Let's start with Baker:
The June US employment report should convince even the determinedly ignorant that the time has come for another round of stimulus for the American economy. The economy is continuing to shed jobs and work hours at a very rapid pace. The unemployment rate is virtually certain to cross 10% by the end of the summer and will likely hit 11% before we are very far into 2010. This is a scenario much worse than the Obama administration had expected when it crafted its stimulus package. It is time for it to adjust its plans accordingly.
When the Obama administration put together its stimulus package in January, it was projecting that, in the absence of any stimulus, the unemployment rate would peak at just over 9% early in 2010. With the unemployment rate reaching 9.5% in June, they clearly underestimated the size of the downdraft hitting the US economy.
The June data showed the economy shedding 465,000 jobs - but even more striking was the fact that hours worked fell by 0.8%. This rate of decline in hours worked is the same as in the period of economic free fall from October to April. It's good that employers cut back hours per worker, rather than lay people off, but it still means that the demand for labour is plummeting. If hours per worker did not change, this would be equivalent to a loss of more than 900,000 jobs in June.
There was a fairly broad consensus of economists who thought the stimulus was far too small, and now it seems clear that they were right. Beyond that, everyone who actually understood the basics of economic multipliers realized that tax cuts were far less effective, overall, than government spending. Furthermore, cuts in government spending at the state and local levels were commonly understood to be counter-stimulative, directly undermining the federal stimulus spending, so that every dollar that didn't go to making state budgets whole was a dollar lost in the overall stimulus effort.
So with all three of those factors considered, it was strikingly obvious that Obama's original proposal wasn't up to the job, and that the "centrist" Senator's gutting only made matters much, much worse. This was all clearly foreseeable, and, indeed, I wrote about all of these factors, as did others here at Open Left and elsewhere.
While Krugman is widely seen as a particularly prominent critic of Obama, his column once again proves this perception mistaken, to anyone who reads carefully. Instead of focusing on criticizing him for failing to recognize the above three points, the heart of Krugman's column revolves around a parallel that gets Obama off the hook: in normal recessions, Krugman argues, the remedy is for the Federal Reserve to cut interest rates a little at a time, until it's done enough to solve the problem. And Obama's approach with stimulus spending--necessary since the Fed has cut rates as far as it can go--should be seen in the same light. Here's Krugman in his own words:
When there's an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. The Fed responds by cutting interest rates in an incremental fashion. Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes.
During the last recession, the Fed repeatedly cut rates as the slump deepened - 11 times over the course of 2001. Then, amid early signs of recovery, it paused, giving the rate cuts time to work. When it became clear that the economy still wasn't growing fast enough to create jobs, more rate cuts followed.
Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.
And that's what the Obama administration should be doing right now with its fiscal stimulus. (It's important to remember that the stimulus was necessary because the Fed, having cut rates all the way to zero, has run out of ammunition to fight this slump.) That is, policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it's clear that the first round wasn't big enough.
Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we've been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans - and some Democrats - have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.
Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration's ability to respond effectively.
This is actually Krugman bending over backwards so far that he's standing on his head, since (1) As Krugman himself essentially admits, it was always quite obvious that neither the Republicans nor Versailles in general was going to see both forms of recession-fighting in equivalent terms. (2) interest rate cuts have a much more immediate economic impact than stimulus packages that take months before their impacts start being deeply felt, and years before their impacts are spent. (3) There's much less of an economic downside from a too-large stimulus than from a two-small. A too-large stimulus may run up more debt, but the faster recovery helps pay it off faster, wherease a too-small stimulus leaves you mired in deficits far longer than need be, while the full range of human suffering continues far longer than necessary.
Thus, Krguman is working quite hard to go easy on Obama, while still encouraging him to finally get things at least within the ballpark of being right:
As I said, I was afraid this would happen. But that's water under the bridge. The question is what the president and his economic team should do now.
It's perfectly O.K. for the administration to defend what it's done so far. It's fine to have Vice President Joseph Biden touring the country, highlighting the many good things the stimulus money is doing.
It's also reasonable for administration economists to call for patience, and point out, correctly, that the stimulus was never expected to have its full impact this summer, or even this year.
But there's a difference between defending what you've done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden's admission that the administration "misread" the economy, declaring that "there's nothing we would have done differently." There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor's inability to admit mistakes. And that's an attitude neither Mr. Obama nor the country can afford.
What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he's trying to steer the country through a severe economic storm, and that some course adjustments - including, quite possibly, another round of stimulus - may be necessary.
What he needs, in short, is to do for economic policy what he's already done for race relations and foreign policy - talk to Americans like adults.
But Reich seems to have a much better fix on the degree of difficulty of the fix that we're in. There are, he explains, two sorts of theory about what a recovery should look like:
In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.
Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.
That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.
And both of these are mistaken:
Personally, I don't buy into either camp. In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.
Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water -- owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.
Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.
Reich is one of the relative few who's got the courage to squarely face how bad things look:
My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.
This, of course, is heresy--directly rejecting Reaganomics--which is tantamount to saying "the Emperor has no clothes". It's precisely Obama's inability to say this that lies at the root of all his problems on the economic front.
The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin.
