Worse Than Expected on the Economy

Keep your eyes on the gap between what the economy could produce at full employment and the paltry level of aggregate demand (consumers plus businesses plus exports). That’s why the stimulus is too small — and why my bet is the President will be back for more stimulus. The Commerce Department reported Friday that the economy contracted in the fourth quarter of 2008 more sharply than initially estimated. Consumers cut spending the most in over 28 years. Businesses cut way back as well. Exports were dead in the water.

All told, according to the new data, the nation’s economy shrank at an annual rate of 6.2 percent. Last month, the government’s preliminary estimate of the drop in fourth-quarter GDP was only 3.8 percent. Roughly half the Commerce Department’s revision was due to a sharper drop in business spending than had been anticipated. As a result, business inventories — the amount of stuff they they have on hand to sell — have dropped.

That’s good news because eventually businesses will have to replace their inventories, in anticipation of at least some consumer buying, and such replacement spending will spur the economy. But here’s the bad news: Inventories still aren’t dropping as fast as sales are dropping, suggesting even less business spending and investing coming up.

robert_reich.jpgThere’s no reason to suppose the first quarter of 2009 will be any better, and lots of reason to think it will be worse. Government is spender of last resort. We’re at the last resort now. $787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity. Do Republicans know this? Is this why they’re continuing to bet that the economy won’t be recovering by November, 2010, and why they’re going to continue to say no?

by Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.

This article first appeared on Robert Reich’s Blog. Republished with permission

Comments

  1. Jeff C says

    Ha, already, in the face of its ineffectiveness, the predicted cries of “the stimulus is too small.” I’m wondering, at what point after the government has run the rest of the remaining, functioning, economy into the ground, will people come to accept that the Government’s proposed Santa Clause solution is just that: an illusion and a lie?–Though I’m sure you’ll simply continue to propagate the delusion that a continued economic slide is in no way the fault of the catastrophically grandiose and shortsighted measures undertaken by a government now controlled by the Democratic party.

    I expect you will continue to chastise the Republicans, as you’ve done above, not because of any sound economic reasoning, but solely because they are against Obama’s plan, even if claims of the plan’s effectiveness are dubious at best. To paint them as somehow ‘Un-American’ or as having a monopoly on attempts to capitalize politically on the economy is naive at best–as if the Democrat’s have somehow not milked the crisis to pass an unrelated agenda. In fact, I’d say it has played into their hands, politically, even more so than the Republicans.

    They are using the EXACT same kind of politics that exploited 9/11 to take us over a foreign policy cliff that the Republicans employed during the Bush presidency–and frankly, I’ve had enough “with us, or against us” talk over the LAST 8 years in order to allow it to drive us off another cliff, this time economically. The premise that we need big, bold, government action to keep us all safe from imaginary threats–it’s the same kool-aid whether were talking the Economy or Iraq. Put. The cup. Down. And have a look in the mirror..

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