The GOP’s Midterm Strategy:

by MIKE WHITNEY

On Tuesday, the nonpartisan Congressional Budget Office (CBO) released a report on the estimated impact of the American Recovery and Reinvestment Act (a.k.a.–Obama’s $787 billion fiscal stimulus) The report provides conclusive evidence that the stimulus did exactly what it was designed to do and helped to avert another Great Depression. Here’s a summary:

It raised real (inflation-adjusted) gross domestic product (GDP) by between 1.7 per cent and 4.5 per cent;

Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points;

Increased the number of people employed by between 1.4 million and 3.3 million;

Increased the number of full-time-equivalent jobs by 2.0 million to 4.8 million compared with what would have occurred otherwise.

Naturally, the Republican leadership is in a frenzy over the report and trying desperately to underplay its conclusions. That’s why House minority leader John Boehner launched a counterattack earlier this week claiming that the stimulus "has gotten us nowhere" and that it was a sign of "government run amok."

Boehner’s talking points are part of a larger political strategy to mislead the public about the effects of the stimulus while assuming the mantle of fiscal conservatives. Bear in mind, that George W. Bush nearly doubled the national debt–from $5.4 trillion to $10.5 trillion–during his tenure in office through his tax cuts and foreign wars. If GOP leaders were really "thrifty minded" conservatives as they pretend to be, they could have proved it during the time they controlled the White House and both Houses of congress. As it stands, their appeal for more belt tightening just looks like cynical ploy to drum up support for the midterms.

By the time the Republicans were swept from office in 2000, the economy was in free fall. Unemployment was rising at 750,000 per month, and all of the main economic indicators were plunging at a faster rate than following the Crash of ’29. The only thing that kept the country from sliding into an even deeper slump was massive doses of monetary and fiscal stimulus. And, while the hugely unpopular TARP program ($800B) merely distributed public funds to crooked banksters (so they could continue their looting operations), Obama’s fiscal stimulus saved the nation an even deeper downturn.

Here’s Boehner again: “We will not solve our fiscal challenges until we cut spending and have real economic growth….But we do not have the luxury of waiting months for the president to pick scapegoats for his failing ‘stimulus’ policies."

More nonsense. Cutting spending when the economy is still weak is the fast-track to a double dip recession as Ireland, Greece, Hungary, Latvia and Spain have all found out in recent months. Each one of these countries has tried to reduce deficits by slashing government spending, and they’ve all discovered the same thing; that spending cuts widen the output gap, increase unemployment, shrink growth, lower government revenues and, thus, increase the deficits. That’s right; when government cuts spending, revenues shrink and deficits grow, the exact opposite of what one might expect. Additionally, these belt-tightening measures make it more expensive for struggling nations to borrow in the capital markets. Most of these countries are now facing painful downgrades that will make it more costly for them to procure funding to keep government operations going.

Here’s an excerpt from an article by economist Gary Burtless titled "It could have been much worse", which explains how the stimulus helped the economy avoid a steeper decline:

"The tea leaves are clear: The Great Recession will not be a second Great Depression…..Any reasonable grader of the stimulus’s effects on driving recovery and combating joblessness would give the stimulus at least a B+…..

“Federal government programs and stimulus dollars cushioned the massive blow to private family incomes. Disposable income fell less than 1 percent after the start of the recession… Reduced federal taxes and increased government benefit payments, partly funded out of the stimulus package, have kept Americans’ spendable incomes from falling as fast as their private incomes. Household consumption fell in the recession, in spite of the massive swing in taxes and public transfers, but it only fell modestly. Americans were made cautious in their spending because of the drop in their personal wealth and fear of losing their jobs. But government benefits helped boost the spending of the unemployed, and lower taxes helped insulate middle class families from some of the effect of the drop in wealth.

“Could the administration and Congress have done better? (Yes, but) opposition to stimulus spending by conservatives in the Senate precluded a larger package. In fact, Congress passed a smaller stimulus than the one the president asked for. In retrospect, the package should also have included a much bigger allocation for new government capital spending—on roads, mass transit, public buildings, and environmental capital projects. This investment would directly provide jobs to workers in construction and capital goods manufacturing, industries hard hit by the recession….." ("It could have been much worse", Gary Burtless, Brookings Institute)

The Republicans succeeded in blocking a larger stimulus bill although some of the blame clearly belongs to congressional Blue dog Democrats and Obama’s feckless economics team. Even so, it could have been much worse, just as Burtless notes. Once the downward spiral of layoffs, debt-liquidation, falling asset prices and deflation begins, it is hard to reverse. It’s much better to keep Pandora’s Box bolted shut, than to unleash economic forces that can lead to widespread hardship and social unrest. Fortunately, those troubles have been mitigated (to some extent), but we’re not out of the woods yet. Rebuilding the economy will require a long-term commitment to expand the deficits until the private sector repairs its balance sheets and can resume spending. US households are presently in a humongous hole from a decades-long credit binge. The administration must sustain stimulus outlays until the economy rebounds and private sector retrenchment ends. Absent government spending, unemployment will rise, investment will fall, and the economy will shrink.

