5 Reasons a Double-Dip Recession Could Happen

Harvard Professor Kenneth Rogoff recently appeared on “All Things Considered” and raised the possibility of Congress taking action that could lead to a ‘trade war,’ like a tariff on goods from China …[The U.S. has] 15 million people unemployed. Fiscal policy has reached its limits. Monetary policy is testing its limits. [They are] going to be fishing around for something else.”

He got it backwards.

Real fiscal policy has hardly been used at all to end this recession. The TARP/Bailout funds were too “Wall Street-specific” and did very little for Main Street. The Stimulus Package was less than 1/2 the size it needed to be, and 1/5 of it went to business tax relief – a notoriously ineffective tool when the major problem is lack of consumer demand.

On the other hand, monetary policy might be even less effective. For example: the plan which was recently announced by the Federal Reserve to buy $600B of long-term US Treasury bonds from American banks. The theory is relatively simple: increase the money supply. You see, if commercial banks give treasury bonds to the Fed in exchange for cash, then the banks will have more cash reserves, which will enable them to make more loans. Buying treasury bonds will also drive up the price of treasury bonds, which has the effect of lowering the rate of interest.

But what good will more cash reserves and lower interest rates do for the unemployment picture? Interest rates are already at historic lows and cash reserves are high yet (1) banks are not lending to small businesses and (2) big businesses are borrowing, but they are not spending on new plants, equipment, or jobs. Rather, they are stockpiling cash until the economy improves.

Which brings us to an old economists’ saying : “You can’t push a wagon with a rope.”

That is, monetary policy is ineffective in a recession because businesses do not build new facilities and hire more workers when there is not enough demand to sell all of their current productive capacity.

What might “real” fiscal policy look like?

Here’s one suggestion: Let all the Bush tax cuts expire at the end of 2010. The ‘lame-duck’ Congress can do this simply by doing nothing.

Next, spend much of the $70 billion saved each year (by not extending the tax cuts to the wealthiest 2%) to fund alternative energy projects like wind & solar power, ocean tidal power, and upgrading our electrical grid. (This is not an atypical use of Federal Dollars, by the way. Millions of Americans have electricity in their homes today as a result of TVA dams. Railroads were heavily subsidized by Federal land grants. Today’s trucking industry would barely exist without the Interstate Highway Acts.) This will provide jobs in infant industries that are still viewed as too risky to attract the big money needed for them to get a foothold.

Which is why, if Congress is fishing around for something else to try, they might want to try what only government can do: tax & spend.

VRin Michigan of MI 10:02AM November 23, 2010

Please don't forget to pray....it works!

Marc of CA 2:59AM October 14, 2010

Ross Perot where are you when we need you the most??

Jim Nasium of MD 8:31AM September 21, 2010

Hey! We are America and we will overcome these times of difficulty! We all need to listen to the lessons our Grandfathers and Grandmothers tried to teach. Great young men and women will rise up and lead us through these times, they always have and always will. The greedy need to step aside for all the money in the world will do your family and you no good without a country. Concetrate on our greatest resource! Our children will lead the world back to greatness, but only if we truely take the time to love and to nurture them. Teach our children the lessons we ignored. Keep our politicians and ourselves honest. Stop complaining and blaming! Have the guts to stand up and make the changes we need happen. Give the best you have to offer and lets get rolling again. Greatness is around the corner if we want it. I most certainly do!!

your fellow countryman

Larry

Larry of WV 12:29AM September 21, 2010