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 forecasting is extraordinarily difficult. 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 likely will induce unemployment in excess of the early Reagan era double-digit figure.
The U.S. economy is in the midst of the collapse of “history’s greatest asset bubble.” The housing industry, long a major driver of the U.S. economy, is in major retrenchment. Declining housing values also leave many consumers feeling both 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 U.S. 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 billion to $700 billion. Nonetheless, given the shortfall in consumer and invest-ment spending, the need, as American Prospect editor Robert Kuttner suggests, is likely to be closer to a trillion dollars a year for the next two years. If Congress takes too long 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.
Contrary to most conservative opinion, the reluctance of FDR — who distrusted economist John Maynard Keynes, who suggested that governments should spend money they don’t have — to move boldly enough prolonged the Depression. Only deficits on a scale of close to 30 percent of Gross National Product during World War II 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.
More broadly, there are fewer risks of inflation or a precipitous dollar decline if the U.S. economy regains its soundness and productivity. To this end, economic reconstruction should emphasize revenue sharing for state programs, infrastructure spending, improved unemployment compensation, and increased food stamp and en-ergy assistance.
The reasons for such priorities are both social and economic. Many of the most severe budget cuts both in Maine and nationally have damaged poor and working-class residents. Grants to state governments for immediate restoration of such programs will employ residents who will spend it quickly. Much of their spending, for food and insulation as well as outlays for domestic infrastructure, will in turn create further U.S. jobs, reduce energy costs and take some strain off the U.S. balance of trade deficit.
Congress should resist calls for more capital gains tax reductions. Most businesses use retained profits rather than stock market initial public offerings to expand. In addition, they invest only if they see an expanding market. The private market does not always know best and is not always self-correcting. Capital gains tax favoritism has rewarded the speculative excesses that threaten this economy.
Some federal programs will not be optimally efficient, but almost anything is better than leaving workers and plants idle. In addition, as Paul Krugman suggests, protection for whistleblowers, greater transparency and regular oversight can greatly reduce the likelihood of outrageous abuses. It is time for Congress to put the dis-credited wisdom of wealthy speculators aside and aid those who build this economy.
John Buell is a political economist who lives in Southwest Harbor. Readers may reach him at
firstname.lastname@example.org. He will be speaking at College of the Atlantic at 4 p.m. Tuesday, Jan. 13, about the future of American capitalism.