Anthony Mirhaydari
I'll be blunt: Without more federal stimulus, like the spending in the jobs bill President Barack Obama is set to unveil next week, we face the prospect of reliving the economic nightmare that was the 1937 "double-dip."
The mistakes of '37 didn't just extend the Great Depression, they also created a nasty downturn all their own.
It was one of the sharpest contractions in history. Stocks lost almost half their value. Economic output contracted by 9%. Industrial production dropped 32%. Wholesale prices dropped 11% as the value of several important commodities--- such as corn, cattle and cotton -- collapsed, pressuring desperate, indebted farmers and ranchers. And the unemployment rate, which, like now, had stabilized near 9%, surged to 12.5%.
Then, like now, the problem was entirely avoidable. We needed the president and Congress to spend more, either directly or through the tax code. They didn't listen then, and I doubt they will now. Here's a look at why the economy needs this help, and how all of us will be affected if it isn't provided.
The help the economy needs
The first step to fixing the economy is having the foresight to focus on the true near-term economic threats (joblessness and stagnant growth) instead of the less-urgent malaise that currently dominates the discussion (the national debt and deficit).
Obama will try to refocus the debate after the Labor Day holiday by proposing a plan he hopes will boost economic growth by up to 1.5% and create a million new jobs. According to the latest reports, the plan could include a payroll tax cut for employers hiring new workers, new spending on building and rehabilitating schools, and clean-energy tax cuts. Also on the table could be an extension of payroll tax cuts for workers and the impact of the upcoming expiration of the Bush tax cuts. And long-term deficit-reduction steps could be included, too.
Obama also selected Alan Krueger, a Princeton labor economist and one of the architects of the Cash for Clunkers auto rebate program, as the new head of the White House Council of Economic Advisers. An expert on the problem of long-term unemployment, Krueger may push worker training subsidies as a solution to the problem of long-term unemployment, something I discussed in a recent column.
Whatever the details, the bottom line is that we need more spending to offset the loss of consumer and business confidence over the last few months. And we need it now.
Failure to respond
Wall Street economists are worried about the issue, with the team at JPMorgan referring to the current soft patch in the economy and failure by politicians to respond appropriately as a "policy-induced slowdown." Citigroup puts the odds of a new recession below 20% -- but only in the absence of additional policy mistakes.
Aneta Markowska, senior U.S. economist at Société Générale, told me she's concerned that failure, at the very least, to extend the payroll tax cuts and unemployment benefits "could very well push us into a recession."
Global leaders, such as the new head of the International Monetary Fund, are calling for more stimulus. Federal Reserve Chairman Ben Bernanke last week used his speech at the Jackson Hole, Wyo., summit of central bankers to urge politicians to put America back on the path to a balanced budget, but not by disregarding the "fragility of the current economic recovery." He noted that the "two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal head winds for the current recovery are not incompatible."
He ended by castigating the budget process in Congress and the political mud fights still going on there.
Old mistakes made new again
There is a way to get this all right, but we're going about it all wrong.
Yes, we need to address the debt. But the best way to do so is to get the economy growing again. That's how President Bill Clinton and a Republican Congress produced a balanced budget a little more than a decade ago, after years of deep deficits. They tackled the portion of the deficit that rises and falls with the business cycle.
But now, Washington seems able to focus only on whether to cut the deficit by cutting spending or by raising taxes -- a fool's errand, because either approach will slow the economy and make the cyclical deficit worse. That's the same failed strategy followed by President Franklin D. Roosevelt, Treasury Secretary Harry Morgenthau and Fed Chairman Marriner Eccles in 1937.
To make matters worse, we're hearing conservatives protest the Federal Reserve's efforts to prod the economy with policies like ultralow interest rates and Treasury purchases. This, too, was a feature of the 1937 decline. Those people are calling for a double whammy when the economy needs a helping hand.
According to Citigroup economists, based on current law and assuming the congressional supercommittee tasked with cutting $1.5 trillion from the deficit by November can't come to an agreement, we would see a contraction in deficit spending amounting to 3% of gross domestic product in 2013. That's the result of existing stimulus ending and the Bush tax cuts expiring on schedule. A 3% deficit cut is the same size as the one that created the '37 recession, according to a 1973 study.
