RebelCapitalist: Financial Information for the Rest of Us

No Change = No Growth

Dec 23, 2009 | By: Mr_Blue | Comments | Permalink | Tags: debt, consumer spending, gdp, new normal, economic growth, efca

Yesterday it was reported that third quarter Gross Domestic Product (GDP), our broadest measure of economic activity, was revised (a second time) lower to 2.2%. It was originally estimated at 3.5% in October which is fairly good growth. At this revised level of growth of 2.2%, our economy is not going to generate enough jobs to start a strong economic recovery. This could be the New Normal for economic growth which won’t help with generating jobs.

What are the problems? This is sounding like a broken record but it’s the truth and nothing is being done to address these problems - NO CHANGE here:

1) Consumer driven economy - 70% of economic activity.
2) Debt driven economy - this consumer driven economy needs debt to fuel the spending (debt substituted for wage growth)
3) Financial sector is too big and too influential.
4) Manufacturing base that is weak.

What can we do about it?

1) In the short term any economic stimulus should be strong enough and big enough to close the output gap which is the difference between what the economy would be producing (or output) if it kept growing at its historical pace and the actual decline in the economy. Stop jerking around with these tax credits for homes, cars and appliances. We need a direct jobs program such as the depression-era Worker Progress Administration (WPA) or Civilian Conservation Corps (CCC).

2) Change the tax code to not favor debt - yes that means getting rid of tax deductions for interest expense for business and mortgage interest for individuals. I know this hurts but in the long run it will help with transforming our economy for the better.

3) Defend our manufacturing sector by enforcing current trade agreements.

4) Make the financial sector smaller. Break up “Too Big to Fail” financial conglomerates!

5) Raise the tax rate on the highest marginal tax bracket. Trickle down economics doesn’t work and studies have shown that tax cuts that have favored the highest earners have contributed to the huge income inequality we see today.

6) Support policies that strengthen unions (not weaken them) such as the Employee Free Choice Act. As Prof. John K. Galbraith has said American Capitalism needs Countervailing Powers - in the past unions provided the countervailing power to big corporations. This Countervailing Power has been missing for several decades.