The number one concern of Americans is jobs, getting them, losing them, how much they pay. The number two concern is the federal deficit, its size and where it’s being spent. The GOP is busy exploiting both.
There are two approaches to dealing with these concerns that are time tested to be diametric political opposites. One is for government to borrow and prop up the economy to prime employing our way out of the debt, the progressive position. The other is to do nothing and let the economy contract and so puncture the debt bubble that caused the Great Recession, the hard conservative position. To quote Rand Paul, “people may need to take a cut in pay.” The GOP position is neither. Their position is to exploit the situation to tar the political opposition with failure, a non solution which equates to doing nothing.
Stimulating the economy in times of contraction is so well proven an effective solution for both jobs creation and debt retirement that it just does not need much scrutiny. It’s just a matter of being able to accept the depth and lack of traction of the ditch the GOP and Reaganomics has put us in. On the other side, one might expect the GOP to recognize that no elected government has ever conspired to let the economy contract, not even Hoover or Reagan, until now, as the GOP filibusters a second stimulus bill and extending unemployment benefits.
Stimulus is complex, there’s no doubt. But it is a qualitative certainty that the Great Depression grew out of economic conditions in 1929 that were not dissimilar to what preceded 2008. The one lesson learned from the Depression that is seldom challenged is that the money supply was tightened by the Fed when it should not have been. But then, like now, pumping money into the economy would have simply duplicated the malinvestment bubbles that caused the crash. That is a real risk of stimulus, but as the banks are not lending the injected liquidity but are investing in hedge funds or U.S. Treasuries, a different bubble, not a consumer/realty bubble, is in the making. It’s a different outcome from initial monetary measures that has no precedent. Profit motives do complicate, endlessly.
Fed is acting on monetarist principles to stimulate the economy and the banks are thwarting the Fed by hoarding, not making loans, reducing the money supply to the non hedge fund economy, in effect, though unintentionally, duplicating what the Fed did wrong in 1929. There is a standoff between bank regulators and the Fed over loan practices, nullifying the injection of capital. Not good by a monetarist’s way of thinking. So we, even as we try to be monetarists, fail.
That leaves the Federal government to supply stimulus through incentives and programs paid for through borrowing. Federal borrowing is being partly fueled by banks that are using their hoarded funds to buy Treasuries, which is a less efficient means of stimulus through the Fed, with 3.75% off the top/year. Lets hope they can work this out.
Doing nothing and letting the economy contract is uncharted territory for modern western governments. Without capital injection, inflation, some presume that there is a natural level of commerce and money supply, supported by solid companies and workers, beyond which the economy will not contract. It is also presumed that having contracted to a level of maximum efficiency and absolute need, that the economy will stabilize and will begin to grow again. No one has ever tried this with an economy of this size and complexity. One has to think about futurist predictions, during the 70s, that the complexity of our system means that if one cog fails, the whole thing will fail. Not to be too dire, but there might be more that can go wrong with letting the economy contract than meets the eye. As if what meets the eye weren’t bad enough already.
Doing nothing assumes that when the economy has contracted to a point, a point that can be predicted by no one, it will grow by attracting new investment.
A high of 25% unemployment was reached in the Great Depression, and no one knows how high unemployment could have gone, where the economic bottom would have been, because there was government stimulus intervention after it got to that point. There is no reason to believe that private investment of scale will happen until the bottom for the economy is reached. The only signal that a bottom has been reached is growth itself. There was no increase in private investment during the Depression, in fact there was a prominent decrease until after WWII, once the war spending had doubled the size of the U.S. economy.
At the bottom of the Great Depression, debt deflation became the issue for lenders. Collateral for loans depreciated as much as fifty percent. This has a freezing effect on investment as they saw in the Depression.
As Keynes, wrote, once banks realize that deflation has significantly impaired the value of their collateral:
…they become particularly anxious that the remainder of their assets should be as liquid and as free from risk as it is possible to make them. This reacts in all sorts of silent and unobserved ways on new enterprise. for it means that banks are less willing than they would normally be to finance any project…
Had WWII not created unprecedented demand for goods and services backed up by war fueled doubling of wages, we might still be in the Great Depression, with lenders still waiting for a sure thing. Of course all capital would have evaporated by now.
Further, since all the world is investing in countries where labor is in the low tens of percent equivalent to current U.S. wages, then it seems obvious that no one will invest here until that level of wage contraction is reached. Global capital, which now all U.S. capital of consequence is, will happily wait for us to bootstrap ourselves out of a second Great Depression, without the help from capital or government. That sidelined capital will be destroyed in speculation on an economy to which it does not promote growth.
The portrait of a future along the track of doing nothing for the economy is so real that those who lived through the Great Depression can still feel ghost starvation. The fact that government, banking and business are duplicating, in too many cases just out of ignorance, the motives and actions that led to the first great debt bubble recession becoming the Great Depression should not be lost on government, business or the public.
That the GOP in the Senate screws around trying to get some seats back by allowing the economy to run toward the brink of disaster should not be lost on the government, business or the public either. A depression is quicksand. The deeper you sink the harder and more expensive it is to get out. It took the most gargantuan debt to GDP the country has ever seen, WWII, to dig out of the mess that the Republicans made back in 1929.
It took a trillion dollars just to halt the collapse of 2008-9. It might take another trillion to reverse it, another 8% added to the debt. Wages will have to rise to fill the gap in the economy formerly occupied by easy credit. Investors will have to see growth before they invest in the real economy again. Spending is how it’s done, and the deficit doesn’t matter until and unless the economy is working again. Our ability to service debt is a more certain thing, given competent economic policy, than is our ability to endure a total collapse of the global economy.
Republicans will be sorry when they get the economy that they seek to create in order to win back control and discredit, ironically, the things that could save them personally. This is the worst brinkmanship we have ever seen, because in 1937 when the GOP convinced FDR to halt stimulus spending, they just didn’t know. Then they thought they were right and were proved wrong. Now they have forgotten. So they hold up not only further stimulus but even the basic unemployment extensions that no Congress has held back since unemployment was enacted. And they do it all to gain back control so that they can do nothing. Doing nothing is not an option and neither should then be Republicans.
The public never knew what exactly happened in the Great Depression, just that it got better, bit by bit. FDR held them together while the world experimented with giant economies on the brink of total collapse. Lessons learned and are now lost. They are lost on Senators and Congressmen who are unwilling to care about consequences further away than the next election. The lessons are lost on bankers and businessmen that are bent on making the same mistakes that ruined their grandfathers. They are lost on a public enamored of Ayn Rand fictions of self reliance in a world where you can’t get breakfast without a container ship being involved. And it is all not about the long term, to borrow from Mia Farrow in Rosemary’s Baby calling up the devil scene, “this is no dream, this is really happening”. To you, right here and now.
Capitalism has failed twice in a century, socialism only once.
Read more: Congress, Economic Stimulus Package, Federal Budget Deficit, 2010 Elections, Economic Crisis, Gop, Federal Reserve, Politics News