobs and growth will be unavailable.

The Reagan Revolution that got us into this mess must be reversed.  It’s not really a choice between deficit reduction and job creation.  It’s a choice between the rich and everyone else.

JMH – (revised 6/15/11)

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5 Responses to A Double Dip Recession for 2012?

  1. ohiodale says:

    During the Regan years there was a major increase in government revenue so how did tax cuts cause a deficit. The answer is the tax cuts did not cause the deficit increased government spending did. The same as the Bush years. The debts of his first 4 years were less than the yearly cost of the Iraq war. Bush should have implemented a gas tax to fund the war and we would have been running in a surplus. The stimulus was promised to keep unemployment under 8% so it was a failure period. You can not say I have a plan to keep unemployment under 8% and unemployment goes to 10% and say your plan worked.

    • There was also a big increase in spending, especially military spending. The deficits were the result of spending more than the revenue coming in. The tax cuts reduced the amount of revenue coming in, and dollar-for-dollar, revenue lost through cutting taxes added to the amount of deficit spending, borrowing and debt.

      • ohiodale says:

        You just said the same thing I said. Yes much of the increase in spending was military spending but social spending also increased significantly. I was responding to the aurthor’s opinion that the tax cuts caused the deficits. The deficits were not caused by the tax cuts but by the increase in spending. My point is tax cuts will increase revenue if you keep spending level or at least steady with inflation.

      • Ohiodale says:

        I agree the tax cuts contribute to the deficits but I completely disagree its a dollar for dollar contribution to the debt. You have to take into account the economic growth due to the tax cuts. Its better for our nation to keep the taxes lower and to reduce government spending. Of course the spending should be reduced slowly. If taxes were lowered it would create an economic climate that would make ameria’s GDP grow thus creating jobs. I’d rather reduce government spending and have a job than paying for programs that are not needed and not have a job. I consider the military spending the most important.

        People argue that a deficit 60% of our GDP is not bad becausegthe deficit was higher than this after WWII. That is a terrible argument. After WWII we had very high economic growth because we had no competition, since most of the factories of Europe were destoyed in the war. Asia didn’t have much manufacturing with the exception of Japan and their manufacturing was all but eliminated from the war. We have nothing in america that will give us the type of growth we experienced immediately following the war so this debt is much worse than some would have us believe.

        Bottom line, America wastes money to buy vote. The lazy people on the bottom are looking for handouts and the wealthy have to0 many loopholes and do not pay their fair share. I would like to see the taxes lowered and ALL loopholes eliminated. This would increase the tax revenue more than rasing taxes on the so called rich. $250K is not rich. The upper middleclass pays a higher percentage of their wages than the top 0.1% and this information is availble on the IRS website. We need to eliminate loopholes and I think both parties could agree to this.

      • Thanks Ohiodale for your comments. I agree with much of what you want to accomplish, but i must disagree on a couple of points. I certainly agree that there is no “dollar-for-dollar” contribution to the debt from lowering the TOP tax rate along the way: That would be true only if the foregone tax revenues from the top tax bracket exactly equaled the budget deficits every year; however, there is a close relationship between the amount of wealth rich people have accumulated (using reported figures for the top 1%) by increasing their percentage of total U.S. wealth over roughly 30 years ($about $8.8 trillion up to $2007 and more thereafter) and the amount of debt raised by Republican administrations over the same time frame (about $12.2 trillion today, with interest). Lowering rich people’s taxes over the years actually reduced the growth rate, because economic demand fell. It matters whose taxes you cut: Cutting taxes for the rich does almost nothing to increase demand, but cutting taxes for poor people, and middle class people who are saving less or running up debts, increases economic demand substantially. The most stimulative thing to do today (and it is also one of the most reasonable) is to increase unemployment insurance. And of course I agree that cutting military spending should be a high priority; the externalities of war are over the top, and only military contractors benefit financially.

        I agree that there’s no need to raise taxes on $250,000 annual incomes, but everyone making a million or more should be paying significantly higher taxes. Really rich people like billionaires get almost all of their income from capital gains, which are taxed at 15%, the same as the ordinary income rate for people at or near the poverty level. That should be doubled or tripled soon. The Republican plan to eliminate the capital gains tax completely is suicide for America. I agree with you that the U.S. debt level now is worse than some would have us believe, and it must be reduced. Increasing the capital gains rate and the rate for incomes over $1 million substantially, while providing a negative tax for the roughly 50 million people who are in poverty and unemployment relief for the millions who have lost their jobs, would put us on the road to recovery. Even moderately rich people would end up better off as the economy recovers!
        Thanks again for your comments.

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