How to Pull Out of a Recession—the Fastest and Most Ethical Way, Not the Bush Way

By Matthew Rothschild, January 11, 2008

Even Bush has finally figured out that the economy is facing “some challenges,” as he so delicately put it.

As a solution, he is sure to propose making permanent the tax breaks for the rich that he’s already put in place.

But there are two problems with this: one ethical, the other economic.

The ethical problem is that the top 1% has already made out like bandits. Their slice of the income pie has grown dramatically over the past few years, while the slices for almost everybody else have shrunk.

The economic problem is that extending the tax cuts won’t do anything in the here and now, because those cuts are already in place for the next two years.

On top of that, the economic stimulus from giving the superrich some more money would be next to nothing compared with the stimulus you’d get if you gave almost everybody else some serious tax relief right now.

It is a good idea to cut taxes in a recession.

But those breaks should go to the people who need them, and who will then turn around and spend the extra money they have.

Another way, other than just relying on the Fed to lower interest rates, is for the government to spend more money on urgently needed domestic projects, like rebuilding bridges, which should be an easy sell, given the St. Paul disaster.

Or, as the progressive economist Dean Baker suggests, the government could focus on environmentally sane options.

“There are many ways to make a stimulus package at least partly green,” he writes. “For example, we can have generous tax credits for people to install more insulation in their homes, solar panels or other improvements that will reduce energy use. This would be an effective way to reemploy many of the construction workers who are losing their jobs. . . . We can also give people money and a powerful incentive to use mass transit by giving transit agencies money to reduce fares. If we gave public transit agencies enough money to reduce transit fares by $1 a trip, over the course of a year this would provide the same stimulus as giving a $500 tax rebate to every user of public transit.”

But the kind of government spending that Bush prefers is on the military, especially the Iraq War.

Look what we could have bought instead of that disaster.

“The $500 billion that Bush has squandered in Iraq could have paid for 4 million new housing units, or hired 8 million new teachers. And the $2 trillion we may end up spending on this war could pay for universal health care for 12 years,” Anita Dances of the National Priorities Project points out in a recent piece for the Progressive Media Project.

What’s more, that domestic spending would have been far better for the economy.

“Not all government spending is equal,” she notes. “Every billion dollars spent on the military results – directly and indirectly – in fewer jobs and lower quality jobs than a billion dollars spent on education, a recent analysis published by the Political Economy Research Institute showed. That is, the effects of military spending ripple through the economy with much less vigor than government spending on other programs. Plus, domestic spending has a longer lasting impact on the economy. A well-educated, healthy workforce, along with investment in infrastructure, will fuel the new industries of tomorrow.”

When facing a recession, we always need to ask: What kind of tax cuts? What kind of deficit spending? For whom, and for what?

Yet another way to ease out of a recession is to increase federal spending to local and state governments, which suffer a budget shortfall during slowdowns but are usually required by law to be in balance. To get there, they then slash their own funding, laying thousands of people off.

We’re seeing that prospect right in front of our eyes in California, where Governor Arnold Schwarzenegger has declared a fiscal state of emergency and is calling for 10 percent cuts in almost every department. That will not only send California’s economy into a tailspin but it may drag the entire country’s economy off the cliff.

More fundamental proposals could also lift us out of recession. Economist Robert Pollin spells some of these out in a recent article in New Labor Forum entitled “A People’s Economy Is Possible.”

He calls for the creation of one million new jobs in “health care, education, and energy conservation.” He also advocates “extending public medical insurance” to every single American who doesn’t have it today, and greatly expanding educational opportunities.

Pollin recognizes that this would increase the budget deficit in the short term. But he convincingly argues that this concern is overblown. “The primary problem with the U.S. Treasury’s fiscal stance is not the size of the deficit, per se, but how the money is being spent.”

It is not the time to worry about the budget deficit when a recession is upon us. It is the time to figure how best to kick start the economy in an ethical manner.

And don’t look to Bush for that.