Unleash Fiscal Policy Now, or More Severe Recession Ahead

The economy is failing. Banks are hurting and credit continues to dry up. Consumer debt is dangerously high; foreclosures and credit-card defaults are mounting. Consumer demand is dropping precipitously and exports can’t begin to make up the difference.

It’s now clear the Fed can’t and won’t stimulate the economy. This leaves fiscal policy as the sole remaining vehicle. Distributing those little stimulus checks this month were like dispensing aspirin for pneumonia. Blue-dog Democrats, Calvin Coolidge Republicans, and Ross Perot Independents all must understand the critical importance of deficit spending right now. It’s all we have left.

Congress only has a few weeks left and must put on the President’s desk a genuine stimulus before it recesses permanently, and the President must sign it if he has any hope of being remembered as even halfway competent. The fastest and strongest fiscal stimulus would be a one-year exemption of the first $15,000 of income from payroll taxes, starting as soon as the bill is signed.

This should be followed up by a major infrastructure spending bill soon after the next president is sworn in, based on a newly-formed capital budget. (Don’t get me wrong: I’m not in favor of large, permanent and growing deficits, such as McCain’s economic proposals will get us, and which will load America and the dollar with even more foreign IOU’s. The next fifteen months is when we need the fiscal stimulus.)

And then a far more progressive tax structure, so the middle class begins to have the buying power it needs to keep the economy going.

Unless fiscal policy is unleashed, the current recession has a 50-50 chance of turning into something far worse by this time next year.


Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

4 Responses to "Unleash Fiscal Policy Now, or More Severe Recession Ahead"

  1. PhilT   July 3, 2008 at 3:37 pm

    Prof. Reich et al ~Can you please explain why almost all media/commentary is excluding follow-up coverage of the June 23, 2008, House Subcommittee on Oversight and Investigations hearing "to explore whether weak regulation of the energy futures market has permitted pension managers and currency hedgers to flood the oil futures market with so much money that, at a time of tight supply and demand, oil prices have become disconnected from underlying supply and demand.?"Here is a link to transcripts in case you missed the C-SPAN coverage of the extremely compelling testimonies of, in particular, Messrs. Fadel Gheit, Roger Diwan, Michael W. Masters, Edward N. Krapels – et al.http://energycommerce.house.gov/cmte_mtgs/110-oi-hrg.062308.EnergySpec.shtmlThese gentlemen have demonstrated a clear understanding of the Energy Futures Markets and their functions/purposes, short-term and long terms problems, physical investors vs. electronic/paper investors, the impact of speculators in the futures market on price discovery in the spot market, and the immediate remedies required to be incorporated in legislation that bring the price of oil in line with real market conditions within 30-60-days.Any thoughts on why the drafting of this legislation from an apparently bi-partisan, forward thinking sub-committee is not on a fast track as the expert testimony assured that the price of oil would decrease ~50% from its current price level as a result of appropriate legislative action.Looking forward to your thoughts …

  2. Leslie the Realist   July 3, 2008 at 4:16 pm

    When the twin bubbles of CREDIT and HOUSING imploded, the jig was up! NOTHING is going to stop the American Greater Depression of 2008 from occurring — Nothing. The pendulum is currently swinging to its reverse position. It’s about time for the shake-out of the great imbalances between the haves and have-nots when it reaches such extremes. This is always a telling sign prior to a depression. Isn’t it ironic timing how millions of Americans have become stranded in far-flung boonies from coast-to-coast just as peak oil occurred, unable to pay their bloated mortgages, commute to distant jobs, or even pay utilities for their outsized McMansions. DEBT will become the new 4-letter word.

  3. Stormy   July 3, 2008 at 8:39 pm

    I have yet to hear a Democrat–and certainly never a Republican–address the root of the problem: The Trade Deficit.Simply going deeper in debt to rebuild infrastructure is not enough. Central banks are now propping up the economy. We have less and less to trade; all we seem to do is to create jobs in government and health care.The twin deficits have to be addressed. Government stimulus will not do the trick. Rebates, tax breaks–even government investment in infrastructure are all short-term remedies.The governments that are doing well have trade surpluses and positive account balances. We have neither.Your thoughts on trade, Prof. Reich?

  4. satish   July 4, 2008 at 8:04 am

    Fiscal stimulus for a largest capitalistic country. America is moving towards socialism