How to make a bad recovery worse.
Author | Petbokoukis, James |
Position | Management of budget deficits |
DURING THE last four years, Washington has conducted an audacious experiment: take an economy suffering its worst downturn in nearly a century and see what happens when you hit it with loads of new taxes and regulations (while threatening even more) while boosting debt to growth-crippling levels. The result? The weakest post-recession economic recovery in the history of the United States.
Now it's time for the second phase of the experiment: take an economic recovery that's grinding along just above stall speed and slam it with roughly $800 billion--about 5 percent of gross domestic product--in tax hikes and cuts to planned government spending. The result? Probably catastrophic.
Before delving into recessions future, let's take a look a recessions past. The only comparably severe bout of "fiscal tightening" since World War II occurred in 1968, when Washington tried to pay for the Vietnam War while cooling an overheated economy with an across-the-board individual and corporate income tax surcharge. That tax hike, along with some spending cuts, amounted to 3 percent of GDP. Growth slowed sharply. By the end of 1969 the economy had entered a mild recession that would last until November 1970.
The big problem with that strategy this time around is that the economy isn't what it was in 1968, when growth was at 5 percent and unemployment sat below 4 percent. As a recent Citigroup analysis puts it...
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