Congress may soon pass an economic reconstruction program. The devil will be in the detail. Like most states, my home state of Maine has an immense stake in this debate. Even our sparsely populated state faces a cumulative shortfall of more than $800 million over the next two years. If the economy decelerates further, that figure will grow higher.
Although current unemployment rates remain far below expected rates for January 2010, food pantries across the country are already struggling to meet needs. The debate in Washington will have an immense effect on how many citizens will need assistance and on how much communities can provide. Though some package is virtually inevitable, many Republicans will fight to slow its passage via the filibuster, limit its scope, reduce assistance to the poorest, and load it with further reductions in business taxes.
Obama and some Democrats incline toward including substantial business tax cuts, presumably to secure immediate bi-partisan consensus. This pre-emptive bipartisanship, however, is unlikely to work and has political risks. No matter how many business tax favors Obama offers, he is unlikely to satisfy most Republicans. More fundamentally, business tax cuts—just like cuts in the interest rate—will not extricate us from this recession. Democrats may be held responsible for the failure that results from a flawed package.
The rapid increase in layoffs, the debt burden exacerbated by the collapse of the housing bubble, and the fragility of the financial system make this an unusually dangerous recession. It affects pocketbook and psychology. Businesses will not invest and consumers will not spend beyond necessities just because interest rates or taxes on possible profits are lower.
Even in prosperous times, capital gains tax reductions are ineffective. New investment in plant and equipment is funded by retained profits, not the stock market. Already low capital gains taxes under Bush only turned stock and derivative markets into speculative, job destroying casinos.
Corporations invest when they see prospects of marketing their goods. Government must spend if business is to have the market growth on which new investment can be based.
Since the shortfall in corporate and consumer spending will likely be very large, Obama must think in terms of a package about twice as large as the one initially floated. When I suggested this to the generally progressive students at College of the Atlantic in Bar Harbor last week, some were disturbed. I view their reaction as one symptom of the power of conventional corporate media. They have spent a generation instilling fear of government and deficits under any circumstances.
Failure to act boldly, however, will still mean vast increases in the deficit. Unemployment compensation and welfare grow dramatically. In addition, the unmeasured but consequential burdens to private charity—or the likelihood of starvation or freezing to death— will escalate.
Conservatives argue that FDR did not end the Depression. They are right. He listened to them, and in 1937 and 1938, well before the economy had rebounded adequately, FDR cut government spending. Unemployment soared. The war tells a different story. Chapman University Professor Timothy Canova points out that after 1940, there was a different scenario: “The Greatest Generation [invested] on a scale much greater than today, spending billions of dollars on the Second World War, the Marshall Plan … and the GI Bill of Rights that housed, educated, and integrated more than sixteen million returning war veterans. As a percentage of GDP, the US government … borrowed more than fifteen times as much as today.”
Of course our world is different from FDR’s in one crucial respect, the global nature of the economy. A poorly targeted stimulus package will create more jobs in China than in the US, and the inordinate balance of payments problems may cause a precipitous decline in the value of the dollar. The best progressive package would emphasize unemployment relief, food stamps which would be spent immediately, shovel-ready infrastructure projects, revenue sharing for slashed programs, and energy saving projects. It would also include a substantial commitment to assist troubled homeowners on condition that banks also write down the value of the principal. Such an approach would increase consumer demand and minimize job leakage and short- term pressure on the dollar.
Stimulus along these lines is likely to be required for several years. Long-term balance of payments problems and threats to the dollar will require more coordinated stimulus policies by the major Asian economies, China, and the European Union. No one nation can or should be the sole engine of economic growth and stability. Obama’s commitment to genuine international negotiation will be tested as much on these issues as in Middle East diplomacy.
As for our government debt, economists distinguish between cyclical and structural deficits. As the business cycle moves downward, deficits grow. But with appropriate government spending, the economy will likely rebound and tax revenues begin to increase. When the economy nears full potential, government can increase taxes or cut spending. The debt as a percentage of total output (the real measure of the debt) then falls. Given the vast inequalities fostered both by the recent banker bailouts and tax policies of the Bush era, raising capital gains taxes as well as increases in the top marginal tax rate are the most effective and equitable way to eliminate any structural deficit.
Compromise is often necessary, but Democrats should compromise only at the end of the day. Citizens deserve an up or down vote on a genuinely progressive package. The best bipartisanship gives each side a chance to make its clearest case and then authorizes a vote. Such bipartisanship gives citizens a chance to evaluate their representatives and the consequences of real policy differences. In this vein, I hope that even principled Republicans would vote to block any anti-democratic filibuster on this vital measure.
This is a shorter version of my recent talk at College of the Atlantic. Readers interested in the full talk can contact me at jbuell@acadia.net or PO Box 226, Southwest Harbor, Maine. 04679.
From The Progressive Populist, Feb. 15, 2009
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