More Truth About the American Economy

economyWashington’s Paralysis

Under normal circumstances, this would be the time for the federal government to take bold action to ward off a double dip.

For example, it could put more cash in peoples’ pockets while giving employers an extra incentive to hire by exempting the first $20,000 of earnings from payroll taxes, for a year or two. It could lend money to state and local governments. It could launch a new WPA (modeled after its antecedent during the Great Depression) to put the long-term unemployed to work on public projects.

It could amend the bankruptcy law to allow people to include their prime residences in personal bankruptcy, thereby giving homeowners more leverage to get mortgage lenders to mitigate the terms of their loans. It could enlarge and expand the Earned Income Tax Credit so that the bottom 60 percent got a wage subsidy instead of a tax bill.

But these aren’t normal circumstances. America has been through a devastating recession that poked a giant hole in the federal budget. And with a presidential election coming up next year, both parties are already maneuvering for tactical advantage.

Since taking over the House of Representatives in January, Republicans have focused on cutting government spending and paring back regulations. Their colleagues in the Senate, whose leader has proclaimed his major goal to unseat President Obama, are almost as single-minded. Cynics might suspect Republicans of quietly hoping the economy stays rotten through Election Day.

Democrats, meanwhile, are behaving as if they’re powerless to affect the economy even though a Democrat occupies the White House and his appointees run the federal government. They’d rather not dwell on the slowdown because they don’t want to spook the bond market or add to the prevailing gloom (Jimmy Carter’s ill-fated comment about the nation’s “malaise” during the stagflation of the late 1970s has served as a permanent admonition for presidents to stay upbeat).

Democrats are staking their electoral hopes on continuing disarray among Republican presidential aspirants, as well as the Republicans’ suicidal plan to turn Medicare, the popular health insurance system for seniors, into vouchers that would funnel money to private, for-profit insurance companies.

The result is as if Washington were on another planet from the rest of the country (many Americans would argue this is hardly a new phenomenon).

The noisiest battle in the nation’s capital is over raising the statutory debt limit – a game of chicken in which Republicans are demanding, in return for their votes, caps on future federal spending while Democrats insist on preserving the possibility of tax increases on the wealthy. Countless budget analysts are combing through endless projections of government revenues and expenditures in five or ten years.

Robert ReichThink tanks and blue-ribbon panels are issuing voluminous reports on how to tame the budget deficit in decades to come. The President, meanwhile, is trying to appear as fiscally austere as possible – keeping a lid on non-defense discretionary spending, freezing the wages of civil servants, and offering his own deficit-reduction plans.

Washington’s paralysis in the face of a stalled recovery is bad news – not just for average Americans but for the world. Ironically, it also worsens America’s future budget crisis because it postpones the day when the debt begins to shrink as a proportion of the GDP. Yet as the 2012 election season looms, the prospects for sensible policy seem to decrease by the day.

Robert Reich
Robert Reich’s Blog

(Written for the Financial Times.)


  1. Gabrial Singh says

    I find this analysis by Robert Reich laughable, maybe even criminal. He started us on this slippery slope, him and Newt Gingrich, by ramming NAFTA and CAFTA down our throats. destroying our trade unions and our jobs. Now he figures he will set us straight?? I dont know to laugh or cry. Pathetic to say the least. Criminal, to say the MOST!

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