Jay Carney, the White House press secretary, sought to assure the country that there is no threat of double dip. Forgive me if I’m less than sanguine.
Economists like Larry Summers, Brad DeLong and Paul Krugman, as well as other observers, like Floyd Norris, recognize the possibility but still feel it is less than 50/50. They are certainly far more knowledgeable than me (or Jay Carney) on the economics and current statistics, while bleak, may not foretell a looming recession (yet). Still, I think it is practically inevitable.
I think they have failed to adequately account for the politics.
Republicans are determined to undermine Obama’s presidency at any cost – including another recession or even a depression. Their political calculus - about which they have been stunningly candid – is that Obama will be held accountable by voters for the state of the economy. The worse they can make it, the greater the damage to Obama’s political fortunes and, in the two-party, zero-sum game of U.S. politics, the better for theirs. If you suffered any doubts about their commitment to this goal, the debt ceiling debate should have evaporated them. They will continue to force spending cuts and remove the little remaining support this recovery has until the economy succumbs.
The maddening part is that Obama seems determined to assist them. Perhaps he thinks his posture will attract the amorphous, mindless “independent” vote which he is apparently convinced is the key to his re-election. Or maybe he is simply temperamentally incapable of eschewing a deal, no matter how atrocious that deal may be. Whatever the reason, he seems compelled to agree to, nay, seek measures that undermine the recovery.
Sadly, it is hard to see any scenario over the next fifteen months that could alter this dynamic. Republicans are rewarded for damaging the economy so they are sure to keep coming back for more hostage-taking and spending cuts. (This will no doubt be proven when Congress addresses the continuing funding resolution and expiration of the gas tax in September.) The media – and the democrats, for that matter - continue to frame issues in Tea Party republican terms: It is no coincidence that deficits that were ignored during the Bush Administration suddenly achieved crisis status among the chattering classes once Obama assumed the presidency. Economically speaking, the real crisis facing our country is not deficits or debt but unemployment.
Krugman and, to a lesser extent, DeLong at least recognize the politics but do not seem able to factor the proper weight into their assessment of future economic performance.
It seems Stein’s Law is the only reason to believe this will end, but that certainty gives no comfort as it does not tell us when or how badly.
There are really only two ways out of this: one is to fall into a deflationary spiral until we hit rock bottom. The other is for one of the sectors of the economy to increase spending to support demand and, ultimately, employment. With employment flat – and quite probably worsening - and household balance sheets wrecked, we are unlikely to see any increase in consumer demand. Without an increase in demand, businesses – despite their $2 trillion cash surplus - won’t increase hiring. So, the likelihood that any such spending will come from the private sector seems exceedingly remote. Perhaps, the dollar will fall and we’ll improve our trade balance – except the EU seems determined to fail even more spectacularly than us and China is basing their growth on exports - plus they are actually trying to put the brakes on growth, right now. That leaves government – specifically, the federal government since most states are required to balance their budgets. Monetary policy has proven fairly ineffective as we are up against the zero interest lower bound. Fiscal measures, ideally spending, are probably our best hope – especially considering the incredible rates investors are currently offering the Treasury. Unfortunately, spending has been politically foreclosed by the Tea Party-manufactured deficit hysteria, Obama’s embrace of the ignorant government-as-household analogy and the perceived failure of his inadequate initial stimulus.
If I’ve missed something, if you know of some spark that is waiting to ignite a recovery – for that matter, if you know of anything to short circuit the political pathology that is sending us into another recession - please edify.