It's amusing, all this talk about the economy falling off a cliff. So much breathless speculation about what might happen. Well, I'll tell you what will happen: Cautious businesses will batten down the hatches, refusing to hire amid the uncertainty. Interest rates will drop further as investors continue fleeing to the perceived safety of Treasury bonds. Consumer spending, the backbone of the U.S. economy, will sputter, and economic growth will grind to a halt, sparking a recession. Politicians will bicker over who's to blame and what to do about it.
Could it happen, you ask? Could we go over the cliff? News flash: We already did. Years ago.
What, you forgot? You forgot that the housing bubble burst way back in the spring of 2006? That it set off a line of dominoes that led to the near collapse of the economy in 2008? The bailout in August 2008 of Fannie Mae and Freddie Mac, the government-sponsored mortgage entities? The bailout in October 2008 of the big banks? The bailout that began in December 2008 of Chrysler and General Motors?
In September 2008, the economy lost 403,000 jobs. The next month: 423,000. In November 2008, the economy lost 597,000 jobs. The next month it lost 681,000. In January 2009, it lost 741,000 jobs. February 2009 was 681,000. March 2009: 652,000. Housing prices plummeted across the nation, wiping out $7.5 trillion in wealth. Consumers, all of a sudden house poor and up to their necks in debt, slashed spending. Corporate profits for the S&P 500, on an inflation-adjusted basis, plunged to their lowest levels since the early 1930s. The economy as a whole fell at an 8.9 percent rate in the fourth quarter of 2008 and at a 5.3 percent pace in the first quarter of 2009.
If all of that isn't falling off a cliff, then I sure as hell don't know what is.
Here's where our current mess comes in. We haven't recovered from the 2006-09 plunge, and the painful and austere decisions we're about to make — which will result in slower growth and diminished economic expectations for years — are the direct results of it. To talk about our current predicament in isolated terms is to deny recent history, and the causal relationship between the mess we're in now and events of four to six years ago.
There are two reasons our deficit — the difference between what the government spends and what it takes in — is so big. First: As the economy fell off the 2006-09 cliff, tax revenues evaporated and now stand at their lowest levels (relative to the size of the economy) in 60 years. The conservative Washington Times points out that this collapse in revenue deserves just as much blame for our current deficit as the federal government's free-spending ways.
Second: To prop up the economy, Congress and the Obama administration approved some $620 billion in tax cuts (mostly an extension of the Bush tax cuts and a break in your payroll taxes) and a massive $874 billion stimulus package. The total cost of these two initiatives is nearly $1.5 trillion, which is larger than the size of the current annual deficit of $1.09 trillion. In other words: Take away the tax cut extensions you've enjoyed and the stimulus (about a third of which was also tax cuts, by the way), and the deficit wouldn't be anywhere near its trillion-dollar size. Incidentally, even without new taxes or spending cuts, that $1.09 trillion in red ink is smaller by $207 billion than it was in fiscal year 2011; the recovering economy has bolstered tax revenues.
In addition to the tax cuts you've enjoyed over the last few years (you're welcome), all that gravy ladled out by the president and Congress helped prop up state governments as well. The economic collapse crushed housing and consumer spending, blowing big holes in state governments' budgets: $538 billion between 2009 and 2012, says the Center on Budget and Policy Priorities. Now state governments are coping with another $55 billion shortfall in 2013. That's what happens when real estate taxes and sales taxes — which prop up local economies — plunge.
The stimulus helped states delay the pain in years past, but now that the federal spigot has dried up, they're on their own. This may mean fewer cops in your neighborhood, the closure of a firehouse, or maybe that pothole-filled road you drive to work on won't get fixed as often as it used to. In some states, the kids pay: Texas Gov. Rick Perry has presided over the biggest education cuts his state has seen in decades — this after happily taking $33 billion in stimulus funds, using them to patch up his state's finances — all while criticizing the stimulus itself. If there were a prize for chutzpah and hypocrisy, the winner, hands down, would be Rick Perry.
So here we are. Washington has a spending problem, you say? We can't go on living beyond our means? I agree. We fell off one cliff between 2006-09. Let me know what you're willing to give up to keep it from happening again.
THE WEEK'S AUDIOPHILE PODCASTS: LISTEN SMARTER
- How academia's liberal bias is killing social science
- 43 TV shows to watch in 2014
- Why Pakistan won't hunt down the terrorists within its borders
- What would a U.S.-Russia war look like?
- Sorry, GOP, tax cuts don't pay for themselves
- Vox, derp, and the intellectual stagnation of the left
- How to be the most productive person in your office — and still get home by 5:30 p.m.
- 3 key insights about Obama from Chuck Todd's The Stranger
- Why TheWeek.com is closing the comments section
- Diagnosing the Home Alone burglars' injuries: A professional weighs in
Subscribe to the Week