Is this the Iraq Recession?

by: Matt Stoller

Wed Jan 23, 2008 at 06:01


New America Foundation ForumI just got back from the New America Foundation forum on the economic crisis, with presenters from the McCain, Edwards, Obama, and Clinton.  Apparently the Romney, Paul, and Huckabee campaigns were going to send reps, but did not.  I wanted to test out the 'Iraq Recession' frame, which Moveon put out in an email a few days ago when discussing the stimulus.

Basically, this is the closest any of us are going to get to Davos, the exclusive global elite conference going on in Switzerland right now where the freakout du jour is the credit crunch and coming recession.  Multiple Democrats made the point that this is not a 'subprime' mortgage crisis, it's a credit crisis reflecting many sectors of the economy.  Leo Hindery from the Edwards campaign said it's a crisis involving regulatory neglect combined with trade, current account, Federal, state, and consumer deficits and debt.  He was by far the most radical in his diagnosis of the problem, which coheres with the politics of the Presidential campaign.

Gary Gensler of the Clinton campaign spoke, and I found his speech interesting for the way that he framed Clinton's thinking about policy.  Gensler said that Clinton is an extremely thorough policy-maker, and won't put out policy unless she has personally ensured that it is rigorously done.  But he also added that she is listening to voters on the campaign trail (he spoke of her 'conversation' with the country that she announced upon the start of her campaign), and she is hearing that middle income voters are suffering because of housing and energy costs.  This explains why her plans are targeting these areas, and why she's become much more liberal in her rhetoric.  Gensler also mentioned Clinton's embrace of 'smart trade' instead of simply free trade.

Kevin Hassett of the McCain campaign also spoke, and he gave a remarkably uninspiring and status quo argument for tax cuts for corporations as well as entitlement reform (ie. gutting Social Security).  Hassett basically doesn't see anything particularly problematic in our current predicament except that the long-term crises of Medicare and Social Security are going to cause the markets to 'punish' us, and that corporate tax rates have stacked the deck against companies that invest in America due to lower tax rates abroad.  In an unwitting nod to Naomi Klein's Shock Doctrine, he spoke of the current economic crisis as a great opportunity that we should not squander to fix our longer term problems, as well as lauding Bill Clinton's record on free trade and attacking Hillary's recent move away from it.

Obama's advisor, Austan Goolsbee, an economist at the University of Chicago, discussed the need for immediate stimulus in the form of disbursements of cash to low and middle income wage earners through existing channels.  He stressed the need for speed in moving a stimulus package that gets money out quickly, and used the traditional Keynesian argument that a stimulus that moves to slowly will hit the economy during the recovery, leading to inflationary pressures instead of help for a sagging economy.  In the question and answer session, someone analogized our current predicament and certain policy options to the Weimar crisis, and Goolsbee dismissed this notion out of hand, but I was impressed with his answer on trade.  He pointed out that existing free trade agreements are 900 pages long and full of loopholes, and that they aren't in fact helping to open markets in any particularly consistent manner.  He'd like free trade, but we don't have it.

After the session, I asked both Gensler and Goolsbee about the frame 'Iraq Recession', and Gensler brushed it aside.  "It's not broad enough", he said.  He then noted that this recession has deeper causes than just Iraq, that while Iraq is constraining our options (a Steve Clemons phrase) circles in with housing, credit, and oil prices.  Goolsbee was much more open to the idea, though he agreed with Gensler that Iraq did not cause our current economic problems.  I learned during our chat that the Chicago school economist Goolsbee is friendly with David Sirota.  In an argument about free trade, Sirota actually encouraged Goolsbee to read a trade agreement, who was then horrified at what he found.  I can see why elite liberals love Obama, since his advisors seem sincerely open-minded about policy ideas, in contrast to a much more lowest common denominator voter and poll-driven top-down approach from Clinton.  Both approaches have their strengths and their weaknesses.

