The debt ceiling debate caused a free fall in US stocks. What is needed to avoid a double-dip recession and restore confidence in the US economy is a second New Deal, a bold effort to stimulate the American spirit through federal spending and presidential leadership.
Image by George Cassutto
Used with permission
The Dow Jones Industrial Average dropped over 500 points today amidst fears of a double-dip recession, a growing European debt crisis, and greater uncertainty as a result of incompetence in Congress. The first-ever default of the US government was averted by the Budget Control Act of 2011, but the in-fighting that characterized the process by which it was concluded scared investors to such a great degree that selling was the word of the day on Wall Street. The Republican and Tea Party mantra that reducing the nation’s debt and cutting the deficit would restore confidence to the US business community and begin the restoration of the US job market appears to have had the exact opposite effect. Investors know that the reduction of public funding in the US economy will actually result in a contraction of the gross domestic product (GDP). Close to $1 trillion of wealth disappeared today as a result of this stock market correction, and we can thank the Republicans in control of the House of Representatives for that.
The American public is witnessing the effect of the Tea Party’s refusal to compromise on fiscal policy. By drastically reducing the federal government’s role in the economy to such a great degree, the business community is feeling increasingly nervous about the private sector’s ability to recover from the abuses of the 2008 financial crisis. The housing industry continues to contract in the US, which means construction jobs are not being created. America’s crumbling infrastructure continues to decay, while global competitors such as China pour massive amounts of capital into their public transportation, public spaces, and manufacturing sectors. Chinese GDP is growing at a rate more than five times that of the United States in part because its government reaps the benefits of our borrowing and reinvests that money into its own economy. The excuse that China is communist does not fly any more. China has evolved into a new economic system called “state capitalism” where the government directs growth and development in what is still a command economy. That system may not be right for America, but our government could take a page from their playbook by investing in the livelihood of people by creating public sector jobs.
If more Americans returned to work, even if those jobs were government-funded, consumer demand in the US would increase, people would buy more goods and services, the economy would grow, and confidence would slowly be restored. It is the restoration of consumer confidence that would convince businesses and entrepreneurs to hire new workers and increase productivity. When that change takes firm hold, the government can allow public sector investments to revert to those provided by the private sector. But until then, President Obama and the Congress should be ending corporate welfare, reducing defense spending, and eliminate fraud and abuse in the tax code and in government programs, then turning that revenue into a real reduction in unemployment.