It Will Soon Be Time For A New New-Deal
First of all, I want to say I’m very glad that unemployment benefits are being (temporarily) extended yet again. I was afraid that with that the recession being “over,” there would be political pressure (or laziness) not to, and this bill helps hundreds of thousands of people who were about to see their income dry up.
It is crazy to think that many people are about to run out on a minimum 79 week benefit (some states are even longer, up to 90 weeks) but that is the state of the job market these days. In fact, the number of long term unemployed has smashed all post-WWII records, a figure that is going to get much worse before it gets better. Christmas is setting up to be an “unforeseeable” catastrophe, with employment and sales projected to be 5-25% less than last year. I personally think that it will be the middle of that range, as credit is contracting at a record pace, defaults are at a record, and trade is plummeting. The latter can be seen by looking at railroad traffic to get an idea of domestic orders, and port activity for international trade. Please read this fascinating article about a “ghost fleet” that represents the face of global trade contraction. It should be noted that September to October is the prime time for ordering inventory for Christmas, so the failure to see much of a rebound at all thus far is indicative of stores expecting very low demand for Christmas goods.
If things do play out like these indicators suggest, we are going to see extensive bankruptcies of retailers and all of the unemployment that brings. It’s unclear what effects that would have on the rest of the economy: I’ve read that a lot of businesses are waiting to make major capital investments based on the strength of the Christmas season, so if they decide not to then there will be another contraction in manufacturing. On the other hand, that industry has already lost so much they probably don’t have much further to go. In any case, if there is a good Christmas season we’ll probably see unemployment rise a bit above 10% with U6 around 18%, but if there is a bad Christmas unemployment will surely rise closer to 12% and U6 to 20%. Either way, there will be protracted lengths of unemployment above 8% and a good chance that a secondary (and perhaps larger) recession will start within the next year or two, driving those numbers up much further.
There are already millions of people that have been out of work for over a year, and unless things drastically improve, that number will skyrocket in the next six months. That’s not even counting the number of people that are in non-sustainable job situations where they have worked a series of temporary jobs, had their hours cut back, or are “contractors,” a figure that is surely in the tens of millions. The situation is putting a huge strain on state resources and forcing them to raise unemployment insurance on businesses (leading to more cutbacks) and take out loans from the Federal Government that, if not repaid in a couple years, will accrue interest that comes out of the general state budget.
It is time for the government to accept that this isn’t a run of the mill recession that is rebound quickly with financial system stimulus. Indeed, we’ve thrown trillions at it and nothing is happening because consumers are tapped out. By this time next year, we’re going to be talking about a New New Deal, the only question is what form it takes.
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35 Responses to “It Will Soon Be Time For A New New-Deal”
Good post. We have to stop the economic bleeding, even if that means running more deficits. Once we've recovered we should cut back on spending and start building a rainy day fund for when the next recession hits. But that is going to require fiscal discipline from all parties, which seems unlikely…
It depends what the deficits are spent on. Something that has really bugged me about Paul Krugman is the idea that total spending is what matters, not how it's done or the efficiency. In fact he explicitly argued against efficient spending.
We need to be as efficient as possible and stop spending immediately on wasteful projects and/or ones where most of the money flows to a few people (like some of the insane “stimulus” projects) and instead spend it on projects that will benefit us in the long term and employ many people. One possibility I've read is to have energy efficiency squads that go around and weatherproof buildings, starting with government offices, and perhaps even residential.
“By this time next year, we’re going to be talking about a New New Deal, the only question is what form it takes.”
That's a bold prediction, to say the very least. And shouldn't you at least temper that boldness (with roots in the ambitious-then-radical 1960s, decades out of date) by considering the ineptitude as well as wrong-doing that already have been happening in Washington?
Assuming they no longer operate in HUA mode or somehow stop wanting to overreach wildly, a serious anticipation is one of ugly dread, asking aloud when the inflationary mechanism will start.
Uh, when there are at least 5 million people that have been out of work for over a year, the only thing I can see that would stop the Feds from stepping in would be if they were literally incapable of doing so, i.e. demand for treasuries has dried up. While that is possible, based on where trade imbalances go, I think it's unlikely to happen for at least half a decade to a decade. That's when the US will really be in trouble.
Otherwise, people will be for corruption and ineptitude over losing what they have every day of the week. Although I do agree that I am assuming that the government won't get blatantly worse about that…if they do then their sway may fall apart before any jobs program could be enacted. I still think there is at least a 50/50 chance that the financial crisis will rear up to its worst and cripple the government.
Mikkel,
It's undeniably true that the deficit spending should be targeted for maximum efficiency. But the choice back in Jan. & Feb. was between no bill and a crappy bill. Without more than 2% of Congress acting in a sane and selfless way, these are the choices we're left with.
“Uh [sic], when there are at least 5 million people that have been out of work for over a year, the only thing I can see that would stop the Feds from stepping in would be if they were literally incapable of doing so.”
