The Next Recession

Perhaps it’s unfair of me but I find it difficult to struggle through an op-ed after the first poorly-informed statement. This morning I managed to make my way through Lloyd Blankfein’s op-ed in the Wall Street Journal and I think it was worthwhile if only as a framework for commenting on our economic situation. In his op-ed, Mr. Blankfein, CEO of Goldman Sachs, lists four economic priorities for the Obama Administration in the coming months:

Remove the risk of a double-dip recession and give the economy a stimulative jolt.

This was the bullet point that nearly made me stop reading. There is no risk of a double-dip recession because the economy has now been expanding for more than 15 quarters. A double-dip recession is a recession that takes place within a quarter or two of a previous recession. The window during which a recession would be characterized as “double-dip” has passed. Another recession is inevitable. The business cycle has not been repealed and every claim of its repeal has proven false. A new recession becomes a little more likely with every passing day. I think it’s possible that the next recession could be ameliorated with Keynesian stimulus if the stimulus were timely, properly targeted, and of the appropriate size. Stimulus spending does relatively little good after an expansion has already begun and it does the most good in sectors that aren’t already at full production with substantial barriers to entry, e.g. healthcare. I think that block grants given to the states to help them live up to the unrealistic promises they’ve made to their public employees are unlikely to produce the level of stimulus that we’d need.

Unfortunately, Congress has not proven itself equal to the task of producing a timely, properly targeted stimulus of the appropriate size. It has, however, proven more than equal to the task of lining its own pockets, giving handouts to politically-connected cronies, and paying off contributors. I doubt that’s an efficient way of stimulating the economy.

Restore confidence in public finances.

By this Mr. Blankfein means a “grand fiscal bargain” and I suspect that none is on the horizon. I have no objection to the tax hike that the president is asking for, indeed, I thought the “Bush tax cuts” that the president and the Democratic Congress re-authorized were a mistake. However, I don’t think we should be under the illusion that $82 billion worth of tax increase, the largest estimate I’ve seen of the results of the tax hike, will offset a $1 trillion plus mismatch between revenues and expenditures. That’s only 8%. The Democratic Congressional leadership has already specifically precluded Medicare cuts from consideration. Much as I think we can reduce defense spending I don’t think we can reduce it enough to make up for the difference.

Even in the unlikely event of a “grand bargain” being arrived at would that restore confidence in public finances? I doubt it. I think we’d need an amenable process for resolving impasses of the sort we’ve had for some time to do that and that’s just too much to hope for. There is simply nothing on the horizon.

Keep marginal tax rates low.

We have among the highest marginal corporate taxes in the developed world. To keep them low we’d need to get them low and that appears to be unacceptable to the Senate Democrats. Even with the tax hike the president is asking for the marginal rates on individual income taxes are among the lowest in the developed world. I’m honestly not sure what Mr. Blankfein is advocating here. It’s either the impossible or the tautological.

Act like we need to compete and win—because we do.

This bullet point appears to be a catch-all for pursuing lower energy costs, immigration reform, and trade reform. Remember that the U. S. is the Saudi Arabia of coal. The Obama Administration appears to be pursuing its crusade against coal, a primary leg of energy production, even as it says it has no such crusade. Perhaps it’s a miscommunication between the White House and the EPA. Immigration reform is much in the news these days but most of the energy is being directed towards amnesty for illegal immigrants who are already here rather than immigration reform to allow more highly educated and otherwise qualified immigrants of the sort that Mr. Blankfein appears to be advocating.

I’ve been advocating trade reform right along but it does not appear to be an area in which anybody but me and, I guess, Mr. Blankfein has any interest.