People smarter than pols

Opinion: August 15, 2011 at 12:00a.m.

The American people, and the markets, are much smarter than the politicians.

Consider that distasteful spectacle a few days ago, in which politicians drove the nation to the edge of a cliff, threatening to send the country into default. When they raised the debt ceiling at the last minute, the markets were supposed to breathe a sigh of relief. Instead, stock prices — and with them the savings of rich and poor alike — have gone into a tailspin. Next comes the rest of the economy.

It may sound confusing, but it’s actually very simple. Politicians have decided to pull the rug out from under the economy when it had barely stood up after getting beaten to the ground. The single-minded effort to cut the budget deficit at this moment will send us back into recession.

We know exactly what’s going on, because it happened in 1937.

We are preparing for the 75th anniversary of the Great Depression’s double dip by concocting a second wave of the Great Recession.

I’m not arguing the deficits and the mammoth national debt don’t matter. They matter, and they must be cut. But doing it now will cause the economy to contract so much that it will make the deficit, among other important things, much worse.

Depression’s aftermath

In 1937, the economy was getting on its feet after the calamity of the Depression. Unemployment had dropped to a still-awful 14 percent, down from the devastating 25 percent of the early 1930s. But President Roosevelt’s policies had cost a bundle and opened a big budget deficit. FDR agreed to slash spending by a hefty 10 percent even while the Fed cut back on lending.

The stock market collapsed, unemployment soared and the economy slipped back into recession. In a few months, the Dow Jones plunged from 187 to 98, a loss of 48 percent. Unemployment climbed to 19 percent.

Real growth in employment, stock prices and industrial production returned only when the government launched the massive spending — and deficits — required to win World War II.

Certainly, America will need to make the painful decision required to nurse its fiscal wounds to health. In the long run, the deficits are clearly not sustainable. But, as FDR’s closest aide Harry Hopkins famously said, “People don’t eat in the long run; they eat every day.” And today’s approach will create not only more suffering but also less prosperity. In order to grow, the economy needs people who eat, people who work, people who produce and pay taxes.

Today, the debate about economic policy has fallen victim to a dysfunctional political culture. The dominant voice in the debate comes from people who have fallen in love with a dogma that says the deficit is the most urgent problem we face, and declares we cannot raise one more penny in taxes to close it. On the other side stands a president who has proven a stunningly inept negotiator. Squeezed in the middle are millions of unemployed Americans, hundreds of millions of stock holders, and billions of people the world over, flabbergasted as they watch America make a difficult situation worse.

Cutting now will not just hurt the unemployed and the poor. A return or continuation of the recession will cost businesses — owned by Republicans and Democrats — billions in profits.

Housing market

There is a solution. First, the U.S. economy needs to get moving. One element of that is to unclog the housing market, which is causing nationwide sluggishness. People who can’t sell their homes because they owe more than they’re worth are people who can’t go where the jobs are. A plan to cut mortgage balances by giving banks a path to recover their losses in the future is very promising.

Then, America’s feckless leaders, if they were up to the task, should sit down immediately around a table, with copies of the deficit reduction plan put together by the Simpson-Bowles commission as a starting point. It is possible to tackle the deficit. Political differences include valid opinions that deserve to be fought out without threats and without taking the entire economy to the brink of disaster.

The discussions can and should produce a serious deficit reduction plan that everyone will understand, providing clarity to businesses and investors. But one that will go into effect only after the economy has recovered.

The American people’s disenchantment with politicians and the markets’ steep slide tell us the politicians are getting it wrong. If only Washington would listen.

Frida Ghitis writes about global affairs for The Miami Herald. Distributed by McClatchy-Tribune Information Services.