Is the GOP Cooking the Books to Avoid Recession Until After Election Day? [View All]

[marmar]

via AlterNet:



Is the GOP Cooking the Books to Avoid Recession Until After Election Day?

By James Galbraith, Mother Jones. Posted July 8, 2008.

Two enormous clouds remain for whoever becomes president: the housing slump and the banking crisis. Both are far from being finished yet.



Is the worst over? Are we on the road to recovery? Will the next president take office against a backdrop of economic improvement, as Bill Clinton did in 1993? Or has something deeper and more intractable gone wrong?

Early this year, the optimists, including Citigroup chairman Bob Rubin and Treasury secretary Hank Paulson, argued that the slowdown was short-term and that a "stimulus" package should be "targeted and temporary." This with rare haste the Democratic Congress enacted. As a result, most taxpayers got one-time $600 checks in May, prefigured by bubbly messages touting "Good News!" if you filed your taxes electronically.

The rebate isn't the only little Dutch boy thrown headlong at the dike this election year. Government spending, especially for defense, will be up: Military spending as a share of gdp is expected to grow by $75 billion in fiscal 2008, enough to neutralize a 0.3 percent decline in gdp. Dick Cheney was secretary of defense for Bush 41; just before the 1992 election he engineered a big run-up in outlays, as the military restocked following the first Gulf War. (It was exposed in the first Clinton "Economic Report.") Is the Pentagon up to that trick again? I'd be astonished if it were not.

Under intense pressure from panicky bankers, Ben Bernanke cut interest rates relentlessly from August 2007 through the spring of 2008. I don't accuse Bernanke of playing politics. But it's worth noting that this is what usually happens. In presidential election years when Republicans are in office, the Fed regularly and predictably pursues a more expansionary policy than when Democrats rule -- after controlling for differences in the rates of inflation and unemployment. (I made these calculations myself; see the chart.) Maybe they just can't help themselves.

But much of the ordinary effect of interest cuts on new lending -- like a rebound in construction and automobile sales -- didn't happen this time. That's because the fall in home prices (and therefore the value of collateral) overwhelmed the benefit of cheaper money to the banks. And the banks barely cut mortgage rates, so consumers saw no benefits at all. Lower interest rates did cut the value of the dollar, however, and that promotes exports and foreign investment. (These days New York Times real estate listings come with a currency converter.) It also boosts the stock market, since multinational firms can report their (unchanged) foreign income as higher dollar earnings. .....(more)

The complete piece is at: http://www.alternet.org/workplace/90683/