Friday, October 23, 2009

The Political Economy of Recovery

As the 2010 elections near, Republicans are trying to argue that the stimulus was a failure and today's high unemployment is the proof. The fact of the matter is that the economy is starting to pick up but employment growth always lags overall economic growth. Jobs are the last thing to pick up as employers try to meet rising demand with what they've got. As I pointed out in my previous blog, the last big recession, 1980-82, had high unemployment for four years after it ended.

The current recession started mid-way through Bush's second term - in the fourth quarter of 2007 and may have ended in the third quarter of 2009. The recession started and was the longest lasting recession in decades when Bush left office.

The irony is that as the 2010 elections are looming, unemployment is likely to peak at 10.5% next summer and could still be at or above 10% around election time. This could be very bad indeed for Democrats throughout the country and it could be very bad for the entire country.

First of all, the party of the Presidency almost always loses seats in the off year election. In Washington State, the party of the president lost seats in 23 of the last 29 off year elections

Secondly, even if the economy is starting to grow, 10% unemployment will touch a third of the population and probably enough to tip key races in swing districts.

This is bad for the country because this recovery is likely to remain fragile for the next year or so. As Republicans blame the high unemployment on the failed stimulus and rail against big deficits, public support for renewal of stimulus spending is likely to wane. We could then find ourselves in the second V in W shaped economic recovery if the economy falters.

How can Democrats head this off? Obama has already started off in the right direction looking at extending unemployment benefits and the first home buyer tax credit as well as some lending incentives for small business. State legislators could look at unemployment benefits as well.

Democrats could also try and meet Republicans half way and look at some tax breaks that actually work. Senator Derek Kilmer proposed a job creation tax credit last session that gave small businesses a $3,000 tax credit for each new job they create. Washington state actually taxes the labor used in construction at nearly 10% a temporary tax credit could incentivize investments. Years ago, Congress enacted a Investment Tax Credit that allowed companies who invest within a short period of time a 20% tax credit. GAO research indicated that this was a tax break that actually stimulated investment.

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