Whether the economy recovers quickly in 2010, stagnates for a while, or stumbles into the dreaded W-shaped double-dip recession, the policy response will depend on a calculus between short-term and long-term pain. The more Washington kicks the can down the road on spending, housing, and banking, the more long-term troubles the American economy will face. Obviously, giving federal money to consumers can be politically popular, just as bailing out bankrupt states can be politically expedient for politicians who depend on support from public-sector unions. But these short-term gimmicks do not lead to sustainable economic growth. And the president himself has indicated that the free money days might be coming to an end. “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said in November.
The Congressional Budget Office has projected that by the end of 2019 the U.S. will have nearly doubled its debt to more than $17 trillion, or 82 percent of GDP. And that’s before dealing with the peak of baby boomers draining Social Security and Medicare funds. And it’s not just government capital rapidly draining away. The administration’s political capital took a massive hit in January when an unknown Republican won Teddy Kennedy’s old Senate seat in overwhelmingly Democratic Massachusetts. The president is running out of other people’s money and with it the chance to maintain his Potemkin case that the economy is recovering.
“My guess is that the first two quarters of 2010 are not going to look as good as [2009’s third] quarter,” Joe Engelhard predicts. “We’re probably gonna go sideways for a while.”
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