Economic Cliff Ahead: Economist Damon Silvers' Warning

On Wednesday the stock market remained in the doldrums [1], thanks largely to the release of Federal Reserve June meeting minutes that revealed that at least some members of the Fed believed the economy needs "further policy stimulus," but the Fed nonetheless took no action to boost the economy during that meeting.

Meanwhile, June's weak jobs report has helped fuel speculation that the U.S. economy is slipping—or has already slipped [2]—into another recession. The chief operations officer of the Economic Cycle Research Institute, Lakshman Achuthan, said in a Bloomberg TV interview [3] this week, "I think we’re in a recession already." Recent negative trends in industrial production, employment, income and sales are "consistent with a recession having already started."

All of which makes a speech by AFL-CIO economist Damon Silvers at the Take Back the American Dream conference last month even more important to hear.

In this speech Silvers raises his own concerns that politicians in Washington will take austerity actions that will make an impending or already beginning recession worse when they reach the so-called [4] "fiscal cliff" [5] at the end of the year—the confluence of the end of the Bush tax cuts, the Obama payroll tax relief and the beginning of the automatic federal spending cuts that would be triggered in the absence of a comprehensive bipartisan budget deal.

"Seventy years ago, when the world faced a similar prolonged economic crisis, set off fundamentally by inequality and financial instability, the United States was the only country of any significance that addressed that crisis head on by doing the two things that had to be done," Silvers says: restructuring family debt, forcing bankers to take a hit for the sake of the broader economy, and getting people back to work by reinvesting in and modernizing the country. "Nowhere else in the world did this happen. The other sort-of democratic countries of Europe pursued economic orthodoxy all of the way to economic, social and political ruin.

Silvers hesitates to use the words "recession" or "depression" to characterize today's economic stagnation, but he did say in this speech that "the global financial system remains very fragile. ... There is, I'm afraid, the real possibility of systemic crisis in the second half of this year as bad policy choices in Europe and unresolved issues in the United States, combined with slowing growth in Asia, pressure that financial system again."

Silvers says that we need to push for a set of policies that would create a "virtuous cycle" of grassroots economic growth. "We need to start by getting people back to work," Silvers says, with government taking the lead while the private sector gains confidence that a consumer base for their goods and services is being rebuilt.

We also need to fix the housing mess through principal write-downs for people whose mortgages exceed the value of their homes, thus freeing up capital that homeowners can use to buy goods and services in their communities. And as the economy begins to grow again, we need to revive worker bargaining power so that increased growth and productivity translates into higher worker wages and stronger consumer demand.

The programmatic decisions that flow from these policies have broad support among the American public, Silvers adds.

"The worst possible thing that we can do in this situation, when we are underinvesting in our public assets, so that we are endangering our country's competitiveness, and we have an economy that is sluggish, with massive long-term unemployment ... would be to impose austerity in the short run and cut taxes on the rich in the long run. That is a recipe for immediate economic pain, political instability and national decline. And, surprise, surprise, that is the Republican agenda," Silvers says.

The obstacle to avoiding this disaster is the entrenched set of interests in Washington and Wall Street that see themselves as the beneficiaries of a downtrodden and disempowered 99 percent. "It is time to move that obstacle aside," he concludes.