Worries about the economy were indeed prominent on voters minds, despite the administrations weapons of mass distraction. But Democrats failed to present a sufficiently forceful and cohesive message about what they would do differently.
The cloudy economic picture complicates matters. The U.S. economy has been growing slowly this year, the unemployment rate unexpectedly tapered off slightly in late summer, and there was another stock market rebound in October. But troubling signs—including four straight months of decline in the index of leading economic indicators—still overwhelm positive news.
Even if economic growth doesnt decline further, the best prospects are for slow growth, which will leave the economy fragile and unemployment high.
The stock market collapse, the continuing waves of corporate scandals and the prospect of war have left both investors and consumers jittery. But the most worrisome danger is that some shock, such as the collapse of a big bank, could push the economy into a deflationary spiral. With prices falling and interest rates near zero, consumers would delay purchases, waiting for lower prices.
Deflation would further reduce the value of many assets, increase debt burdens, and make it impossible for the Federal Reserve to stimulate the economy, since it couldnt push interest rates below zero percent. A Japan-style deflationary slump in the United States would further drag down the global economy. This country has been the primary motor for the past decade, and neither faltering Europe nor Japan could take its place.
Consumers have sustained modest growth by increasing their debt, taking advantage of lower interest rates to buy homes and cars, refinancing existing mortgages to get cash, and loading up credit cards. But according to the Center on Budget and Policy Priorities, growing numbers of workers are involuntarily unemployed or working part-time, duration of unemployment is lengthening, and as many as 3 million workers may be without unemployment benefits at the end of the year. Last year, poverty increased, the poor became even poorer, median household income fell, and inequality reached record levels (as income declined for every group except for the wealthiest 5 percent).
Not surprisingly, household defaults on debt are rising sharply. This would be worrisome on its own; the buffer for most house, holds has been rising home prices. But Dean Baker, co-director of the Center for Economic and Policy Research, argues that the housing market is experiencing an unsustainable bubble. Consequently, if housing prices decline, household debt burdens will be less manageable, and consumer demand will drop.
Meanwhile, corporations have already cut back on investment—the steepest and longest decline since the Great Depression, says The Economist. Earnings are still depressed, and businesses are saddled with extraordinarily heavy debt. Some of that debt went into investments, such as telecommunications, that have since tanked. Many corporations also squandered their resources in the merger boom of the late 90s; a Business Week analysis shows that 61 percent of those mergers have failed, enriching top executives but destroying shareholders wealth and leaving the companies less able to invest. Many key industries-information technology, telecommunications, airlines and large swaths of manufacturing-are in deep trouble, with major firms in or near bankruptcy.
In the wake of revelations about widespread corporate corruption and the exploitation of a vast array of financial innovations, as the apologists call them, to enrich top managers and conceal poor performance, some high-profile businesses have collapsed. But the related fallout from financial deregulation continues to threaten banking and financial services.
Many industries have vastly more capacity to produce goods or services than they have customers, and that in turn depresses both prices and investment. As a result, even in Silicon Valley, the Financial Times reported, there have been widespread cutbacks in research and development, which threatens the growth of the most innovative sector of the U.S. economy.
Meanwhile, many businesses, facing rapidly rising health care costs, have shifted the cost to their employees. As a result, people will pay more for health care (or lose insurance) and have less to spend on other needs. And businesses that had relied on a rising stock market to fund fixed-benefit pensions now face new costs for those plans. The end result of all this: Businesses will have less money and motivation to invest, eliminating o important cause of the late-90s boom.
Slow growth also depresses tax receipts. The federal budget went from a surplus, excluding Social Security, of $86.6 billion in 2000 to a deficit of $322 billion for fiscal year 2002. Democrats opportunistically—and misleadingly—bash Bush on this point. Running a deficit, along with the Fed lowering interest rates, is the right policy. But it would be better social and economic policy for deficits to finance tax cuts for low-income people, not the rich. Also, speedy deficit spending that improves productivity—for education, research or infrastructure—is better than tax cuts. Such targeted spending provides short- and long-term benefits, and it is less likely to be drained away in consumption of imports.
State governments race a bigger tax problem, with projected deficits of more than $57 billion for fiscal year 2003. They cant run deficits because few have large reserves; and federal tax cuts—which many states mimic—made a bad situation worse. As a result, most states have cut work forces and essential services, including education, child care and Medicaid. Such policies deepen the downturn, hurt the most vulnerable and undermine future economic prospects.
The global context simply makes matters worse. Over the past year, the nations trade deficit has sharply increased, as has its current accounts deficit (which includes investment income). Exports have declined, while imports—especially from China—have increased. The deficit partly reflects economic weakness throughout much of the rest of the world—as well as demand for the dollar, which is held by other countries as a reserve currency and is used in much of global trade and finance. But the strong dollar makes imports cheaper and U.S. exports more expensive.
