The basic story of this downturn remains incredibly simple. We lost close to $1.4tn in annual demand when the housing bubble collapsed. The construction boom that was fueled by the bubble went into reverse, with new construction falling to its lowest levels in more than 50 years. The consumption boom fueled by the bubble-generated equity collapsed when that equity disappeared.
We cannot return to full employment until we have something to replace the demand that had been generated by the housing bubble. This is simple arithmetic.
Unfortunately, both parties in the United States refuse to talk about filling the hole created by the collapse of the housing bubble in a serious way. The Republicans talk about giving everything to “job creators”, with the idea that if we are generous enough to the rich (with tax cuts), they will show their gratitude by creating jobs. There is zero evidence to support this view. Are we supposed to believe that investment will somehow increase by 50% as a share of GDP just because we are nice to rich people?
The world doesn’t work that way. Firms create jobs when they have more demand, not because we are nice to their rich owners.
President Obama and the Democratic leadership have refused to put forward a serious alternative path. While they have been willing to argue that rich people should have to pay some taxes, they have not come to grips with the nature of this downturn, as if hoping that, somehow, the economy will just jump back to its pre-recession level of output through some magical process. There is no magic that will allow the economy to override basic arithmetic. In the short term, only the government can provide the boost necessary to support the economy. Over the longer term, we will need to get the trade deficit down through a more competitive dollar.
I don’t think Dean gets anything wrong in his description of the Republican reaction to the economic crisis we continue to live in. But given that description is pretty much in line with what any leftish commentator is saying about the GOP, I’m more interested in his take on Democrats. What’s particularly relevant to me is that there is no vision for how to stimulate the economy, to fix the arithmetic problem of weakness still reverberating from the collapse of the housing bubble.
There has been and will continue to be a lot of talk about the fiscal cliff. Dayen, linked above, notes that it’s really more of a slope than a cliff and even Republicans are talking about deploying military Keynesianism to mitigate it. One of the key issues at play here is the expiration of the Bush tax cuts. In the context of deficit hawkery, many liberals have (for years) pointed out that if we simply let the Bush tax cuts expire, the long term deficit problems functionally disappear. There would be no long term crisis. That’s all well and good, but we’re dealing with a struggling economy now and we have a real need for stimulative spending now.
What is amazing to me is that basically no one is saying that we should take the massive amount of money the federal government would expect to take in after taxes reset to pre-Bush tax cut levels and put that towards stimulative spending. This money could go towards building roads, bridges, the electrical grid, constructing schools and fire departments and hospitals, giving people unemployment benefits and expanding SNAP. It could go towards green technology and education, too. A massive input in stimulative, job creating endeavors paid for by the federal government with new revenue from the expiration of the Bush tax cuts could conceivably do a lot to help fix the arithmetic problem Baker references above.
Additionally, it would be a proactive vision for how Democrats could actually fix the economy, beyond some piddling additional taxes targeting the super rich.
I don’t expect that Democrats will suddenly start talking about the coming cash cow that is the expiration of the Bush tax cuts as a vehicle for a massive stimulus. I think that the Democratic leadership is genuinely opposed to having taxes rise at all for the lower 98% of America and is likewise on board with deficit hawkery as a vehicle for cutting the Big Three social services. But as Baker points out, the Democrats are not offering a coherent pathway to right the economy now and this is a big problem.