G.O.P. on Defensive as Analysts Question Party�s Fiscal Policy

[RamboLiberal]

Source: NY Times

WASHINGTON � The boasts of Congressional Republicans about their cost-cutting victories are ringing hollow to some well-known economists, financial analysts and corporate leaders, including some Republicans, who are expressing increasing alarm over Washington�s new austerity.

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Among those calling for a mix of cuts and revenues are onetime standard-bearers of Republican economic philosophy like Martin Feldstein, an adviser to President Ronald Reagan, and Henry M. Paulson Jr., Treasury secretary to President George W. Bush, underscoring the deepening divide between party establishment figures and the Tea Party-inspired Republicans in Congress and running for the White House.

�I think the U.S. has every chance of having a good year next year, but the politicians are doing their damnedest to prevent it from happening � the Republicans are � and the Democrats to my eternal bafflement have not stood their ground,� Ian C. Shepherdson, chief United States economist for High Frequency Economics, a research firm, said in an interview.

As for the longer term, Ethan Harris, co-head of global economics research at Bank of America, wrote this week that �Given the scale of the debt problem, a credible plan requires both revenue enhancement measures and entitlement reform. Washington�s recent debt deal did not include either.�



Read more: http://www.nytimes.com/2011/08/13/business/economy/voices-faulting-gop-economic-policies-growing-louder.html?_r=1&hp

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The events of the last few weeks � gridlock in Washington, brinksmanship over raising the debt ceiling, Standard & Poor�s downgrade of long-term Treasuries, renewed fears about European debt and a dizzying plunge in the stock market � bear an intriguing resemblance to some of the events of 1937-38, the so-called recession within the Depression, with a major caveat: it was a lot worse back then. The Dow Jones industrial average dropped 49 percent from its peak in 1937. Manufacturing output fell by 37 percent, a steeper decline than in 1929-33. Unemployment, which had been slowly declining, to 14 percent from 25 percent, surged to 19 percent. Price declines led to deflation.

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By 1937 an economic recovery seemed to be in full swing, giving policy makers every reason to believe the economy was strong enough to withdraw government stimulus. Growth from 1933 to 1936 averaged a booming 9 percent a year (rivaling modern-day China�s), albeit from a very low base. The federal debt had swelled to 40 percent of gross domestic product in 1936 (from 16 percent in 1929.). Faced with strident calls from both Republicans and members of his own party to balance the federal budget, President Franklin D. Roosevelt and Congress raised income taxes, levied a Social Security tax (which preceded by several years any payments of benefits) and slashed federal spending in an effort to balance the federal budget. Income-tax revenue grew by 66 percent between 1936 and 1937 and the marginal tax rate on incomes over $4,000 nearly doubled, to 11.6 percent from an average marginal rate of 6.4 percent. (The marginal tax rate on the rich � those making over $1 million � went to 75 percent, from 59 percent.)

The Federal Reserve did its part to throw the economy back into recession by tightening credit. Wholesale prices were rising in 1936, setting off inflation fears. There was concern that the Fed�s accommodative monetary policies of the 1920s had led to asset speculation that precipitated the 1929 crash and ensuing Depression. The Fed responded by increasing banks� reserve requirements in several stages, leading to a drop in the money supply.

The possible causes of the ensuing stock market plunge and steep contraction in the economy provide fodder for just about everyone in the current political debate. Republicans can point to the Roosevelt tax increases. Democrats have the spending reductions, which coincides with Mr. McElvaine�s view. �It appears clear to me that the cause was policies put into effect in 1936-37, mainly cutting spending when F.D.R. believed his re-election was secured,� he said.

http://www.nytimes.com/2011/08/13/business/financial-aftershocks-with-precedent-in-history.html?hp

[applegrove]

1. The US needs a massive Trillion dollar infrastructure plan. Now.

[roomfullofmirrors]

5. I don't think that will fix anything. It's a band aid placed over a severed femoral artery.

It doesn't close the wound or stop the bleeding. We don't need bandaids, we need a tourniquet and congress doesn't have the will for that. You want to fix America? Quit buying shit that wasn't made in America.

[xchrom]

2. '& the democrats to my eternal bafflement have not stood their ground.'

This from a republican.

Moderate dems - this is your disaster & yours alone.

[ProgressiveEconomist]

3. K&R! 'only 3 instances when such a steep market decline was not followed by recession'

"'The parallels to what is happening now are very strong,' Robert McElvaine, author of 'The Great Depression: America, 1929-1941' and a professor of history at Millsaps College, said. ... Then as now, policy makers were struggling with how and when to turn off the fiscal stimulus and monetary easing that had been used to combat the initial crisis.

Are we at similar risk today? David Bianco, chief investment strategist for Merrill Lynch Bank of America, told me this week that 'the market is collapsing faster than any fundamentals would warrant.' The possibility that the United States faces a recession as bad as 1937�s seems far-fetched. Nonetheless, Mr. Bianco notes that the market is now pricing in an 80 percent chance of recession, one likely to be more severe than in 1991. (He said Merrill Lynch places the odds at 35 percent.) He noted that there had been only three instances when such a steep market decline was not followed by recession: 1966, 1987 (after the October stock market crash) and 1998 (after the implosion of Long Term Capital Management.) 'Confidence is shaken and rapidly falling,' he said, a problem worsened by falling stock prices."

From the OP, "Aftershock to Economy Has a Precedent That Holds Lessons" By JAMES B. STEWART August 12, 2011, at http://www.nytimes.com/2011/08/13/business/financial-aftershocks-with-precedent-in-history.html?_r=1&hp=&pagewanted=print

What a well-written, well-edited, concise article on an obscure economic subject. I wish someone coulf figure out how to get such economic sophistication into media with a huge audience, such as the network nightly news or "60 minutes".

[toddwv]

4. K&R

for later use

[DLine]

6. Saving for later reading.

K&R

[TomCADem]

7. Nice Article That Digs A Little Deeper Behind The GOP's Talking Points

Normally, the media does not question right wing talking points that taxes kill jobs or that spending cuts will help improve employment.