So how will this play out?

Everyone else seems to be prognosticating these days, predicting X million jobs will be created or the Dow will recover to Y by summer or….. so why don’t I try as well?

Here is my read of our situation so far, subject of course to further unexpected events in the country or the world:

It seems likely that the just-passed stimulus package will have little or no perceptible effect on the economy in the next couple of years. The tax breaks and givebacks are probably too small to really make much of a difference to consumer confidence, and the spending will probably not be as effective as hoped. My experience is that when government, either directly or through a contractor, does something it costs 2-3 times as much for the same effect as if a private company, subject to shareholder restraints and competitive market pressures, does the same thing. Given the haste with which this package was assembled, and the mismanagement and pandering to special interests at both the Federal and state level and even the corruption that will inevitably ensue, a multiplier of 4-5 might be more realistic for these projects.

I would expect the administration to come back to Congress several more times over the next two years for various bailouts and extensions of the TARP and auto company bailouts and perhaps even another stimulus package or two. Congress, having found it can spend money without limit in this crisis environment, will happily oblige, though probably without significant Republican support. Expect Congress to continue to pack such bills with as many long-term liberal agenda items and as much local district pork as they can. The total of bailouts and stimulus packages and loan guarantees might well reach $5-6 trillion over the next two years, all added to the Federal debt.

The Republican alternative to have a payroll tax holiday and perhaps cut corporate taxes significantly might or might not have worked better. We will never know, because there is no prospect that they will get a chance to try it.

It seems likely that President Obama’s hopes for bipartisan support will be frustrated, and he may in fact have privately never expected it in any case. Congress runs on raw power. When parties have a majority, they tend to just ignore the minority party and ram through their own ideological programs. The Republicans did it when they last had a majority, and the Democrats are doing it now, and that behavior is not likely to change in either party. Besides, there are too few moderate Republicans left in Congress to appeal to.

Since the massive spending and bailouts will probably not solve the major financial problems within the next two years, I would expect the Republicans to make that a major campaign issue in the off-year elections, and perhaps win enough seats to eliminate the Democratic majority but not gain a working majority themselves, which will leave Congress in a stalemate – and that might be better.

Voters have short memories. Right now President Obama has inherited a Republican recession and Republican wars in Iraq and Afghanistan. In two years, especially if things haven’t improved, the recession will be a Democratic recession. In two years, if we are still in Iraq and/or Afghanistan, these will be President Obama’s wars.

If the economy is still in the dumps in four years, the Republicans may well recapture the White House, but at the moment there seems little prospect that they will be any more effective at solving the problems, given the far-right ideological flavor the party has taken on in recent years. They have bet heavily on unanimously opposing the stimulus package. If the spending doesn’t work, they will look good and liberal Keynesian fiscal policy will be in permanent disrepute. If the Democratic stimulus plan does appear to work, Republicans may have thoroughly marginalized their party and may well remain out of power for decades.

Given that the administration staffed its financial experts largely from Wall Street, there seems little chance that it will be able to summon the courage to take the drastic steps that are needed to identify the banks that are really in fact insolvent, and to restructure them through nationalization or bankruptcy. That means the credit crunch will likely persist for some years yet.

Given that this recession is affecting the entire world, and especially those nations like China that have been major purchasers of Treasury notes, it seems likely that the Treasury will have increasing difficulty rolling over the Federal debt, and that this will cause the administration yet more problems in a year or two.

The global slowdown is also likely to provoke some dramatic changes in the world. Nations which have been riding high on US consumption will experience dramatic slowdowns that will sometimes incite serious political instability. I would expect a number of nationalistic, radical and even anti-American governments to be voted in as a result. At the same time some of the nations that cause us concern these days may implode – Russia and China among them. China is already under very heavy internal stress as millions in their costal regions (where Western trade is concentrated) are now suddenly out of work.

There seems to me little prospect that President Obama will be able to do anything effective to address either the Social Security or the Medicare and Medicaid funding issues. Seniors and retirees are a major voting block, and they will vigorously oppose any reduction in benefits, especially during these hard times, and liberals will support them. At the same time, it will be extraordinarily hard to argue successfully for raising the taxes that support these programs during a recession, and conservative would fight such a move tooth and nail. President Obama floated the idea last week of reforming Social Security, and was promptly shot down by his own party, Nancy Pelosi and Harry Reid foremost among them. I expect much the same reaction from the his own party if he tries to reform Medicare and Medicaid. The conservative Republicans would probably balk too, but it will never get to that – the Democratic left will kill any such move at once. Result – no action and the long-term threat to our national finances will continue to grow worse.

If the history of the Great Depression is a guide, markets and housing prices will eventually recover, though not all the way to their “bubble” highs just before the crash, and will resume their steady climb of 6-8% per year. But misguided Washington policy, especially delay in dealing realistically with the insolvent banks, may delay this recovery for some years.

So there are some of my own prognostications. It will be interesting to look back in a year or so and see how accurate I was…..