Recession Economics 101

I am waiting for more definitive information to come out on the Stimulus compromise before offering a more detailed analysis of it. Word tonight is that moderate Republican Senators Susan Collins, Olympia Snowe and Arlen Specter, meeting with about a dozen Democratic moderates have cut about $110 billion off the Administration proposal, to about $780 billion. I will want to see what has been cut and what retained before commenting.

The debate so far clearly demonstrates that the lion's share of remaining Republicans have learned nothing from their disastrous mismanagement of the economy over the past eight years and indeed the impetus of the past twenty-eight.

Let me see if I can make this simple. An economy goes into a recession because people are not buying enough. In other words, demand is low. When sales go down companies cut back production (or orders if they are retailers, or services if they are a service provider, and so on) and labor costs, because there are not enough sales to justify full production or service and therefore not enough work to justify a full payroll.

The people who are laid off lose their income and cut back drastically on their spending. If this happens to a lot of people it means still less demand, requiring further cuts in production and employment across the economy. It becomes a "downward spiral." That is what we are in now. The Labor Department reported today that job losses accelerated to 598,000 in January, the fourth worst month ever recorded in U.S. history. We have lost 3.6 million jobs since the beginning of the recession, more than half of these in the past four months.

On top of that, once people sense the economy is in recession even those with jobs spend less. They fear they may be next to be laid off, so they save any extra money to get them through hard times should they lose their jobs. This depresses demand even more.

In our present particular case we also have the added burden of the housing bubble and related financial crash. Banks lost so much money making foolish loans they are cash-poor and gun shy about making new loans. People have little or no equity in their homes to secure new loans anyway. And companies see little reason to borrow to expand in an economic climate with no demand for their goods or services, even if the banks would make it available at reasonable rates, which they are not.

What did President Bush try to do about this? He passed a $170 billion stimulus plan based on tax rebates a year ago, in February, 2008. The recession has only deepened since. That is because people, with recessionary expectations, did not spend the money. They saved it or used it to pay down things like credit card debt. Next he led a $700 billion effort to subsidize and partially nationalize, at least temporarily, the financial industry. Half of that has been committed, and it has accomplished little as well, since there were no sensible requirements that the banks use the money to lend to people or to avoid wasting it on bonuses to the super rich, junkets and such.

So, what did Senators McCain, Kyl, McConnell, Graham and most other Republicans do? Thirty-six of them voted in favor of McCain's amendment to get rid of almost all the spending in Obama's recovery bill and just have tax cuts. That is thirty-six of the forty-one, or almost 90% of them, voted to reinforce failure by continuing to do what did not work last time, or the time before that, or the time before that. They do not learn because they have their beliefs, which are impervious to results.

What Obama and most Democrats want to do is to get spending going in the economy by having the government do it. If business can't, the banks won't, and consumers either cannot or dare not, who else is there to restore demand? That's right, only the government in such a climate can spend the kinds of sums necessary to increase sales for goods and services which will result both in the direct creation and restoration of jobs and the breaking of the recessionary cycle. The theory behind this has been established for over seventy years and has been successful in overcoming many recessions over the decades. Look up a selection of biographies of economist John Maynard Keynes here.