Don't Look To 2013 For The Economic Cure
SEARCH BLOG: GOVERNMENT and ECONOMY
Had a long chat with Bill today. Bill and I have become acquaintances through this blog. He emailed and then called several years ago and we have kept in touch on political and personal issues since then. He keeps his finger on the pulse of politics and the economy in the southeast... and has not been very optimistic for awhile. He expressed deep frustration with the lack of anyone resembling a "leader" to take the country out of this economic morass. While Obama has been a disaster, he doesn't have much faith that Romney can fulfill the role of a leader or a plan for fixing this mess.
What follows is an email he sent to me and my reply:
Putting Off Addressing Fiscal Cliff Risks DepressionPeter MoriciTwitter @pmorici1
President Obama and Congressional Republicans are engaging in dangerous brinksmanship. Putting off addressing the fiscal cliff until after the election risks a second Great Depression.
Without a compromise by January, $400 billion in mandatory spending cuts and more than $100 billion in tax increases immediately go into effect. With GDP only growing $300 billion annually, such a shock would thrust the economy into prolonged contraction.
With the federal deficit already exceeding $1 trillion, additional stimulus spending significant enough to rescue the economy is unlikely, and interest rates are at record lows. These leave policymakers with few tools once things start unraveling. However, President Obama has given Republicans few political choices but to roll the dice. Facing reelection, he promises to veto any extension of Bush-era tax cuts for middle- income Americans if Congress does not raise rates on upper-income families. He won't entertain meaningful cuts in entitlement spending or health care.
Even if Mr. Obama wins, he likely will be saddled with a Republican House.
Armed with a mandate, he will get higher taxes on upper income families. However, he has made commitments to expand the U.S. naval resources in the Persian Gulf and Asia to counter Iran and China. He can't finance those without giving Republicans some of the entitlement reforms they want but can't get now.
For the economy, one of three outcomes is likely.
President Obama wins but doesn't reach a deal with Republicans before February or March. Mass layoffs begin late this fall, especially in the defense sector, and the economy stumbles badly.
Mr. Obama wins and deals with Republicans in Congress by late December. Taxes go up, and overall spending is cut, but not as much as current legislation requires. The combination still derails the fragile recovery.
Governor Romney wins and implements a pro growth agenda, but the current situation is too urgent to wait for actions that won't take effect until at least next spring and summer.
Businesses are already curtailing investments in machinery and information technology as a hedge against a contracting economy in 2013, and consumers are spending less. Retail sales fell each of the last three months.
The Great Recession was caused by manifest structural problems in the economy: a wide trade gap with China and on oil, banks that had forgotten how to earn profits through sound lending, failed financial regulations, and skyrocketing health care costs.
President Obama's policies have mostly exacerbated those problems. That's why the recovery is so weak, and a second recession now could put the economy down for good.
Too many young adults unemployed or in poorly paying jobs are living with aging parents. Many older Americans are running down IRAs before reaching retirement age, hoping for better days.
The safety nets provided by parents and savings will soon tear. If the economy goes down again, the negative feedback cycle of fewer jobs, less spending, more layoffs, and so forth will be much more severe than in 2008.
The hallmark of a depression is a recession that does not sow seeds of recovery by creating pent up demand for business and consumer durable goods. Truck and car replacements played a mighty roll in the most recent recovery.
With many Americans slipping from the middle class, businesses may simply downsize for a permanently smaller U.S. economy, and families will own fewer vehicles, appliances and electronic toys. Unemployment in the range of 15 percent easily could become the new normal.
President Obama should risk upsetting his base and offer Republicans in Congress a reasonable deal now.
Republicans should admit what they already know-Mitt Romney is no messiah-and take the risk of compromising now.
American can't afford for their elected officials to dither any longer.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.
Peter MoriciProfessor Robert H. Smith School of BusinessUniversity of MarylandCollege Park, MD 20742-1815
My reply:
We have had a period of antipathy toward business that has incentivized the bases of this present economic spiral. One could point to the no-down-payment-homes-for-the-unqualified as the trigger, but the table was set a long time ago.
I fear that we are entering a Japan-like malaise with regard to employment. Businesses that remain have already adjusted to the new reality [hope and change] by outsourcing peripheral functions and becoming very lean in core functions. More and more, the financial "magicians" come and go making a quick fortune with smoke and mirrors and outright fraud, while the old-line "build something people want and need" types have been disappearing. That's why the Facebooks are the big IPOs. Smoke, mirrors, no substance.
MONDAY, AUGUST 06, 2012
Recovery In Name OnlyWhat we are faced with an inverse relationship: the growth of government = the decline of the economy.
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