Archive for October 28, 2010

As it seems pretty likely now that we will have a Repub­li­can House with a Demo­c­ra­tic Sen­ate and Pres­i­dent start­ing late Jan­u­ary and I’ve begun to think about the eco­nomic impact. Obvi­ously, even if the party pre­dic­tions are spot on, there are some big unknowns, so I’ll start by out­lin­ing a cou­ple of the most sig­nif­i­cant, and what influ­ences they will have.

I’ll pref­ace this by stat­ing that this is only a pre­dic­tion based on the evi­dence I have seen to date.

First, will Obama be will­ing to stand up to the Repub­li­can House the way that Clin­ton did? Up to now, he has at least given numer­ous indi­ca­tions that he was will­ing to enter­tain the notion of work­ing with Repub­li­cans. Then again, from where I sit it looks as if the Repub­li­cans have been unwill­ing to nego­ti­ate in good faith, and I expect win­ning the House to embolden them to be even less will­ing to nego­ti­ate. So we could be look­ing at a Gov­ern­ment Shut­down II. Or Obama could let the House stomp all over him. It’s too soon to tell.

Sec­ond, what will the Tea Party mem­bers of the House do when they dis­cover that they can’t actu­ally get their bills through the process? I see three pos­si­ble imme­di­ate options:

1. They could with­draw and refuse to be part of the process, which would rel­e­gate them to irrel­e­vance in terms of Con­gres­sional influence.
2. They could throw tantrums in pub­lic, hop­ing to get the pub­lic ral­lied behind them in a Repub­li­can coup attempt, which would have an unknown outcome.
3. Or they could become part of the Borg col­lec­tive, which is the path most mem­bers of Con­gress take, even while pub­licly deny­ing that they are doing so.

Based on his­tory, I’d bet on the last option, though the sec­ond option would be the most enter­tain­ing from a purely anthro­po­log­i­cal perspective.

It’s pretty much going to be var­i­ous forms of sound and fury and no appre­cia­ble leg­is­la­tion. I have yet to hear any­one cred­i­bly sug­gest otherwise.

So what will hap­pen to the econ­omy? It’s pretty clear that money from the US Trea­sury won’t be sent to the states to fill their bud­get gaps. Given the size of the states’ rev­enue declines, it’s all but guar­an­teed that there will be state gov­ern­ment lay­offs and ser­vice reduc­tions, which will increase unem­ploy­ment and allow infra­struc­ture not cov­ered by exist­ing ARRA funds to fall fur­ther into decline. I sup­pose some states could raise taxes to com­pen­sate, but I find that hard to believe.

We’re cer­tainly not out of the woods until we see unem­ploy­ment drop below 7%, and that’s not hap­pen­ing any­time soon. At the same time, I doubt unem­ploy­ment insur­ance would be extended, so we’re prob­a­bly look­ing at more bank­rupt­cies and fore­clo­sures than we would have had with­out the divided gov­ern­ment. If more peo­ple end up on or over the edge, tax rev­enues will decline fur­ther, which will fur­ther rein­force the gov­ern­ment lay­offs and ser­vice reduc­tions. As with most eco­nomic forces, each indi­vid­ual case has a cas­cad­ing effect, which dimin­ishes rel­a­tive to the dis­tance one looks from the source. In other words, some­one who has less income will spend less, which will have a smaller effect on those busi­nesses that would have oth­er­wise received the busi­ness from that per­son, which will reduce their rev­enues by some (smaller) amount, which may trickle out another layer or two in a mea­sur­able way.

As long as those ini­ti­at­ing eco­nomic forces are rel­a­tively few in num­ber and/​or infre­quent, the econ­omy absorbs them with­out too much dam­age. If they are large in num­ber and/​or fre­quent, they can cre­ate pos­i­tive feed­back loops (a strange term to use for some­thing neg­a­tive, but you see the point). The impact of the real estate melt­down had a sig­nif­i­cant direct impact on a huge num­ber of peo­ple, and the result­ing lay­offs were sig­nif­i­cant enough to cause cas­cad­ing effects that have only recently sta­bi­lized. Part of the sup­port for that sta­bil­ity is money being pushed through the econ­omy via safety net programs.

If we lose the safety nets that are sta­bi­liz­ing the econ­omy, it is hard to see how that won’t cre­ate a new set of sim­i­lar cas­cad­ing effects. We can cer­tainly reach a new equi­lib­rium with­out those safety nets, but that would prob­a­bly include sig­nif­i­cant home­less camps. After all, where do unem­ployed peo­ple go when they’ve had fore­clo­sures? Some go to fam­ily or friends (who may or may not be in the same boat), but that only works if they have that social safety net avail­able. If they don’t, they live in tents and the like. This is what hap­pened on a grand scale in the 1930s.

I’m not at all try­ing to imply that a Repub­li­can House nec­es­sar­ily trans­lates to another Great Depres­sion. It is more likely, how­ever, to trans­late into a drop to a new equi­lib­rium, more due to inac­tion than due to action. The ques­tion is one of degree, not one of direction.

This all sounds like doom and gloom. Frankly, I’m gloomy about the econ­omy. Banks aren’t lend­ing, even though they have the cash. Busi­nesses aren’t invest­ing, even though they have the cash. The econ­omy depends on money mov­ing (a topic for a later date), and these large cash eddies are hurt­ing our abil­ity to have a speedy eco­nomic recov­ery. I see no indi­ca­tion that a divided Con­gress will be able to pro­duce any­thing that will address this.

Am I miss­ing some­thing big here? Is it pos­si­ble that the next Con­gress will pro­duce leg­is­la­tion of ben­e­fi­cial con­se­quence to the econ­omy? Please, some­body, give me a rea­son to have hope.