July 2011, Week 5


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Fri, 29 Jul 2011 23:57:27 -0400
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How to Make a Bad Economy Even Worse

     New GDP numbers should be a warning bell for Obama
     and Congress. But they're not listening

By Andrew Leonard
July 29, 2011

Here's how monumentally screwed up our national
priorities are. Just two hours after the government's
Bureau of Economic Analysis released disastrous new
figures indicating that GDP growth has essentially flat-
lined, the president of the United States gave a brief
address to the nation calling for both political parties
to come to bipartisan compromise on "how to cut spending

Obama was responding to Thursday night's monumental
failure by House Republicans to pass their own debt
ceiling bill, after a revolt by conservatives who deemed
the measure unsatisfactory because it doesn't cut
spending enough. With the default deadline only four
days away, and at the end of a week when stock market
indexes have already fallen by about 4 percent, when
short-term credit markets are showing signs of stress
and investors are pulling billions of dollars out of
money market funds, the display of Republican
incompetence was the last thing a nervous economy needs.
A little reassurance that the White House was on top of
the situation would have been sorely appreciated.

Because the GDP numbers are the icing on this
recessionary cake. The BEA pegged growth in the second
quarter at a paltry 1.3 percent. The first quarter was
revised down to a moribund .4 percent. And perhaps most
noteworthy at all, revisions to even earlier data showed
that the depths of the recession were much worse than
anyone realized at the time. In the fourth quarter of
2008, for example, growth fell by an incredible 8.9

With those numbers ringing in our ears, President Obama
addressed the nation and warned us that "on a day when
we have been reminded about how fragile the economy is"
both parties need to get together and cut a deal. And
thus he demonstrated once again the amazing disconnect
between the current obsessions dominating our political
system and the economic plight of the nation.

Yes, we need a deal that avoids default. But if the GDP
data proves anything, spending cuts shouldn't be part of
it. Shrinking state and local budgets are already a
significant drag on growth. Consumer spending is weak.
And yet everyone seems to agree: Obama, Republicans and
Democrats, that the first order of business should be
shrinking government even further, subtracting even more
demand from the economy, and likely accelerating our
economic decline.

Conservatives have been fond of arguing that the weak
economy proves that Obama's stimulus didn't work, and
I'm sure they'll be citing today's GDP numbers as
additional evidence. But if there's anything that should
jump out of the GDP data, it's the confirmation that the
Obama stimulus was far too small to deal with the true
state of the economy. Based on the data that we were
aware of at the time, administration economists such as
Christy Romer, chair of the Council of Economic
Advisers, were recommending at least $1.2 trillion in
stimulus. Instead we ended up injecting a little under
$800 billion -- and half of that was in the form of tax

Now we know that the economy was contracting much faster
than anyone imagined. Is it any wonder that the badly
designed, cash-poor Recovery Act only managed to have
the mild effect of keeping unemployment from rising even
higher than it would have without stimulus?

The political dysfunction over debt ceiling negotiations
has already hurt an ailing economy. But neither the Reid
Plan nor the Boehner plan offers the right medicine.
Neither is even focused on treating the right disease.
Yes, it's clear that there is no political will for any
further efforts to boost demand in the economy. But the
first commandment here is simple: Do no harm.


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