Recent surveys show that more than 50 per cent of Americans think that the funds for Obama’s stimulus were "wasted". Clearly, Republicans have been able to capitalize on the fact that activity hasn’t returned to pre-crisis levels. But this is an impossibly high standard. The economy cannot return to the "frothy" bubble era without generating another gigantic credit bubble. And that’s unlikely since the bubble depended on easy credit and gargantuan leveraging on the part of households and financial institutions. Those days are over, at least for the time being. The present sluggishness reflects the true state of the economy (the "new normal") sans steroids (excessive leverage). The government needs to ease the transition to slower growth by shoring up demand while the economy emerges from its postcrisis funk. That means more stimulus.

Here’s an excerpt from a report by Obama’s Council of Economics Advisers; "The Effects of Fiscal Stimulus; A Cross-Country Perspective"

"The evidence suggests that countries that did larger stimulus in 2009 had better GDP performance in the second quarter of 2009 than would have been expected. The relationship between “beating expectations” and stimulus looks even stronger when the sample is limited to OECD countries…..

"We do see a consistent positive statistically robust relationship between stimulus and growth performance. Countries with stimulus did better than expected and did so by a margin that is consistent with a sizable multiplier effect…..

“All the countries that did very large stimulus (over 2.3 percent of GDP) saw surprisingly strong growth when measured with respect to either private sector forecasts or simple time series forecasts. Countries with small stimulus packages did not perform as well relative to expectations when compared to the high stimulus countries…..for every 1 percent of GDP done as stimulus, countries grew roughly 2 percentage points faster."

In a new study by The Roosevelt Institute titled "The Boom Not The Slump; The Right Time for Austerity", economists Mike Konczal and Arun Jayadev show that there is "no episode" where a country that’s in the grips of recession "has cut its deficit and succeeded in reducing its debt through growth." Conservatives insist that cutting deficits increases business investment because it builds confidence in government finances. But this is just public relations hype. The truth is, it just doesn’t work.

Finally, consider this excerpt from a recent post by Bill Mitchell who chronicles the changes in economics that led to the emergence of the middle class post WW2. The large government deficits were instrumental in increasing demand, lowering unemployment, reducing inequality, and building powerhouse industrial centers which dominated global trade. Here’s a clip from "Fiscal policy Worked":

"At the end of 2008 and into 2009, as the real sectors in our economies were starting to experience the aggregate demand collapses instigated by the banking crisis, most governments took steps to stop the meltdown from becoming the next Depression…After years of eschewing active fiscal policies, governments suddenly rediscovered the fiscal keyboard key and in varying magnitudes pushed fairly large expenditure injections into their economies….

“The experience of the Second World War showed governments that full employment could be maintained with appropriate use of budget deficits….From 1945 until 1975, governments manipulated fiscal and monetary policy to maintain levels of overall spending sufficient to generate employment growth in line with labor force growth. This was consistent with the view that mass unemployment reflected deficient aggregate demand which could be resolved through positive net government spending (budget deficits).

“Governments used a range of fiscal and monetary measures to stabilize the economy in the face of fluctuations in private sector spending and were typically in deficit. As a consequence, in the period between 1945 through to the mid 1970s, most advanced Western nations maintained very low levels of unemployment, typically below 2 per cent…" ("Fiscal policy Worked–Evidence", Bill Mitchell, Billy Blog; alternative economic thinking)

Economists know what it takes to lower unemployment and put the economy back on a strong growth-path. But GOP obstructionists want to torpedo the effort because it conflicts with their real objectives which are to force the privatization of public assets, crush the labor movement, and to further weaken the state. A robust economy makes it harder to "strangle the beast" and to assert greater corporate control over the political process. Besides, the Republicans figure the only way they can regain power is by making sure Obama fails. And that’s their top priority.

MIKE WHITNEY lives in Washington state. He can be reached at fergiewhitney@msn.com

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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