They have been stepping in. Of course, they have been not incapable, but inept (when not corrupt).
Moreover, the most important point is that talk of “A new New Deal” is hyperbole. This isn't the 60s.
“I still think there is at least a 50/50 chance that the financial crisis will rear up to its worst and cripple the government.”
We may or may not reach a debt trap or even inflationary problems necessarily in the short- to medium-term (but with these clowns, either is not impossible!). Finance-related crippling (not a “crisis”) is inevitable in the longer term (next 10-20+ years) given the unsustainability of Social Security and Medicare (the nature of which was concealed by our fine friends in office now, with pertinent information reported in past years deleted from this year's Trustees Summary report for some odd reason) and the growth of other government-related presently-unfunded liabilities. All that will come as we experience aging and likely economic decline, and certainly additional struggles.
Chris's rainy-day fund is good only in theory; nobody in Washington could ever be entrusted with it.
A New Deal, beginning November 2010. =D
If you want to increase jobs, lower the corporate tax rate on all businesses operating inside the country. The extra income will allow for greater competitiveness and more jobs. Its really that simple. Another alternative would be to cut payroll taxes, then employers could hire more workers for the same expense.
“lower the corporate tax rate on all businesses operating inside the country [...] cut payroll taxes”
I fear nobody will learn these long-overdue lessons. Worse, they're likely to seek the opposite; along with multi-national harmonization of regulations will of course come ratcheting-upward of taxes among those nations with “unfairly low” (always too low, never too high) corporate taxes and other “race to the bottom” objects of wrath. If anything, expect income taxes to be raised and be made more rather than less progressive (i.e., more inherently unjust and counterproductive), and in the extreme case, we could see the introduction of a new (progressive) wealth tax. There's no way spending will be viewed critically and unnecessary or harmful spending reduced, ever, as a rule.
Lowering the corporate tax rate is fine, as long as the revenue is captured on the other side through personal income taxes.
But by the same token, we already have very low effective corporate tax rates and I'm not sure how effective lowering it further would be.
Why would companies want to hire more people? There already is already far too much supply of everything compared to demand and employees have no bargaining power because of so much slack in the labor market.
They've given the banks access to free money to make loans and the banks are just sitting on it because everyone that is a good credit risk doesn't want it and the people that want it aren't good credit risks. Why would businesses be any different?
Our corporate tax rates are the second highest among OECD countries, a rate of about 39%. Certainly, for the sake of job creation and economic prosperity, there is room for them to be lowered.
http://chrisbanescu.com/blog/2008/12/27/us-corp…
PWT,
I very specifically said “effective” tax rate. The GAO puts our “effective” corporate tax rate at 25.2% which is below Germany, China, India and others: http://mediamatters.org/research/200902030003
“Lowering the corporate tax rate is fine, as long as the revenue is captured on the other side through personal income taxes.”
Somehow I knew you wouldn't “neglect” “revenues” or income (or wealth) taxes rather than better taxes.
Sensible people want spending reductions, or at the very least, critical review of all spending, in addition to seeking better taxes than income or wealth taxes (especially such taxes that are progressive).
The theory that the federal government needs to spend more now and even borrow now is predicated on its doing these things well, which it has not; it merits even less trust to have the theory that during boom or “overheated” times, government (to many, the federal government) should tax “excess” and save it as a contingency or reserve fund for tapping during subsequent declines and the “need” for spending by the government to re-stimulate things.
* * *
“Certainly, for the sake of job creation and economic prosperity, there is room for [our corporate tax rates] to be lowered.”
However, I fear the worst — that in the name of “harmonization,” that Obama, Geithner, and similar sorts will get together with friends in Europe and elsewhere and ratchet upward the US and other rates which currently are “unfairly” [sic] low compared to those at the highest rates. Expect this with taxes as well as with regulation (and looting and bullying of the tax havens).
It's not just bureaucrat-fluff and chicken-chatter that can ensue at the G-20 meeting, but worse things.
Oh really?
http://film-in-iceland.org/resources/images/inv…
note we also practice worldwide taxation instead of territorial taxation.
Here is an excellent video that helps explain US corporate tax policy and how it hurts competitiveness.
Leonidas,
See my reply to PWT.
DLS,
“Sensible people want spending reductions, or at the very least, critical review of all spending, in addition to seeking better taxes than income or wealth taxes (especially such taxes that are progressive).”
I didn't say I didn't want that, but it doesn't make sense to start being fiscal conservatives in the middle of a d*mned recession. Cutting spending and government jobs now, when there is nowhere else for people to go, will only make things worse and increase human suffering.
“The theory that the federal government needs to spend more now and even borrow now is predicated on its doing these things well”
No, it's predicated on things getting worse if we do nothing, or follow your advice and cut spending. No stimulus is going to be perfect, the same as tax cuts, but I would much rather you help me convince the thieves in Washington to do a better stimulus than to do none at all.
I like how Icleand and Ireland are the lowest tax rates on that chart. Wow, surely they must be doing amazingly well!
