Republicans have proposed legislation that would cap federal spending at 20.6% of the country's Gross Domestic Product (GDP) -- just below the average of the last forty years. Sounds reasonable, right?
Only if you like the idea of another Great Depression.
Over the last forty years federal spending has averaged about 20.7% of Gross Domestic Product (GDP), so Senator Bob Corker (R-TN) has proposed the "altogether reasonable" idea that Federal spending should be capped at 20.6%. To exceed this cap, a two-thirds majority of the House and Senate would be necessary. Unfortunately, this proposal has been endorsed by several Senate Democrats.
But -- as the events of the last two years should have made clear to everyone -- this reasonable- sounding proposal is actually a prescription for economic suicide. Had it been in effect when the recklessness of the Wall Street banks collapsed the economy in 2008, the Great Recession would have nose dived into another Great Depression.
As most economists will confirm, the major factor that saved us from another depression was the very fact that Federal spending as a percentage of GDP substantially increased in 2009 and 2010 -- to about 24.7% of GDP.
When the bottom fell out of the economy, the GDP shrunk. The level of spending by consumers and businesses -- and demand for American exports -- also declined. As a result, millions of people lost their jobs and had less money to spend, so there was even less demand and more people were laid off. That downward economic cycle can only be broken when some actor has the ability to increase economic demand and break the downward spiral.
The only actor that can take that kind of action is the Federal Government, and in 2009 when Barack Obama took office, that's exactly what the Federal Government did. Of course, even without affirmative action by Congress or the President, Federal spending as a percentage of GDP would have gone up because most Federal spending on things like Social Security, Medicare, Medicaid, Defense, etc. continued at the same level as the overall economy shrunk. Other areas of Federal spending also automatically increased -- like spending on unemployment insurance. But President Obama and the Democratic Congress also passed an $870 billion economic stimulus bill that further supplemented economic demand -- and further increased Federal Spending as a percent of GDP.
If the Federal Government had been required to cap its spending at 20.6% of GDP in 2009 and 2010 there is little question what would have happened. Federal spending on things like unemployment, Social Security, Medicare, money for state governments, etc. would have been slashed. That would have meant that Millions of additional Americans would have lost their jobs, the economy would have continued in its downward spiral, and the financial system could easily have experienced complete meltdown.
Of course Corker would argue that he provides an escape hatch to his cap with the two-thirds vote of each house. But the economic stimulus bill that was so critical to preventing complete economic disaster did not even get two-thirds vote of the Senate.
What's necessary in the face of an economic emergency is fast action. Why would you make it harder for Congress to take the actions that are necessary to prevent economic Armageddon. You might as well put a device on a car that makes it harder to turn the steering wheel when you see an oncoming vehicle.
And that's not the only reason why Corker's cap proposal is such a disaster. As everyone knows the demographic make up of America is changing. We have more and more retired Americans who have paid into Social Security their entire working lives. That will mean that the percentage of GDP spent by the Federal Government will naturally rise as the number of Social Security and Medicare recipients increases.
If Corker's cap were to be in effect in the future it would require across the board cuts to every category of Federal spending -- including Social Security and Medicare. So in fact, his proposal is a stealth attack on Social Security benefits.
The Corker proposal is just another example of right wing economic proposals that sound reasonable rhetorically, but are catastrophic in practice.
Republicans often go on about how, when times are tough, your family has to tighten its belt and the same should be true with the Federal Government. This sounds reasonable too -- right? But it is 180% degrees wrong.
When times are tough for your family, you have fewer goods and services available to your household, so you have to tighten your belt -- that's true. But when the economy of the United States collapses it's not because we have access to fewer goods and services. In fact, economic downturns happen because we produce more goods and services than there are people with money to buy. Recessions and depressions don't generally happen because there are too few goods and services available, but because there is a demand deficit -- there is too little economic demand.
