A while back that I thought the economy might fall into recession some time this year. And in the past week or two, I wrote several posts noting that considering the tax cuts we’ve had (on income from 2001 to 2003, and on repatriated income corporate income in 2005 and 2006, and on the estate tax 2001 to 2010), which is supposed to be a stimulus, and considering that we had several years of strong stimulus from the Fed as well for several years, we should be asking why the economy is in trouble now. After all, with all that help, since GW took office, there were two dismal years of growth, then some mediocre growth, then some average growth, and now this…
After asking the question a few times, I’ve had a chance to move it around in my head for a while… so here are a few more thoughts and a few thoughts on where we’re going. (I’m in a bit of a hurry, so apologies if this reads rushed.)
1. When GW took office, fiscal responsibility went out the window. The Economic Blueprint called for big tax cuts and paying down the debt a lot – and it was obvious at the time you couldn’t do both. (Some of us voted against GW in large part because of this economic silliness.) After having Robert Rubin at the helm, this sort of stupidity made even the cheerleaders on Wall Street wonder. Throw in the strong-arming of Uncle Alan to make him come around… and financial markets weren’t exactly looking like a place with a future.
2. I imagine that after the dot com crash, there was a lot of excess capacity in the system. The tax cuts did not serve to stimulate the economy – the money went primarily to folks who were financially sophisticated (or, more likely, had advisers who were financially sophisticated) and who understood that investing in factories and plants here in the US wasn’t going to produce good immediate returns. So they didn’t make those investments. As a result, we got a small amount of very short term stimulus out of the tax cuts… at the cost of a growing debt.
3. As per Keynes, when the private sector won’t provide the stimulus, well, that’s what the gubmint is for. But the gubmint on GW didn’t spend money on the types of programs that produce much kick for the economy – after all, those were the sorts of expenditures Clinton made, and they didn’t want to do what Clinton did. Instead, big chunks of money have been spent abroad, and on single use items which produce no lasting improvement on the US economy, such as explosives.
4. Given fiscal policy wasn’t helping, the Fed kept money really, really cheap for a very long time. The money had to go somewhere… and it went into the housing market. We know the result of that.
So now what? Well, tax cuts won’t work. At best, they’ll produce a very small very short boost… and the cost in the long run in the form of increased debt will far outweigh that very small very short boost.
Monetary policy isn’t going to do much that’s positive either… the Fed is in the position of a doctor who has a patient who likes to cut himself and roll around in the mud. All the doctor can do is prescribe antibiotics… but eventually the patient develops a strain of bacteria that is resistant. But actually, the situation is worse than that. The rate cuts are simply taking away the last safe place to put money where it might actually earn something… the bank. Expect a bunch of irate seniors by the November elections.
There are two ways out:
1. Wait… recessions do come to an end by themselves.
2. Government spending on things that GW would never spend money on, and to get started in the next couple of months.
Given option 2 is impossible, we’ll be going with option 1.
My fellow Angry Bear Dan’s post this morning has a table showing some recent recessions, and I’m struck by one thing when I look at it. Generally, when the country emerges from a recession, it is in a stronger economic position than it was when the expansion preceding the recession began. (Put another way, when a recession ends, the economy is generally stronger than it was when the previous recession ended.) I think you have to go back to 1975 to have a recession where that might not be true. I don’t think it’s going to be true this time around. And in the end, that will be GW’s – leaving behind an America that is much weaker and less confident than the one he became president of seven years ago.