Gloomy, Gloomier, or Gloomiest
12:00 AM, Jul 28, 2012 • By IRWIN M. STELZER
These gloomy and gloomier thoughts are rays of sunshine compared to what passes for wisdom among the gloomiest of our analysts, who see a new recession and long-lasting stagnation in their crystal balls. They warn that those who are waiting for the Fed cavalry to ride over the hill and rescue the economy are doomed to disappointment. They say that if the Fed adopts an idea reportedly suggested by the Bank of England – make cheap credit available to banks to lend to businesses and consumers – it will be wasting its time and balance sheet. The banks are awash in loanable funds, businesses are cash-rich and opportunity-poor, and interest rates are already so low that lower still will not attract borrowing. As the Manhattan Institute’s Diana Furchtgott-Roth points out in RealClearMarkets.com, “More liquidity is unlikely to impart more impetus to the sluggish economy…. Congress and the president should not count on the Fed to bail them out of their mistakes…. Central banks are unable to help in the face of persistently flawed economic policies.”
The deep-gloom set also believes that many of the unemployed will never again be employable as their skills will have atrophied or become irrelevant in the face of fast-changing technology. Renewed growth cannot cure that problem.
Their main worry, however, concerns government policy. If Congress does not vote to extend the Bush tax cuts, and to head off the spending cuts (most in defense) mandated for year-end, some 4.5 percent will be ripped out of the economy, sending America into still another recession. Until now, Democrats shared Republicans’ horror at the prospect of driving off that “fiscal cliff,” or what some call taxmageddon. No longer. Democrats now say that if Republicans don’t agree to substantial tax increases on everyone earning more than $200,000, the group Obama calls “millionaires and billionaires,” they will welcome a dive over the edge of that cliff. The party with a glorious history of Franklin Roosevelt’s New Deal and Harry Truman’s “Fair Deal” has become the party of “No Deal.” Weighty voices in the Democratic party say that the new recession triggered by tax increases and spending cuts will be short and shallow (they cite the Congressional Budget Office forecast that a new recession would be relatively mild), and that the higher taxes and lower spending that will cause it will also cut the deficit and renew confidence in the U.S. economy. Rarely has John Maynard Keynes’ faith in the curative power of deficit spending been so suddenly and completely abandoned by former acolytes, now rushing to adopt a new heretical faith: prosperity-through-austerity.
If all of this does not cause you to enlist in the ranks of the gloomiest, consider the set of data compiled by Nicholas Eberstadt, political economist and demographer at the American Enterprise Institute, and published under the title, “A Nation of Takers.” Government transfers resulting from some 50 benefit programs – money taken from some taxpayers and redistributed to others – continue to grow at an exponential rate, and twice as fast as per capita income. Between 1969 and 2009 these transfer payments have risen from 7.8 percent of personal income to 17.6 percent. Most significant, Eberstadt shows that almost half of all Americans live in households receiving some government benefits. It is not unrealistic to expect this fact to affect votes in November, and to create an atmosphere favorable to President Obama’s goal of making our country more like European social democracies, should he be given the opportunity.
Let me conclude with two bits of cheer. First, economic forecasters were invented to make weather forecasters look good. They badly over-estimated the rate at which the economy would grow this year, and it is not impossible to guess that in their herd-like revision of their forecasts they might overshoot on the gloomy side. Second, American entrepreneurs aren’t about to shut their garage doors and put an end to the innovations that sweep away outmoded methods of business and create more efficient new ones – call it creative destruction. Nor are Americans who prefer a less intrusive state – and that is the majority – certain to remain insensitive to the risk created by politicians whose main appeal is to a nation of takers. All is not yet lost.