Real wealth is the sum total of goods and services in our economy. Money and the flow of money is not real wealth. It represents goods and services -- it enables the exchange of goods and services so that we can meet our needs in a highly-differentiated economy of millions of people.
Most recessions do not involve the collapse of productive capacity at all. They involve the collapse of the system of exchange we use to trade the goods and services created by that productive capacity.
When the Federal Government increases its demand for goods and services, that stops the downward economic spiral that develops when that system of exchange is disrupted by something like the Wall Street meltdown. If the Federal Government behaved like a typical family and tightened its belt, the breakdown in the system of exchange would continue and we would lose more and more wealth because fewer and fewer people would be employed producing goods and services.
Sometimes it is amazing how quickly people can forget the lessons of the very recent past. It was just a little over two years ago that the economic philosophy espoused by Senator Corker and others Republicans caused the worst economic collapse in nearly eighty years. Time for the rest of us to take a stand against economic amnesia.
Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com.
Yes, but it would have been OUR depression, made by real Americans for other real Americans -- on behalf of the top 2% of the wealthy -- who probably wouldn't even have noticed a depression anyway.
Now that Bush left us deep in debt again with a busted economy, we need to spend on infrastructure, which Reagan neglected, and put people back to work. Putting people back to work will increase tax revenues. And raising taxes to pre-Reagan levels can take care of the deficit once our economy is back on track. A good way to stimulate the economy without increasing the defecit would be to eliminate the cap on payroll taxes and lower the payroll tax rates so that the majority of the working people would have more spending money
Increased production without increased consumption doesn't grow the economy, just the amount of warehouse space needed to store unsold goods. And remember, this recession was worldwide, and without intervention by the US government would have been much worse worldwide, so we could not have counted on exporting unsold goods.
Without a strong middle class, consumption tanks. The "free market" has proven that it is not willing to support a strong middle class, despite the fact that it would be in it's best interests to do so.
I'm afraid the growing attitude among the business elite is that they will just go find new consumers offshore. The American Class was nice while it lasted, but it has completed its useful life, been fully "depreciated," and is on its way to being written off the books.
to feed the poor
Till there are no rich no more. - Ten Years After - I'd Love To Change the World
Under the "Income Redistribution" plan how are these "Rich" going to keep their money. Won't there be a new class of "Rich". This would be the "Radical Revolutionaries" that bring down the "System".
The depression is coming anyways.
Why don't all economists start for just ONCE to think OUTSIDE the box....called monetarism.
NO matter what side.
Obama's Keynesian
Paul's Austrian
Both are complete bull paths leading to dead ends
Both have no chance of fixing the economy
Both are filled with nothing but sophistry
It's called Glass-Steagall
We refuse to remember this ideal from it's last usage or the previous times used, under the same (err..all the other times were much better numberwise btw) conditions, under the same scourges...but with added 99 percent bogus MBS, all the putbacks and reclaming of homes in the millions (also kicking out those who bought homes that weren't legally up for sale), the 1.4 quadrillion in derivatives, and all the rest of the bad debt that must be wiped away in order for us to have an even .000001 percent chance to survive.
Refuse the Barack Paul, the Keynesian Austrian, fake choice.
Understand the economists are just about ALL worthless, because they only view things from MONETARY BIZARRO WORLD.
It's a bit like depending on Forrest Gump to design your space shuttle. (but we don't need that anymore, huh Nero.)
It will get us off foreign oil and stabilize/drop the price.
alcoholcanbeagas.com
I'm not a secret plugger, just a concerned citizen.
The failure of the big banks would have led to a somewhat more severe recession, but it would have been far shorter, because the big banks would not still be around sucking the lifeblood out of our economy. If we abandon these fraudulent banksters who don't contribute to the economy other than bidding up markets and making it possible for the globalists to strip this country, then we will return to sanity and success. We don't need these massive crooks controlling our lives and our government. We need smaller banks who actually care about the country called America.