Oh wait…
I would like to see a breakdown of the “effective” tax rate though. I think that cstanley is absolutely right when she says that policies aimed at “big business” normally just hurt small/medium sized businesses while the real targets get off scott free. It is entirely likely that mega giants getting taxed far under 25% are bringing down the average and that a lot of small ones are far over.
mikkel,
That's probably true. Not only do big businesses get to write the laws (see the Baucus health care plan and the bankruptcy “reform” from a few years back) but they also have the money to hire the lawyers and accountants that can game the system. The idea that the US government isn't friendly enough to these guys is laughable.
Still doesn't address worldwide taxation policy, Also you have to realize that the government closing off loppholes will increase the rate further. While I have no problem with closing those loopholes (I support it) I also recoggnize that some of the effects will not be good and need to be offset. By closing the loopholes and not offsetting you are raising the effective corporate tax rate.
Additionally that GAO report assuming its estimates are accurate is on US multinationals and not on smaller businesses. Now you might argue those smaller businesses have lower corporate tax rates but that only goes so far. Many smaller businesses cannot take full advantage of opportunities that multinationals have in lowering their effective tax burdens.
0 to 50,000 15%
50,000 to 75,000 25%
75,000 to 100,000 34%
100,000 to 335,000 39%
335,000 to 10,000,000 34%
10,000,000 to 15,000,000 35%
15,000,000 to 18,333,333 38%
18,333,333 and up 35%
Still, however, your point is certainly valid and significant. I just don't think it covers everything, especially worldwide taxation where foreign companies can go to good tax environments and set up production at very low costs compared to US companies who have to pay based on our worldwide taxation system.
Well foreign companies that operate their whose parent countries use territorial taxation policies should certainly be doing very well there, compared with those using worldwide taxation.
I agree that we have very high corporate taxes. Even so, global competition has many CEOs subtracting employees to get to that ever present EPS (earnings per share) quarterly goal. That's the fastest way to profit instead of innovation, research, and development of the next great product and/or service. I think the high taxes affect small business the most and they need to be lowered ASAP. But with the Fortune 1000, things are different. EPS is what they see. And the American workers has a large carbon footprint in many a Fortune 1000 CEO's eyes. Slice, slice! EPS goal met and profit attained.
Actually, if government policy gurus sincerely want to help us struggling small business owners recover, then please fight the desire to help out.
After 30 years, I can tell you firsthand that regulatory stasis actually provides a much better backdrop for sustainable business growth than even (cough, cough) beneficient intention change.
We can figure out our way around or through anything thrown at us, but it helps if the obstacle course remains unchanged while we're doing it.
While true, you also have to understand that some of this is technology driven. We can do more with less people than ever before. And you also have to note shareholders most likely include you and your neighbor.
A hard ending for housekeepers
Yeah, let's cut these scumbags taxes…
WBUR – On Point – Barbara Ehrenreich on Poverty Now
First, using deficit spending to help an ailing economy (Keynesian theory) has never worked. Politicians go back to it because it sounds good, not because it's effective.
Secondly, corporate income tax is one of those that can often cost more to collect than it actually collects. The biggest problem with getting rid of it, however, is keeping people from escaping their income tax by having the corporation provide their goods and services. It would be interesting, at least, to see the analysis.
National Debt 1939 – $40,439,532,411.11
National Debt 1946 – $269,422,099,173.26
That small increase in the National Debt seems to have done the job just fine…
DQ, what the government did in the intervening years was borrow lots of money and blow things up with it. I'm struggling to imagine a worse investment.
We got out of previous depressions without deficit spending. Also, the war, really the great sacrifices made by the people for the war effort, had more to do with that recovery than anything else.
It led to full employment and ended the depression and led to a 40 year epoch of prosperity…
Not to mention Penicillin, the Jet Aircraft, the entire Nuclear Industry, the basis of the computer industry, etc…
Not a bad investment…
Not to mention the defeat of the Axis
Yeah and that worked so well that the Long Depression only lasted 20 odd years…
So we can sit back and do nothing and let this depression run until the mid 2020's, but I am not sure that anyone is going to enjoy the political outcomes, on the other hand it will make for great history reading by the mid 2070's.
That and tons of money spent by Uncle Sam. It was Keynesianism with a vengeance…
Yes, DQ, the draft is a great cure for unemployment. You sound like a neo-con, eager to conjure up a new Axis and rally the country to fight it.
DQ, I think that you need to read your own links.
“It should be clear, then, that the “great depression” of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period.”
Like the 1930s depression and our current contraction, all three were, in large part, fueled by banks.
DQ, I think that you need to read your own links.
And I'll quote from Wikipedia:
From my budget 360:
30 Years of continuous deflation, I am looking forward to it…
In the real world, we've done wars since then, but they all hurt the economy. We've done stimuluses since then, but they have never worked as they were supposed to. So I have to give the recovery to the war effort, which is, the tremendous sacrifice that everyone made in order to win the war.
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