Reports from the Economic Front

a blog by Marty Hart-Landsberg

The economy: what lies ahead?

Economic conditions continue to worsen, and as a consequence the budget deficit continues to grow.  The Congressional Budget Office projects a $1.2 trillion budget deficit for the fiscal year (one reason that this deficit estimate is so high is that the CBO is including the likely cost to the Treasury of its bailout spending).  The deficit is not a surprise—for example, estimates are that tax revenue will fall by $166 billion or 6.6 percent while spending on social services will rise.  This just highlights the seriousness of the economic situation.  One well-known analyst (Nouriel Roubin) predicts:

“It is clear that 2008 was not a very good year, and it is official that the current recession started in December 2007. So how far are we into this recession that has already lasted longer than the previous two (the 1990 and 2001 recessions lasted eight months each)? I believe the U.S. economy is only half way through a recession that will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.”

It is therefore especially tragic that president-elect Obama appears to be backing away from his earlier commitments to aggressively remake the economy (claiming that he wants to win over Republicans and get 80 votes in the Senate).  For example, he now talks about an $800 billion dollar stimulus package that will be spread over TWO years (rather than one).  Moreover, approximately 40 percent of that stimulus is to be given out in tax breaks, half going to business.  Tax breaks have smaller multipliers than direct spending by the government and do less to restructure economic activity.  Obama is also now talking about the need to “address” entitlement programs in order to keep the deficit from growing —which means a likely attack on Social Security (which is completely self funding and not a cause of the deficit) and Medicare.  And of course nothing has been said about slashing spending on the military or a national health care program—two important ways to deal with economic and social problems.

A number of analysts are warning that this change in strategy is a big mistake, and I agree.  For more see:

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