Chicken Little may be right this time. "The sky is falling." As America's economy plunges rapidly toward Great Depression II, consumer and investor confidence rush downward at an even faster rate.
No one has produced the economic plan that stirs people from their increasing gloom. This includes Barack Obama's touted economic brain trust and the Federal Reserve. The astute Nobel Laureate and New York Times columnist Paul Krugman underscored the problem when he asked on February 20: "Who'll stop the pain?"
New economic reports show the extent of the devastating decline. Foreclosures and unemployment keep rising. The gross domestic product dropped 6.2 percent in the last quarter of 2008, the worst since the first quarter of 1982.
Although the authors can offer no sure-fire economic plan, we think a mistake was made when the perceived urgency of determining what to do in the future swept aside the crucial prior question: How did the U.S. get into this mess in the first place? The haste likely arose because of the belief that the answer was clear. It's the economy, Stupid.
After all, economists of different political persuasions agree that powerful economic forces, not the previous president's policies and management or the political environment, dominate how the economy does. Princeton economist Alan Blinder observed in George W. Bush's case: "The main culprit has not been the government but the marketplace. "
Even if economic forces generally are dominant, Bush's misbegotten policies of tax cuts for the rich and draconian deregulation had a prominent place in sending the economy into a free fall. The full explanation, however, turns out to be more complex.
It starts with the Republican political ideology that embraced antigovernmentism and free-market fundamentalism. When the two were joined together, a philosophy of governance emerged that postulated: Federal government institutions are the problem; free-market capitalism, the solution. George W. Bush moved to stay the dead hand of government with tax cuts for the rich and massive deregulation.
But his ideological concepts proved wanting. They yielded a lethal mix of gross mismanagement and wrongheaded policies that weakened the nation's economy and the governing institutions that must be in working order if new policies are to succeed.
Republican Economic Policy
Advocates of free-market fundamentalism believe without reservation that government regulations hinder businesses and individuals. Red tape prevents entrepreneurs from pursuing a course of action that will restore economic growth and prosperity and return America to its rightful place as the exemplar of capitalism.
For the true believers, market discipline in an unfettered free market--not Washington bureaucrats--is the optimum means of effective control. The Bush administration pushed deregulation to the point of no regulation. American financial institutions bundled together good and bad mortgages and sold these toxic packages both at home and abroad to create chaos in domestic and international financial markets.
Despite doling out hundreds of billions of dollars to prop up major financial institutions, Bush still left Obama the worst economic mess since Herbert Hoover. Bush's failed regulatory policy is a primary factor in a worldwide financial crisis of Great Depression proportions. Bad presidential policy, not economic forces outside Bush's control, ends up as the main culprit.
Another key tenet of Republican ideology holds that 1) only people with high incomes will save the benefits from tax cuts and increase capital investment, and 2) the added investment will stimulate the economy and bring the economy to a higher permanent level of growth.
Although the Bush tax cuts disproportionately favored the top income earners, both gross domestic product and capital investment growth rates were much below the average for earlier presidencies. Nothing 'trickled down'. Only the top 1 percent experienced extraordinary income growth.
The middle class ended up in the worst straits since the 1930s with flat incomes, much diminished housing values, far higher debt, rapidly rising unemployment, and limited credit. Bush's income tax cuts produced an unmitigated disaster for tens of millions of low- and middle-income Americans.
Critics of the 2001 and 2003 tax cuts kept predicting deleterious outcomes to no avail. They were right. The Republican theory was dead wrong and needs an immediate burial.
Governing Institutions and Governing
The Bush presidency exercised the poorest quality of governance in modern American history. It is hardly a surprise in that the Bush administration distrusted the federal institutions of governance.
In May 2006, New York Times columnist David Brooks, a moderate Republican, made the apt point that the Bush White House could not or would not govern because Bush was "often openly hostile" to the governance institutions created by the Constitution.
The hostility led the administration to concentrate power in a small, secretive White House clique in order to keep the rest of the executive branch weak and to bully or ignore Congress and the courts. This approach greatly enhanced control. However, it played havoc with governance and the institutions established by the Constitution to govern.
Bush's use of information and argument stands as a sure sign of the administration's gross misgovernance. Deception and secrecy became the main weapons in a continuing propaganda campaign to sell and defend administration policies to the American public. The Bush administration was ready to concoct false data and use it in spurious arguments to attack valid evidence refuting their false claims.
Republican members of Congress and the party's other political leaders followed suit in using the same tactics and arguments as Bush. They still are refusing to recognize the failure of their bankrupt ideology and continue to propose the same Bush tax cuts that did not stimulate the economy efficiently.
President Obama struggles to stop the free fall that is the biggest economic threat to the United States since the Great Depression, while the Republican Party engages in petty partisan histrionics and lock-step intransigence. This behavior is a clear barrier to reasoned policies in this critical time.
Both the party in power and the opposition must reach mutual concessions that result in an agreed upon plan of action. Republican Party irresponsibility threatens to block any viable strategy to combat the continuing economic decline.
Yet it is not just the Republican behavior that makes Congress the most dysfunctional institution the Obama administration faces. Congressional Democrats join the Republicans in making constructive change more difficult. Take the case of America's badly deteriorated infrastructure that is a major blockage to full economic recovery because it reduces the nation's competitiveness.
At a recent meeting of the National Governors Association, the financier Felix Rohatyn, a long-time advocate of increased infrastructure spending, stressed the historic role of the federal government in investing in infrastructure for the long run. But Rohatyn pointed to the difficulty of funding the most needed efforts because Congress members in both parties do not want to lessen their influence over the selection of projects that bring them political rewards.
New York Times columnist Bob Herbert drew on Rohatyn's remarks on infrastructure to observe: "There is something weirdly self-defeating about having a need as clear-cut as the need to move beyond a deteriorating 20th-century physical plant, and being unable to do it because of the wasteful, inefficient and outmoded 20th-century way of doing politics and government."
In looking at President Obama's formidable challenges in preventing Great Depression II, it is useful to set out the authors' final argument: Powerful economics forces alone did not bring down the American economy. George W. Bush's ideologically-driven policies and gross misgovernance and the dysfunctional politics during his presidency were also major factors and must be taken into account in building Obama's strategy for a sustained recovery.
A key task for President Obama is to convince Americans that free-market fundamentalism has totally failed and must be abandoned. He has to show Americans why a larger, vibrant, competent public sector must be reconstructed in order to restore prosperity.
Bipartisanship will not succeed until the Republicans are ready to engage in fruitful mutual compromise and offer ideas that actually have a chance of working. Constructive partisan action based on analysis rather than harebrained beliefs offers the best chance for the United States to escape Great Depression II.
The Republican Party must be turned from its dysfunctional path to destruction and fulfill its role as a responsible party seeking policies consonant with American constitutional government.
Our argument is not that the Obama's new stimulus package and his budget proposals are going in the wrong direction. Much of what the administration had done deserves praise. Yet the biggest challenges lie ahead and will not be met unless Obama can sell the necessity of fundamental institutional changes and the sacrifices that must be made in fixing the economy.
Walter Williams is distinguished scholar, Center for American Politics and Public Policy, and professor emeritus, Evans School of Public Affairs, University of Washington-Seattle. Bryan D. Jones is J. J. Pickle chair of congressional studies, Department of Government, University of Texas-Austin. They are coauthors of THE POLITICS OF BAD IDEAS (2008).