Calculated Risk
There is a path to economic recovery from the worst recession since the Great Recession—and maybe the Great Depression. But it means escaping from the free market economic orthodoxy that has prevailed since 1980, and which has been the major contributing factor of six recessions since 1980, all occurring during Republican administrations.
Concurring events don’t necessarily determine facts, but we know such a boom and bust mentality has been the hallmark of conservative calls for fewer regulations and lower taxes historically. The Federal Reserve was created in 1913 to even out such booms and busts after the stock swindles of the early 1900’s Gilded Age, and the ‘roaring twenties’ financial markets that led to the 1928 market crash and ultimately Great Depression were also eras when governments had few regulations to tame such speculation.
The most recent example during the Clinton administration when budget surpluses were generated during his last four years. The moment President Bush took office, Vice President Cheney trumpeted Reagan’s maxim that “budget deficits don’t matter,” and fired Paul O’Neill, his first budget-conscious budget director that had recommended using the surplus to pay down the national debt to shore up social security and other social programs.
Bush instead proceeded to cut taxes so much that the first $trillion national debt was born and two recessions followed during his eight years, including the Great Recession of 2007.
In fact, if we look at Calculated Risk’s graph history of job loss durations since 1948, we see that the longest job recoveries took place during the 1980 (black line), 2001 (brown line), 2007 (blue line), and 2020 (red line) recessions; all during Republican administrations when budget deficits no longer mattered, as I said.
It goes back to the conservative free market, small government orthodoxy that government regulations retard growth, when since 1980 it has been the de-regulation of whole industries and championing of free-market maxims that have increased the boom and bust cycles we have seen since then, while worsening our income inequality.
There is much more that went into these recessions, of course, such as Reagan’s the cold war arms race with Russia, the Desert Storm Gulf War of GW Bush, and Iraq-Afghanistan invasions of GW Bush that they paid for with borrowed money.
But the dire results of such free market orthodoxy are incontrovertible, as Rutger’s economic history James Livingston put it once in a memorable NY Times Op-ed that described what corporations do with most of their profits these days.
In the early 1900s, most business investment came from the private sector, not government, whereas by 2000 most of such investments—in public projects as well as research to develop new products and services—came from government.
And that was in large part because of the sky-high tax rates for the wealthiest and corporations that prevailed immediately after World War Two—as high as 90 percent during the Eisenhower years and beyond. As President Eisenhower once put it, higher taxes induce people and businesses to invest more in their future, rather than pay Uncle Sam.
“So corporate profits do not drive economic growth — they’re just restless sums of surplus capital,” Professor Livingston wrote, “ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.”
The COVID-19 pandemic has created the need to do what was done when past generations faced the Great Depression and World War Two. They are government policies (more progressive taxation is one such) that will induce US to create more sustainable growth paths with fewer booms and busts, as President Eisenhower foresaw.
Harlan Green © 2020
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
No comments:
Post a Comment