Friday, January 30, 2009

Biggest Drop In GDP In 27 Years

If tax cuts are the most stimulative approach to rebooting the economy, as Republicans claim in rejecting Obama's spending approach stimulus plan, then the economy should already be racing, given the trillions of dollars in tax cuts President Bush and Republicans already gave the nation over the past eight years. Right? Wrong!
The U.S. Department of Commerce reported this morning that in the fourth quarter of 2008 the economy shrank at its fastest pace in nearly 27 years, sinking deeper into recession as consumers and business cut spending.

The government report shows a broad-based contraction across nearly every business sector with the gross domestic product, which measures total goods and services output within U.S. borders, in a near free fall 3.8 percent annual rate of contraction in the fourth quarter. That is the biggest drop since the first quarter of 1982, when output contracted 6.4 percent.

The Commerce Department report said that consumer spending, which accounts for two-thirds of U.S. economic activity, fell 3.5 percent in the fourth quarter, after declining 3.8 percent in the third quarter, and Q4 spending on durable goods, like cars and furniture, plunged 22.4 percent, the steepest decline since Q4 of 1987. Investment by business also sharply declined at 19.1 percent, for the sharpest pull-back since the first quarter of 1975, and residential investment plummeted 23.6 percent too. Exports of goods and services plunged as well at a the rate of 19.7 percent, the biggest drop since the third quarter of 1974.

Added to the 0.5 percent contraction in GDP in the third quarter of 2008, the fourth quarter contraction rate of 3.8 percent yields the first consecutive quarterly declines in GDP since the fourth quarter of 1990 and the first three months of 1991.

Across all four quarters of 2008, GDP rose 1.3 percent, the slowest pace of growth since 2001, when the economy expanded 0.8 percent.
As Center for American Progress Senior Fellows Christian Weller and John Halpin noted in 2006, the outcome of the 2001 tax cuts was "the weakest employment growth in decades." The 2003 tax cuts didn't fare much better, resulting in job creation that was "well below historical averages."

When Bush's White House proposed the 2003 cuts, they promised that it would add 5.5 million new jobs between June 2003 and the end of 2004. But "by the end of 2004, there were only 2.6 million more jobs than in June 2003."

As Paul Krugman has pointed out, the belief that Bush's tax cuts successfully stimulated the economy is a form of mythology. CAP's Michael Ettlinger and John Irons wrote in September, "Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras" that followed Reagan's 1981 tax cuts and Bush's 2001 tax cuts.

Indeed, employment growth was much stronger post-1993 than post-2001. The average annual employment growth was 2.5 percent after 1993 and just 0.6 percent after 2001.

And, remember President Bush's $168 billion tax cut/rebate economic stimulus plan the United States Congress approved in February of 2008, to help stave off economic recession. That does not seem to have worked either. Martin Feldstein wrote in the Wall Street Journal that of course the tax cut stimulus didn't work:

Here are the facts. Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the pay down of debt. . .

. . .Although press stories emphasizing that the rebates induced additional consumer spending were technically correct, they missed the important point that the spending rise was very small in comparison to the size of the tax rebates. . .

The small rise in spending in response to these tax rebates is similar to what previous studies of one-time tax cuts found. It also corresponds to what both basic economic theory and common experience imply. Although someone who receives a permanent annual salary increase of $1,000 typically would increase his annual spending by an almost equally large amount, a $1,000 rise in wealth caused by a share price increase or a tax rebate would raise spending only gradually over a number of years.

The facts show that increased infrastructure spending appears to be a particularly efficacious
way to stimulate the economy as compared to tax cuts TPM:
Mark Zandi, a Republican economist who advised John McCain's presidential campaign, has been stressing this point for months. Zandi's research showed a corporate tax cut delivering $0.30 in real GDP growth for every $1 invested, and a regular tax rebate delivering anywhere from $1.02 to $1.28 for every $1.

Compare that to aid to state governments, which Republicans have roundly criticized: $1.36 for every $1 invested. Infrastructure spending delivers a whopping $1.59 in GDP for every $1.

The Congressional Budget Office also maintains that corporate tax cuts are 'not a particularly cost-effective method of stimulating business spending.
Unfortunately, Reagan's "supply-side" mythology that "tax cut stimulus works best" is alive and well and still promoted by conservatives today. Despite the economic facts, conservatives like Kay Bailey Hutchison (R) and John Cornyn (R) continue to demand corporate tax cuts over infrastructure spending as the solution. Both Texas’ senators Kay Bailey Hutchison (R) and John Cornyn (R) have voiced their staunch opposition to Obama's $819 billion stimulus plan because it does not exclusively use tax cuts. “I read the bill in vain for any real stimulus in the economy,” Cornyn told the Dallas Morning News.

At a luncheon meeting of the Plano Chamber of Commerce on Friday Jan. 23 Senator Hutchison said that she could not support President Barack Obama's proposed $825 billion stimulus package because it wouldn't provide an instant jolt to the economy.

Hutchison said the bill, among other things, would lift the earned income tax credit for low-income workers and allocate billions of dollars to help pay for college, build roads and other structures and invest in alternative fuels and other projects that would not stimulate the economy. Hutchison further said the effect of the sweeping spending plan would be to drive up the federal deficit. "What we're looking for is a jump-start," Hutchison said, "This is not going to be a jump-start."

According to the Dallas Morning News, both Texas senators predicted a lopsided vote in the Senate similar to the House vote where every Republican voted against Obama's plan.

Senate Republicans Are Gearing Up To Filibuster The Recovery Package Despite Promises To The Contrary On Friday night on NPR’s All Things Considered, host Robert Siegel asked Sen. Chuck Grassley (R-IA) about the prospects of a Republican filibuster of the Senate’s version of the economic recovery package. Grassley responded that Republicans would indeed filibuster the package, requiring the bill to garner a 60-vote majority for passage, despite the fact that the Senate version of the recovery package is already loaded up with a significant number of provisions sought by conservative Republicans. Senate Minority Leader Mitch McConnell (R-KY) reportedly said that Republicans “would not filibuster against the stimulus package.” He remarked earlier this month, “I don’t think this measure’s going to have any problem getting over 60 votes.”

On the other hand - Most Republican governors have broken with their GOP colleagues in Congress and are pushing for passage of President Barack Obama's economic aid plan that would send billions to states for education, public works and health care. The 2008 GOP vice presidential nominee, Alaska Gov. Sarah Palin, scheduled meetings in Washington this weekend with Senate Republican leader Mitch McConnell of Kentucky and other senators to press for her state's share of the package. Tx Gov. Rick Perry's Transportation Department is lobbying to maximize its haul of federal money from an $819 billion stimulus bill too.

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