Condemned to Repeat History

The big economic news of the past several days has been that our current slow, jobless recovery has gotten even more sluggish, with unemployment moving back up over nine percent, the stock market softening, consumer confidence eroding, housing prices continuing to crater, and growth in gross domestic product (GDP) dropping from over three percent to under two.  As alarming as all of this, it should surprise no one.

The reason that it should surpise no one is that the United States has been in this position before, and we are in the process of repeating the same mistakes we made then.  In 1933, when Franklin Roosevelt became President, the economy had been languishing for years in the wake of the Great Depression, which had begun under his predecessor, Herbert Hoover, with the stock market crash of 1929.  In response, FDR began implementing a set of programs and policies that, together, were known as the New Deal.  The New Deal utilized government spending - particularly around infrastructure and jobs creation - to kickstart the American economy, producing results with which it was hard to argue.

Once America's gross domestic product had surpassed pre-carsh levels, however, some of Rooselvelt's advisers advocated cutting back on New Deal initiatives, and their arguments would be familiar to anyone listening to the GOP's self-styled budget hawks of 2011.  Tremendous concern was expressed about the budget deficit, inflation and the national debt, with the result that government stimulus programs were sharply curtailed in 1937 in the name of a balanced budget.  The result?  One year after the U.S. GDP had climbed to a record high, it contracted sharply.  The reason?  The private sector had still not recovered from the damage wrought by the Great Depression, and the only player with the wherewithal to stoke the demand that drives the economy - the government - was no longer spending.

In a nutshell, this is very likely what we are seeing today, and it is potentially the beginning of, if not a double-dip recession, at least stagnation.  A number of leading economists - perhaps most notably, Paul Krugman - have been saying for a long time that a second stimulus package was probably needed, but that advice has been effectively buried under a blizzard of conservative opposition rooted in the belief that - despite the weight of history and basic economic principles - "the government cannot create wealth or value; only the private sector can", and therefore cannot help drive the economy.

Since that maxim is so often repeated, let me in turn reiterate the necessary response: that is utter and complete nonsense.  All economies - despite claims that we must do things like cut taxes so the wealthy can "creat jobs" - are driven by demand.  Period.  End of story.  No one in the private sector - and I do mean no one - creates a job unless he believes there is a demand for whatever the output of that job happens to be.   If the purchasing public doesn't have enough disposable income to buy a lot of new automobiles, no car company in the world is going to start adding to its workforce because it got a tax break and now has more cash on hand.  It just doesn't happen.  

Don't believe me?  Well, American companies are sitting on more cash right now than at any other time in history, but unemployment hasn't been below 7.4% since George W. Bush left office, and it's over nine percent right now.  Despite being highly liquid, and despite gigantic companies like General Electric paying an effective tax rate of zero - yes, zero - private sector firms simply aren't "creating jobs."  There's a very good reason for this: there isn't enough unmet demand to justify generating additional supply through hiring, and the consequences of over-staffing and creating excess capacity for a private sector company are compressed margins, losses, or even bankruptcy - none of which are desirable if you're a CEO.

If private industry isn't providing jobs, the only other mechanism capable of putting money in the hands of people who will spend it is the public sector.  This can be accomplished through a variety of tactics including social welfare payments, the creation of government jobs, and tax cuts.  The last, however, only make sense to pursue if private sector cash reserves aren't already at record highs.  Further, social welfare payments are quickly spent by their recipients - they need the money, remember - while tax cuts often result in saving or building cash reserves - as we see today - which do nothing to spark the economic engine.

Additional government spending will unquestionably increase the budget deficit and the national debt in the short term, but both of those are readily addressed once demand has been reignited, consumption resumed, and taxation of that economic activity commences.  Tax cuts, by contrast - even ignoring the cash currently being horded by non-job-creating "job creators" - take longer to work, and by their very nature, diminish the rate at which government debt and the budget deficit can be reduced because the government is collecting less revenue.  (There are still claims made that cutting tax rates raises aggregate tax revenues - i.e. although less money is collected on each transaction or from each individual or corporation, the volume of activity makes up for that fact - but there is no actual data whatsoever to support that contention.)

So, where does that leave us?  Well, until the news media, President Obama and Congress stop fixating on government debt and the deficit - or in the case of House Republicans, pretty much anything but jobs - and begin focusing on growing employment, exactly where we are today: limping along with a massive pool of unemployed workers and stagnating growth.

Get used to it, America; there are strong indications we're going to be here for a while.