To stimulate or not to stimulate? While the Obama administration debates whether to request another stimulus package most Republicans trot out the familiar line that deficit spending never works.
How Obama responds to these forces and arguments may be at least as pivotal for his political future as the health care debate.
Obama is in part the victim of his own fulsome praise of the meager package enacted earlier this year. Mark Weisbrot points out: “Taking into account the spending cuts and tax increases by state and local governments [the U.S. effort] is only about 0.9 percent of its national income. This is a small fraction, perhaps not even a tenth, of the expected decline in private spending from the bursting of America’s $8 trillion housing bubble.”
This package slowed the rate of job loss, but an unemployment rate is virtually certain to exceed 10 percent provides scant comfort. Nation magazine Washington correspondent John Nichols points to a body of research that should give Obama pause. When the unemployment rate reaches double digits, concern about one’s job trumps other political issues. And rightly or wrongly, Obama will soon be viewed as owning this economy.
The current labor market is even worse than headline unemployment numbers suggest. Influential business economist Nouriel Roubini points out: “The total value of labor income is the product of jobs, hours, and average hourly wages — and that all three elements are falling right now.” The longer and deeper our economic de-cline, the more years needed to return even to pre-recession output. We view this issue in abstract numbers, but there is a human dimension as well. When workers are unemployed for any sustained length, skills atrophy and demoralization sets in.
Republicans of a libertarian bent argue that in the good-old 19th century recessions were allowed to take their natural course and recoveries were faster. Yet, in fact, average levels of prosperity grew far faster in the generation after World War II than in the post-Civil War period. Other Republicans and so-called Blue Dog Democrats worry that more government borrowing will compete with private sector needs. That worry is premature. Dean Baker points out: “When you have a severe worldwide downturn, there is no shortage of capital. If the Fed, or anyone else, just prints up money, it will simply generate demand for labor and resources that would otherwise be idle. At some future point when the economy is closer to its capacity, there may be issues of capital shortages, but there is none today.”
Yet, as Baker and most left-leaning economists recognize, that is no excuse to spend foolishly. Rather than oppose stimulus packages, genuine independents should demand of Obama more accountability from the Fed and the Treasury. Their spending on bailouts vastly dwarfs congressional stimulus packages. There is little evi-dence that these funds have done anything more than facilitate continuation of the very banking practices that produced financial collapse.
Moderates might also insist on federal spending that can do the job in the shortest time possible. Robert Kuttner suggests a new stimulus should emphasize enhanced revenue sharing with states — but premised on a requirement that states maintain program levels and taxes in place before the crisis. In addition rewriting and refi-nancing mortgages at long-term trend line prices would keep people in their homes and prevent a further precipitous fall in housing prices. If, as Roubini suggests, housing prices may continue falling to a point where half of American homeowners are under water, adjusting and refinancing mortgages is imperative if the risk of far more severe recession is to be mitigated.
Kuttner warns: “The Republican ticket in 2012 could be Palin-Sanford; if unemployment is 11 percent, it will win.” He may be right, but citizens should recognize that independent Republicans like Maine’s two senators played a key role in stripping the last stimulus of essential provisions. Have they, Blue Dog Democrats, and even Obama learned that smaller is not always better? Fiscal responsibility sometimes means laying a sufficient foundation for private sector prosperity. Absent bold initiatives in D.C., workers and citizens will need to find other ways to hold corporate leaders and politicians responsible, a theme I will address in a subsequent column.
John Buell is a political economist who lives in Southwest Harbor. Readers may reach him at firstname.lastname@example.org.