Tuesday, August 16, 2011

The Great Recession - a Dose of Reality

As we blast through the remainder of 2011, the economic condition of both the U.S. and the world is seriously on everyone’s minds. Just today, the Marketplace Morning Report highlighted concerns that the global economy is not recovering (emphasis mine):

Jeremy HOBSON (Host): When you look at the number -- 0.1 percent growth, then you look at France, 0 percent growth, Japan, negative 1.3 percent, the U.S., 1.3 percent -- are we heading into a global recession here?

Simon TILFORD: I think in terms of the Western, developed industrial economies, we're in a depression, frankly. It's very hard to see where growth is going to come from over the next few years. Governments have tapped out, they can't borrow. Monetary policy is as loose as it can be, interest rates can't be cut any further. The bottom line is there's a massive amount of debt that needs to be addressed.

HOBSON: Well, how can we go from what economists called a global recovery, into, as you say, a depression?

TILFORD: I think all talk of recovery of the last 18 months has been exaggerated. Many developed economies still haven't recovered their pre-crisis levels of economic activity. The U.S. is marginally above its pre-crisis level; Germany is marginally above; France, the U.K., Italy, Japan, well short of pre-crisis levels of output.

It’s a stark view, and at odds with the mainstream line in the American media of late. Yet it seems to resonate will with the experiences of average Americans, and especially their intense interest in job creation and economic growth.

Of course in Washington, the Deficit and debt are still distracting America’s “leaders” from that job issue, especially the post deal finger pointing. Once S&P downgraded us from AAA to AA+, a lot of Republicans began to bandy about the notion that the downgrade was because the proposed spending cuts didn’t go far enough, nor did they have enough additional tax breaks included.

Sadly for the Republicans, S&P said no such thing the first time.

Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default,” Mukherji said.

“That a country even has such voices, albeit a minority, is something notable,” he added. “This kind of rhetoric is not common amongst AAA sovereigns.”

Called out on their behavior, Republican politicians began to try and roll back their message. Sadly, in the Internet age, nothing goes away, as this tracker points out. TPM documents 19 instances in the three months leading up to the debt “deal” where prominent Republicans publically dismissed the doom and gloom predictions oof just about everyone, all the while singing the ideas that SUPPLY Side solutions could solve a DEMAND Side problem.

How bad has the disconnect between the disease and cure gotten? First, consider that much of the federal deficit problem (which feeds the debt increase ) is really a tax cut problem in as much as keeping the Bush tax cuts on the books (which Republicans want) is the single biggest driver for the deficit for the next decade. Second, Second, add in the fact that businesses don’t need regulatory certainty, they need profit certainty – and the best way to increase profits is to slash costs/wages/workers while retaining productivity. Throw in a healthy dose of “Government can’t create jobs” either by paying people to do work or contracting for services (like highway repairs). Stir well. At the end, you end up with plans of action coming from the conservative side of the aisle that ignore revenues, destroy the social safety net, and significantly hobble both military readiness, and our ability to grow the economy.

All this could be avoided, however, if we do a few sensible things. We need to listen to Warren Buffet. One of the richest men in the world reports that his real annual tax burden is about 17%, far below the top marginal federal income tax rate of 35%. As he sees it, and I concur, the tax code is stacked with too many things he and his ultra rich friends can use to pay less taxes, while soaking his own employees with tax burdens of 20- 35%. If he’s willing to call an egg an egg, so should we be.

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