Dismal GDP Adds Desperation to a Divided Congress
Policy + Politics

Dismal GDP Adds Desperation to a Divided Congress

iStockphoto/The Fiscal Times

The economy grew at a dismal 1.5 percent in the second quarter, a cruel reminder that nearly nothing tried so far—tax cuts, deficit spending, spending cuts , slashed interest rates—has cracked the code.

Figures released Friday morning by the Commerce Department showed a country without the propulsion needed to escape the clutches of a recession that technically ended three years ago. Consumer spending increased at the slowest pace in a year, with purchases of big ticket items like home appliances and cars falling by 1 percent.

Gross domestic product has steadily decelerated over the past nine months, with the lone bright spot being that it has done slightly better than the gloomy expectations from Wall Street analysts. It slowed from a 4.1 percent increase in the final three months of 2011 to just 2 percent in the first quarter of this year, and now plods along at a speed that’s close to a standstill. As a general rule of thumb for lowering the 8.2 percent unemployment rate, growth would have to more than double from its current level.

That’s left political leaders calling for desperate measures to push the economy out of the mud. A Republican-sponsored bill to suspend new federal regulations for two years or until unemployment fell below 6 percent was passed Thursday by a 245-172 vote.

When asked why a regulatory freeze would rescue an economy from the twin shadows of Europe’s sovereign debt woes and reluctant consumers still reeling from the housing bust, House Small Business Committee Chairman Sam Graves was blunt—something has to be done.
“Based on the economic data, we’re experiencing recession-like growth,” the Missouri Republican said.  “It is important that Washington takes a comprehensive approach to providing a better environment for growth, controlling what it can within its power. Consumer demand isn’t controlled by the federal government, but taxes and regulations are.”

But even if the bill cleared the Democratic-majority Senate—and it won’t—lawmakers would be flying blind on its impacts. The Congressional Budget Office and the staff of the Joint Committee on Taxation concluded Monday that they could not estimate its effects.

Several Democratic lawmakers and the Coalition for Sensible Safeguards, an alliance that includes the AFL-CIO and the Natural Resources Defense Council, counter that it would leave the country vulnerable to oil spills and tainted food without generating new jobs.
For his part, President Obama—who’s dismissed Republican policies as not working—has glommed on a bit more tightly to the promise of tax cuts for Americans earning less than $250,000. Rather than emphasizing the increase for wealthier Americans under his plan, the administration chose this week to emphasize the benefits of a lower tax burden for the middle class.

The White House released a report noting that the $787 billion stimulus package passed shortly after Obama assumed office provided tax relief for much of the country. A family earning $50,000 a year has saved an average of $3,600 over the past four years, the report said.

But as the Friday GDP numbers made clear, the tax breaks—which have blown the deficit above $1 trillion ear year under Obama—stopped the recession from becoming worse without putting the country on a steady course to recovery.

Revisions to 2009 figures show an increase in federal, state and local government spending that offset some of the drop-off from consumers and businesses, minimizing the extent to which the economy contracted, according to The Wall Street Journal. The trouble now is that the polarized federal government—unable to reach consensus on restoring the economy—is fast becoming the millstone weighing down growth, as the desperation has bred division.

State and local governments have shed workers in a bout of budget-tightening, while the $120 billion payroll tax holiday pushed for by Obama will disappear with the start of 2013. And lawmakers are now flashing a greater willingness to plummet off the fiscal cliff—a combination of expiring tax breaks and automatic spending cuts—in order to protect their ideological values.

In an election based on the promise of economic resurrection, the government has now become a force for its destruction, Ethan Harris, the North American economist for Bank of America Merrill Lynch wrote in a Friday note to clients. “By threatening to push the economy into recession and by threatening to change many of the rules around tax and spending policy,” he wrote, “politicians are causing a large and growing ‘uncertainty shock.’”

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