There's two statements from last year that are useful triangulation points for what Reich is saying, both of which occurred on Bill Moyers, and both of which I've commented on before. First, before the meltdown went into run-away more, Ross Douthat tried to paint the precipitous loss of workers' economic security as no biggie:
BILL MOYERS: But here's let's get to the big issue in your book. The subtitle of your book is "How Republicans Can Win the Working Class and Save the American Dream" because my great concern is that ordinary working people in this country are having a real trouble making a living wage.
The paucity of jobs that pay living wages is, I think, the great moral as well as economic crisis in America today. And neither party has fully addressed that. Conservatives won under Nixon with the silent majority. Reagan won with the-
ROSS DOUTHAT: Reagan Democrats.
BILL MOYERS: -the working class that came over to the Republican Party. And George Bush won with the angry white man. But I don't see what any of those people have gotten from the conservative revolution because they're worse off today in real wages, adjusted for inflation, than they were 30 years ago when you came to power.
ROSS DOUTHAT: I'll push back on that argument a little bit. I think there are a lot of ways in which the working class is better off than they were in that era. I think if just looking at wages is misleading because one of the things that's happened thanks to free trade, thanks to policies that Republicans have championed, is prices, the cost of living, has fallen dramatically across the board for Americans.
If you look at the goods the poor and the working class buy versus the goods the rich buy, the goods that the poor and working class buy today are vastly cheaper than they used to be.
BILL MOYERS: You're not saying that workers face wage stagnation?
ROSS DOUTHAT: No, workers do face wage stagnation. But those wages do, in fact, buy more goods than they used to buy. There are ways in which the working class is better off. But, yes, on the big picture, I agree with you.
But Republicans need a tax policy that helps people investing in America's future in another way: People struggling to raise families. So we talk a lot about making the tax code more family friendly, making it easier for people to have two kids, to have three kids, to put those kids through school.
The idea that working class Americans were better off without their union jobs, pensions, job security, etc. was laughable at the time. Now, one year later, not so much. It's just too damn painful to be laughing now.
Then there was George Soros:
BILL MOYERS: So let's think about those people down at Neely's Barbecue going home tonight having heard you. What they've heard you say is the system is really disfunctioning right now. It's out of control. Nobody's in charge. They've heard you express your own worry that in the next three months it could get much, much worse.
And they've heard you say that you don't see much good news immediately on the horizon. So let's leave them something to think about as they go home. Let them go home and say, "Mr. Soros said here are three things we can do, simply." One?
GEORGE SOROS: Well, deal with the mortgage problem. Reduce foreclosures. Recapitalize the banks. And then work on a better world order where we work together to resolve problems that confront humanity like global warming. And I think that dealing with global warming will require a lot of investment.
You see, for the last 25 years the world economy, the motor of the world economy that has been driving it was consumption by the American consumer who has been spending more than he has been saving, all right? Than he's been producing. So that motor is now switched off. It's finished. It's run out of - can't continue. You need a new motor. And we have a big problem. Global warming. It requires big investment. And that could be the motor of the world economy in the years to come.
BILL MOYERS: Putting more money in, building infrastructure, converting to green technology.
GEORGE SOROS: Instead of consuming, building an electricity grid, saving on energy, rewiring the houses, adjusting your lifestyle where energy has got to cost more until it you introduce those new things. So it will be painful. But at least we will survive and not cook.
BILL MOYERS: You're talking about this being the end of an era and needing to create a whole new paradigm for the economic model of the country, of the world, right?
GEORGE SOROS: Yes.
What Soros was saying then was so perfectly sane, that only a fool would ignore him. And the Democrats have conclusively proven that they are a part of fools--at least at the highest levels. Instead of embracing change at the optimal moment, when the pain of present gave us the strongest tail wind we might ever wish for, the Democrats instead hunkered down, and embraced the smoking ruins of nearly 30 years of Reaganomics. And they're still holding on for dear life.
But what about Bonddad? What about his claim that things are looking up?
Well, some of his data purports to tell us that things have been getting better for months and months now:
and
Doers that feel right to you?
Some says that things have stabilized--but at what level?
and
Yes, Bonddad is right at one level: there are numerous indicators telling us that things have stopped getting horribly worse. But there were similar indications in 1937, which caused FDR to cut back on spending, chasing his dream of a balanced budget, which the economics of the past told him was the key to everything else. And that's when he brought on the Recession of 1937/38. I'm not saying the exact same thing will happen now. But even if that had not happened, the US was very, very far from being out of the woods at that point. The GDP recovered by 1936, but unemployment would not recover until well into World War II. It was only when another imperative--one that even Repbulicans recognized and responded to--that we were finally able to fully lift the country our of the Great Depression.
I'm not saying we're in another Great Depression. But when you look at the levels of unemployment and under-employment, and you look at how long we can expect them to continue, and when you look at the reasons why--as Reich explains--we have no reason to believe that merely restoring things to how they were will get us back on track, then it really doesn't matter that we're not in another Great Depression. We're in another painful economic turning point, with no idea of how to get out of it--at least, no idea that our political masters are willing to consider.
And isn't that bad enough, whatever we want to call it? |
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