Op-Ed Columnist
By DAVID BROOKS
We’re in the middle of a financial crisis, but most economists say there is a broader economic crisis still to come. The unemployment rate will shoot upward. Companies will go bankrupt. Commercial real estate values will decline. Credit card defaults will rise. The nonprofit sector will be hammered.
By the time the recession is in full force, Democrats will probably be running the government. Barack Obama will probably be in the White House. Democrats will have a comfortable majority in the House and will control between 56 and 60 seats in the Senate.
The party will inherit big deficits. David Leonhardt, my colleague at The Times, estimates that the deficit will sit at around $750 billion next year, or five percent of G.D.P. Democrats had promised to pay for new spending with compensatory cuts, but the economic crisis will dissolve pay-as-you-go vows. New federal spending will come in four streams.
First, there will be the bailouts. Once upon a time, there were concerns about moral hazard. But resistance to corporate bailouts is gone. If Bear Stearns and A.I.G. can get bailouts, then so can car companies, airlines and other corporations with direct links to Main Street.
Second, there will be more stimulus packages. The first stimulus package, passed early this year, was a failure because people spent only 10 percent to 20 percent of the rebate dollars and saved the rest. Martin Feldstein of Harvard calculates the package added $80 billion to the national debt while producing less than $20 billion in consumer spending.
Nonetheless, House Speaker Nancy Pelosi promises another package, and it will pass.
Third, we’re in for a Keynesian renaissance. The Fed has little room to stimulate the economy, so Democrats will use government outlays to boost consumption. Nouriel Roubini of New York University argues that the economy will need a $300 billion fiscal stimulus.
Obama has already promised a clean energy/jobs program that would cost $150 billion over 10 years. He’s vowed $60 billion in infrastructure spending over the same period. He promises a range of tax credits — $4,000 a year for college tuition, up to $3,000 for child care, $7,000 for a clean car, a mortgage tax credit.
Fourth, there will be tax cuts. On Monday, Obama promised new tax subsidies to small business, which could cost tens of billions. That’s on top of his promise to cut taxes for 95 percent of American households. His tax plans aren’t as irresponsible as John McCain’s, but the Tax Policy Center still says they would reduce revenues by $2.8 trillion over the next decade.
Finally, there will be a health care plan. In 1960, health care consumed 5 percent of G.D.P. By 2025, it will consume 25 percent. In the face of these rising costs, Obama will spend billions more to widen coverage. Obama’s plan has many virtues, but the cost-saving measures are chimerical.
When you add it all up, we’re not talking about a deficit that is 5 percent of G.D.P., but something much, much, much larger.
The new situation will reopen old rifts in the Democratic Party. One the one side, liberals will argue (are already arguing) that it was deregulation and trickle-down economic policies that led us to this crisis. Fears of fiscal insolvency are overblown. Democrats should use their control of government and the economic crisis as a once-in-a-lifetime chance to make some overdue changes. Liberals will make a full-bore push for European-style economic policies.
On the other hand, the remaining moderates will argue that it was excess and debt that created this economic crisis. They will argue (are arguing) that it is perfectly legitimate to increase the deficit with stimulus programs during a recession, but that these programs need to be carefully targeted and should sunset as the crisis passes. The moderates will stress that the country still faces a ruinous insolvency crisis caused by entitlement burdens.
Obama will try to straddle the two camps — he seems to sympathize with both sides — but the liberals will win. Over the past decade, liberals have mounted a campaign against Robert Rubin-style economic policies, and they control the Congressional power centers. Even if he’s so inclined, it’s difficult for a president to overrule the committee chairmen of his own party. It is more difficult to do that when the president is a Washington novice and the chairmen are skilled political hands. It is most difficult when the president has no record of confronting his own party elders. It’s completely impossible when the economy is in a steep recession, and an air of economic crisis pervades the nation.
What we’re going to see, in short, is the Gingrich revolution in reverse and on steroids. ]/b]There will be a big increase in spending and deficits. In normal times, moderates could have restrained the zeal on the left. In an economic crisis, not a chance. The over-reach is coming. The backlash is next. [/b]