The deficit puts the greatest pressure on manufacturing jobs. Economic Policy Institute economist Robert Scott calculates that the increase in the trade deficit from 1994 to 2000 created, after subtracting export-generated jobs, a net loss of 3 million job opportunities. Since 1998, the United States has lost 2.2 million manufacturing jobs—and nearly 1 million since September 2001—including one-fifth of auto and metalworking jobs and one-fourth of textile jobs, according to the AFL-CIO. Much of that loss resulted from import pressure and capital flight.
The International Monetary Fund this fall described the U.S. deficits as unsustainable and a source of economic instability. Worries about the stability of the U.S. economy, or the value the dollar, could cause a sudden flight from the dollar, a drastic drop in its value, higher interest rates, and, consequently, deeper, global recession. Because the world operates on a dollar standard, this is unlikely to happen soon—but in the late 60s there was such a flight from the dollar to gold, leading to the demise of the Bretton Woods monetary system.
Sensing they might win total control of Congress, Republicans and their business cronies began talking openly in October about an economic agenda extracted from an ideological mold (even if it will be falsely sold as stimulating the economy). They want to accelerate Bushs tax cut, make it permanent, and abolish the estate tax. They also want to cut capital-gains taxes, increase deductions for investment losses, eliminate the double taxation of corporate dividends, and perhaps adopt a regressive national sales (or value-added) tax and a flat income tax.
These tax cuts would be an enormous giveaway to corporations and the rich with little stimulative benefit. From 2001 to 2005, the richest 1 percent of households will garner 19.8 percent of the tax cuts Congress approved last year, according to Citizens for Tax Justice. But they will get even more in the final phase of the 10-year Bush plan, so that by 2010, that elite 1 percent of households-making $518,000 a year or more-will reap 52 percent of the benefits.
Speeding up Bushs cuts and making them permanent would give them much more, much faster, much longer. That would deprive the public of needed resources while intensifying the inequality that has continued to rise even through the late 90s, when nearly full employment finally boosted real wages in the lower-income ranks.
The Bush administration has showed little interest it tackling the issues of corporate accountability. It underfunded the Securities and Exchange Commission, sabotaged appointment of a respected reformer as head of the new corporate accounting oversight board, and retreated on proposals to establish financial research operations independent of the big investment banks in order to reduce conflicts of interest on Wall Street.
Democrats, though hardly united, have at least promoted extensions of unemployment benefits, a higher minimum wage, aid for school construction, and federal assistance to states for Medicaid and to the unemployed for health insurance. House Democratic leader Dick Gephardt does advocate a $75 billion tax cut to help working families and encourage company investment, but Democratic leaders have been unwilling to call for repealing the remainder of Bushs tax cuts.
What would a truly progressive plan look like? It would include repeal of those future tax cuts, reduced interest rates, more revenue sharing with the states (for needs like childcare), and a simplified, more accessible family tax credit (incorporating the Earned Income Tax Credit). It would also include more ambitious investments in long-term needs that would have immediate counter-cyclical effects. For example, besides building more schools, the federal government should invest more in research, provide more college scholarships, and offer displaced workers extensive education and training.
The federal government also needs to drastically democratize and reform corporate governance and regulate the financial services industry to ensure greater openness, honesty and stability. That would also involve some credit allocation, like eliminating the mortgage interest tax credit for second homes and part of the cost of super-luxury homes (or, as the Federal Reserve should have done, restraining borrowing for stock speculation). Theres also a need for renewed but reformed regulation of other deregulated sectors to foster energy efficiency, a rational transportation system (integrating revitalized rail transport), and more publicly accountable communications systems.
Extending Medicare, including prescription drug coverage, to the entire population would improve health and cut costs. Besides giving workers a stronger voice in their workplace savings plans and protecting Social Security from privatization, the federal government should encourage more universal, fixed-benefit pension plans that could be moved from job to job. Vigorous protection of workers rights to organize unions is also critical for making corporations more accountable and reducing inequality.
Globally, there is a need for stronger agreements that roll back excessive corporate rights and protect workers and the environment. But there also needs to be a greater emphasis on raising standards of living in developing countries and on reining in the excesses of the global financial system (starting with more controls on capital mobility and less fluctuation of exchange rates, as economists Christian Weller and Laura Singleton of the Economic Policy Institute have advocated).
These proposals go far beyond short-term stimuli for a sluggish economy, but the recent downturn is partly a product of the decades-long shift toward a deregulated, globalized economy dominated by the interests of financial markets and multinational corporations.
Though Democrats share responsibility for creating this system, it serves neither their political needs nor the American public. If Democrats hope to win popular confidence in their economic stewardship, they must explain clearly and forcefully that the current system is a failure which serves only the rich—and that a bold, new approach, drawing on the best of progressive traditions, can make the economy work much better for the average American.