A Long and Hard Road Ahead

Dated: 22 Apr 2009

Posted by admin

Time To Reset Our Thinking

The Federal Reserve recently revised its economic forecast predicting that recovery will come in 2010 rather than later this year. Not surprising, since our titanic economy simply is not that nimble. Regardless of how aggressively a stimulus is applied, economies don’t turn on a dime.

Case in point: In August 1981, the Economic Recovery Tax Act was passed to encourage economic growth. The goal was to reduce marginal tax rates by 25% over three years. The top tax rate was lowered to 50% (from 70%) and the bottom rate lowered to 11% (from 14%).

The economy continued to contract, however, well into 1982 with the national unemployment rate peaking in November and December 1982 at 10.8 percent. According to the Bureau of Labor and Statistics, the unemployment rate remained above 7% for another 36 straight months dipping briefly to 6.7% in January 1986. It again rose above 7% for seven more months (the nation had short-lived respite in August 1986 when the rate fell to 6.9%).

It wasn’t until November 1986, more than five years after the recovery act was passed, that the economy showed real progress. The point here is not to debate the merits of tax cuts verses spending. Both result in budget deficits. The history of the 1981-1982 recession highlights just how difficult recovery is and the pain that is still ahead for us and our nation. Don’t expect a “V-shaped” economic miracle. There’s not a lot of pent up demand out there and even if there was we as a people are just plain tapped out and scared senseless.

But not all the news is bad. Recently, the Federal Reserve’s “Beige Book” reported that the economic downturn is moderating. On the surface, this sounds positive. But things are still getting worse, just not as fast. And there are more shocks to come. Fire-breathing beasts are still lurking in the shadows ready to kick the living daylight out of our economy. Many economists believe the commercial real estate market is the next shoe to drop. Credit card defaults are also projected to rise dramatically and roughly ten million more homes could see the auction block.

Now is not time for timidity and to worry about silly accusations of socialism and fascism. What’s needed is an FDR moment – bold, swift, groundbreaking actions that stem the bleeding. Besides, the accusations have been made before. Many in the GOP thought FDR to be a communist. The charge of fascism, ironically, came from conservative democrats who said that many New Deal programs likened to “Hitlerism and in some respects Sovietism’. Sadly, the same old fish have spawned anew, but President Obama certainly has the smarts and political moxie to handle crackpots, the do nothing “hole in the wall” gang, and the “a giant asteroid is hurdling toward Earth, we need yet another tax cut” crowd.

Moreover, let’s stop worrying about what rattles Wall Street and worry more about the masses of people who are staring down the barrel of economic despair. Instead of infusing insolvent banks with cash, the money would have been better spent on New Deal-like institutions (e.g., the Home Owner’s Loan Corporation) that would have assisted at-risk homeowners and small businesses with financing.

And enough already with irreversible tax cuts that will put us deeper in the red and have little efficacy. Borrowed money needs to be spent aggressively on capital projects and safety nets for the poor and unemployed, not on tax cuts that will ultimately benefit the richest Americans. And that money spent by the government to fill the gaping hole in our economy is not a waste as the Right keeps insisting. President Obama’s economic team is smart (even if they are the same bunch of insiders that helped create this mess). They know all about the “velocity of money” and Keynesian “multiplier effects”. Indeed, Summers and Bernanke are both keen students of the Great Depression.

They know that money spent by the Public Works Administration resulted in important infrastructure including the Bonneville Dam, electrification of the Pennsylvania Railroad, thousands of schools, hundreds of hospitals, and dozens of airports. The Civil Works Administration put a 4.2 million Americans to work, impressive by any measure. Let’s also not forget that national treasures like the Hoover Dam, Golden Gate Bridge, and US Supreme Court building were completed during the Great Depression. The City of Chattanooga would not be possible if not for the Tennessee Valley Authority.

The Obama Administration should also take some lessons from the other Roosevelt – Teddy – who was famous for his trust busting. Lastly, efforts to re-inflate asset bubbles must end. Wall Street and our 401ks may suffer but, in the words of Paul Krugman, it’s time to make banking and finance boring again.

My greatest fear, not wholly unfounded, is that we will return to business as usual. Alan Greenspan actually said on the CNBC special “House Of Cards” that he wouldn’t do anything differently and that this scenario will occur again in the future. It’s just the price we pay for having the greatest system in the world – pure insanity.

President Obama, this Nation longs for a radical presidency and an FDR-like figure. I am still waiting.