by TW Collins

by TW Collins

From 1974-1982 the Western world experienced a series of economic contractions which were the most severe since the Great Depression. GDP fell sharply in 1975, and in the United States the period closed with a double dip recession that featured both high unemployment and high inflation. The standard policy tools of the time failed to address the morass. Looking back, it can be seen that workers in the developed world never really recovered their previous position. Real wages swooned during the 1980-1982 recessionary period, and have remained flat since then. In the time, the post-war Liberal/Social Democratic consensus was broken by this, and by the perceived social turbulence that was the result of the baby boom coming of age.

The present economic crisis threatens, as many of us have predicted, to be, like 1975, a severe recession which downshifts the level of economic activity for a generation. Economists will talk about "persistent output gaps" and "a productivity depression." People on the street will feel that in not being able to get their lives going again. There is a combination of concrete shock to the real economy, collapse of financial and political arrangements, and existential angst. How things are supposed to work has changed, how to deal with problems doesn’t seem to work, and there seems to be no map forward.

In Washington, the "Reagan Paradigm" of crisis management is still fully in force: have a moment of national unity, put aside ordinary squabbles over smaller issues, pass whatever package will address the moment of crisis, and "stand tall." If necessary, lie to the public egregiously in order to "maintain confidence." These "moments" – 1981-82, 1987, 1991, 1993, 2001, 2003, and now 2008 – were followed by a backlash from the side which had temporarily suspended partisan interests, and then interspersed with periods of gridlock and partisan warfare, and periods where it was politically fatal to rouse too many members of the public on anything. Specifically the failures of George Herbert Walker Bush, and Bill Clinton, in handling their moments of unity set the outer edge of what the political classes saw as acceptable. In each case the backlash was driven as much from within the party of the President, as from the adherents of the other party. In the first case, GHW Bush swooned from the highest popularity then measured, to defeat, in the space of a year. Bill Clinton saw a Democratic Congress obliterated. It is this second failure in particular which guides Democratic Party incrementalism in the present. Doing "too much" is fatal, is their reading. From the perspective of a blue dog conservative Democrat, this is correct: it was the blue dogs that bore the brunt of losses to Gingrich, in 1994, and afterwards.

These facts are not unrelated. The solution to falling real wages, and a virtual end to the upward escalator of the Post-War era, was to bolster consumption by a reverse robin-hood dynamic of cutting progressive income taxes, and then raising regressive taxes, such as payroll taxes and flat state income taxes, to pay for this. Those who had, got, those who did not, fell farther behind. But they didn’t see this as much in their material standard of living, but in the amount of risk that they lived under. The losses were losses of things they didn’t have yet: universal health care never materialized, pensions were no longer offered. Instead, people were expected to play the casino of stocks and houses. Opportunities disappeared, because old manufacturing jobs were sent overseas, and new ones simply were not created. America manufactures more than ever before, but less of a percentage of the total.

Barack Obama is a believer in the moment of unity paradigm, and he has been given one in the form of very high approval numbers. People know that everything they have known, is under threat. They know that something must be done, and that something must come from the President, there being no other actor on the political stage who has the diversity of power and unity of purpose to do it. Even the Chairman of the Federal Reserve, who, arguably has more direct power over the day to day running of the global economy, does not have the range of policy options and depth of reach into America and out into the world.

He is also a believer in Reaganism: that old liberalism "failed" and that the solution is the one Reagan outlined: cut taxes, spend money, and stand tall. This is what is in his economic program: spend money, cut taxes, repeat two mantras: there is a crisis that requires action, and that we will make it through with his actions. However, like a Reaganite, facts and numbers mean nothing, except their place in the power discourse. Obama’s report this morning means that he has lost his "cooking the books" virginity. Initially billed as 2.5 million jobs, then 3.5 million, and then jiggered by smoke and mirrors and faulty assumptions to 3.75 million jobs, and rounded up from there to 4 million jobs – it is a sorry example of a species that runs back to Pericles lying to the Athenians about the costs of his civic improvements.

To take some obvious examples: it resorts to a back of the envelop 1% in GDP increase means 1,000,000 jobs rule of thumb, when the empirical data from Bush’s tax cutting of the same kind, in 2001 and in 2008, has shown that this is not the case for the tax breaks and rebates that he is proposing. The issue at hand is whether tax cutting offers bang for the buck and the authors of the report run to the back of the envelop to win the battle by not fighting it. This is not a matter of ideology, it is a matter of fact that is in question. One can’t hand wave it away and have any remaining intellectual honesty. I can keep going, there are a half-dozen other problems with the report itself of a similar kind of questionable methodological error which always leans in the same direction. Everyone takes short cuts when writing such a document, but when all the errors go in one direction, that is an indication of intent.

That the economic program offers far too much continuity with the last decade is pointed out decisively in this New York Times Editorial:

The "clean break" part of the statement seems an apt description for the spending part of Mr. Obama’s emerging, roughly $800 billion recovery package. He has outlined some $500 billion for bolstered unemployment benefits, aid to states and investment in the nation’s crumbling and outdated infrastructure.

But the tax-cut components of the package are hardly a clean break with the Bush years, presuming that is what Mr. Obama meant by the troubled past. To win the support of Republican lawmakers, the package is shaping up to include roughly $150 billion in business tax breaks, even though such breaks are widely recognized as packing very little bang for the buck when it comes to economic stimulus.

The New York Times is not alone in noting that small amounts of cash, and tax credits for activity which might have happened anyway, do not offer much economic activity for their cost. The author of the report gave himself the most generous estimates on how fast tax cuts would generate GDP, and was forced to admit that it took two years for them to ramp up, and even then, they were less effective than spending. Spending numbers he had sandbagged by applying an analysis of state propensity to save that it did not did not apply to the tax cutting.

Over at 538, Nate Silver is convinced that Obama wants liberals to march forward and push for more spending. This isn’t what the report says, because Obama has already taken off the table many of the things that liberals would want to spend on. Most specifically he has taken health care off the table, and he has taken demobilization from Iraq and Afghanistan off the table. Since these are two projects which will shave as much as 7% of GDP off of misdirected effort, Obama is basically asking anyone who has any good ideas for more fat to come forward, because the food value has been limited.

This is exactly the strategy he employed with the TARP bail out: first make a deal with the right, then find out how much opposition he has from the left, and offer up small concessions to get the left, not the right, to get on board. The right has gotten a tax cut package which is far larger than they could have proposed on their own. Obama will get his 80 votes. And liberals? Some rural clinics, small projects and pork. It’s Deep Dish Chicago style politics: what does it take to buy off the people who you need.

Related posts:

  1. Doug Hoffman’s Cunning Plan to Reduce the Deficit: Cutting Earmarks, Taxes
  2. More Leaks That Obama Will Turn Deficit Hawk in 2010
  3. Jobless Rate Hits 26-Year High: Does Obama Have an Economic Team? Where’s Their Jobs Program?
  4. Obama to Congress: Insurance Requirement Okay with Public Health Plan Option and Cost Regulation
  5. Why Obama Now Needs The Public Plan