Recession Plans?
It is remarkable how quickly the discussion amongst policy makers has turned from denying the possibility of an economic downturn toward developing plans to alleviate the impact of one. here is a good run down on the subject from today’s New York Times:The Debate Over How and How Long
The debate over the type, extent and duration of various economic stimulus packages has already begun. A growing number of experts outside of politics are now openly talking about the prospect for recession and this has made it politically feasible for stimulus talks to begin.
For most of us the technical aspect of a recession is irrelevant. We will feel as if the economy is running badly even if it doesn’t fall to the statistical point that would constitute the designation of “recession”. Growth of close to zero still feels rotten compared with the normal 2% to 3% growth rate we are accustomed to. So 2008 looks as if it will be a very poor year under any circumstance.
Reality has taken a long time to filter its way into George Bush’s vision, but now apparently even he is beginning to see the need for action [do you see the amount of hedged language that’s needed to describe his level of activity and/or interest?!]
So the stage is set for a political dog fight over the stimulus. Unfortunately, because of the profligate spending of the Bush regime, which is the biggest government spender in US history, we are running a significant budget deficit. So a traditional Keynesian package of tax cuts to lower and middle class families, which is the best way to get money into the economy, would have the side effect of putting quite a bulge in our finances. It’s one thing to prime the pump when you’ve been running lean, but it’s quite another matter to do so when you’re already the worlds biggest debtor. Someone has to buy the paper you print to finance the tax cut.
And that’s where this year gets interesting: the world is already awash with dollars we have printed to finance our spending sprees on Iraq, housing, and the first round of Bush tax cuts. So while it is clearly in China and the our other creditor’s interests to have American consumers spend – those dollars produce good jobs abroad – there will come a point that they have to cry enough! The flood of new dollars will depress the dollar even more thus devaluing all those already out there. That means that anyone holding dollars is made poorer and so is tempted to start dumping what they have in order to stem future losses. The result would be a new run on the dollar and a potential spiral down that would be very difficult to control.
The same goes for interest rates: lowering interest rates to make borrowing more affordable and thus prime the US economy simultaneously reduces the value of the dollar debts held abroad. So the international pressure would be intense to raise, not lower, those rates.
These two scenarios demonstrate why the appalling economic management of the Bush regime, or rather the total indifference it has to the effects of its policies, was so damaging. All the really attractive policy options are either off the table because of their international consequences, or will be blunted because they would be introduced into an already over stimulated economy.
Bush’s famous negligence and indifference towards difficult subjects like economic management is about to come home to roost. It will ensure his legacy is tainted further. So look for him to kick and scream about tax cuts and so forth this year as he tries to position himself as the saviour of the economy. Then ask why he didn’t care at any point in the last seven or so years.
Ultimately there will have to be a stimulus package. The tussle between the White House and Congress will get under in earnest as soon as we get an early read on the last quarter of 2007 and its implied trajectory for the first half of 2008. All of a sudden the economy looms as the deciding factor in the upcoming election. That does not portend well for the Republicans since it is their policy that produced our current situation.
