Americans looks for a new ‘new deal’: Kohler

As Americans go to the polling booths today they have received the clearest evidence yet that their economy is going into a very deep recession.

The ISM (Institute for Supply Management) Manufacturing index has crashed to 38.9, its lowest level since 1982. Just two months ago this index was at 50, which is the neutral level that separates growth from recession.

And the most dramatic changes have been in prices and exports, although all components of the index are going backwards. But a month ago prices and exports were rising; now they are falling very sharply. They were both well above 50 and are now well below that level.

This morning’s other news is that Ford has reported a 30% drop in sales for October. Sales of Porsches are down 50%, Toyota 23%, and Mercedes Benz 24.5%. Even the people who want to buy cars can’t get finance.

In the circumstances it’s tempting to think that all bets will be off when it comes to the economic policies of the US presidential candidates.

The campaigns began and the policies were written when there was a sub-prime mortgage problem and the beginnings of a bear market in stocks. Now there is a full-blown recession, the financial system is demoralised and dysfunctional, and the sharemarket is down 45%.

There has been a lot of talk lately comparing the current situation to the presidential election of 1932, won decisively by Franklin D Roosevelt and leading to two “new deals”, in 1933 and again in 1935-36.

Some of the recent comparisons have been way off the mark, such as John McCain’s accusation that Barack Obama is imitating Herbert Hoover, who lost in 1932 and is usually accused of helping cause the Great Depression. If anything, today’s Hoover is George W Bush.

In fact Obama’s economic advisers have recently been hinting that the Democrat president would imitate Roosevelt’s “first hundred days” legislative program of 1933, during which he met continuously with Congress and was granted every legislative request. One of the first of these was the closure of all of the nation’s banks on 4 March 1932.

If Barack Obama is elected president after today, it will decisively bring the Reagan era to an end, an era in which conservatives have been working to undo the new deal state set up by FDR in 1933.

Bill Clinton’s eight years – the only Democrat administration since Ronald Reagan – did nothing to reverse that process; in fact, Clinton was a fiscal conservative who managed to balance the budget before George W Bush destroyed it again with tax cuts for the wealthy and laissez faire economics.

An Obama presidency, with the impetus of a new “great recession”, would bring to an end the Reagan-inspired unwinding of the 1933 and 1936 new deals and mark the beginning of a new era of activist government.

The seeds of this are already present in his policies; but as I said at the start, all bets would probably be off after inauguration.

The most dangerous aspect of his economic policies is his tendency towards protectionism. He has condemned free trade and free trade agreements, opposing several of them in Congress. In this respect, the comparison with Herbert Hoover is valid: Hoover’s Smoot-Hawley tariff was instrumental in turning the 1930 recession into the Great Depression.

Based on the policies released during the campaign, Obama would cut taxes less than McCain: $US2.9 trillion over the 2009-18 period, versus $US4.1 trillion, according to the Tax Policy Center.

McCain would cut the corporate tax rate from 35% to 25%; Obama would raise the top two personal income tax rates to their Clinton levels of 36% and 39.6% (from 33% and 35%). This is behind the “socialist” tag that McCain has been flinging at Obama.

Both candidates, by the way, assume a baseline in which the Bush tax cuts become permanent, and do not expire as planned.

Normally you’d say Obama’s tax policy is more responsible than McCain’s, since he will be spending less of the deficit, but these are not normal times.

When the new president is inaugurated, the deepest recession since 1982 will have been officially confirmed – possibly the deepest since 1930, although we won’t know that for a year – so spending will be required and justified.

But unlike Roosevelt, the new president faces a massive blow-out in healthcare expenditures that will force a big increase in government spending as a share of GDP, and require government revenues to increase, not decline.

The estimates of the cost of each candidate’s health care policies range from $US1.2 trillion to $US2 trillion, but in any case America’s healthcare problem must limit the incoming president’s room to move on the economy.

So it will have to be a “newish deal”.

This article first appeared in Business Spectator