During the conversation, I brought up the FISA legislation and swing liberals with Goolsbee, and someone else mentioned that Obama is going to be in DC on Monday afternoon for a fundraiser.  The arguments I've gotten from the Obama camp on FISA are that he has scheduling problems with coming to DC, so we'll see, if it's accurate he'll be in town, whether he can make time to help Dodd protect the Constitution.  After Saturday in South Carolina, the contest goes national, and this is when Obama could shine and bring home some of those swing liberals with a clear fighting spirit against Bush's top priority.

In my final observation, I'll note that the topic of Iraq did not come up during the forum, and that no one touched on the military budget and its huge imprint on the American economy.  It eats up something like 53% of discretionary spending, money that would be useful in dealing with a massive credit crunch and recession.  But that money is apparently untouchable and not part of fiscal responsibility.  Funny how the Blue Dogs never whine about the military budget in all their harping about excess government spending. 

During the forum, I got an email from a super smart financial analyst who pointed out that there is probably very little experience with stagflationary policy-making among those advising the campaigns.  I'd feel a lot better about our bumpy road if any of the people who staffed the forum were policy-makers in the 1970s and knew how to deal with something other than the Goldilocks economy of the 1990s.

Matt Stoller :: Is this the Iraq Recession?

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actually, 80s analysts (0.00 / 0)
I'd feel a lot better about our bumpy road if any of the people who staffed the forum were policy-makers in the 1970s and knew how to deal with something other than the Goldilocks economy of the 1990s.

Actually, it's people like Summers and Krugman who would be the go-to guys on this. The folks who were there at the time were lost, unprecendented etc.  The post hoc analysis of the rising young policy economists would be the ones to talk to.

Krugman was, IIRC, on the Reagan CEA staff, so would have been hands-on during the Reagan/Vollker recession that killed off the Nixon/Burns inflation aftermath. He might be a good person to ask.


Why not endorse Obama? (0.00 / 0)
I mean this as an honest question. Take your comment...
I learned during our chat that the Chicago school economist Goolsbee is friendly with David Sirota....I can see why elite liberals love Obama, since his advisors seem sincerely open-minded about policy ideas, in contrast to a much more lowest common denominator voter and poll-driven top-down approach from Clinton.

I think it is clear Edwards is not going to win. I realize the importance of him saying in (Bowers post on delegates etc). But given that Obama seems to be consistently closer aligned with bloggers than Clinton, why don't, Kos, Stoller, Bowers, Hamsher etc, endorse him over Clinton. Wouldn't this help with the so-called swing-liberal issue?

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Several reasons (4.00 / 1)
1) I'm not sure how much of an impact that would have. Most of the blogosphere had made up its mind. High-level bloggers don't get automatic respect anyway. And the blogosphere is not the same as the Democratic primary universe. So I doubt it'd move many votes.
2) I think the point that Matt is making is that Obama has to earn the support of swing liberals. And he hasn't been doing that. Nobody wants a repeat of the 1990s, when the support of liberals was assumed and therefore they were ignored.
3) What does the endorsement get for bloggers? Obama hasn't been good at outreach to them, nor is it likely to push their issues. The religious right doesn't endorse the ones closest to them, they make people work for their support. That's not a bad way to go about it if you want to shift the Overton window left.
4) Endorsements in the past from this lot have tended to go to aggressively proud Democrats with a strong anti-war stance going up against a corporate-backed establishment candidate. And they've been outsiders who need the support. Obama really doesn't and the blogosphere can't deliver the margin of victory anyway.
5) Neutrality helps for the general election.

Forgotten Countries - a foreign policy-focused blog

[ Parent ]
When Obama sends a few dogwhistles to the left (0.00 / 0)
I might consider voting for him.

Filibustering FISA would be an excellent start, but apparenlty he has "scheduling conflicts."

I am in earnest -- I will not equivocate -- I will not excuse -- I will not retreat a single inch -- AND I WILL BE HEARD.  


[ Parent ]
Three small states have voted..... (4.00 / 2)
the death of Edwards is greatly exagerated. I realize the chances have narrowed because people are lemming-like and want to back a winner, but calling for people to switch their allegiance is premature. Let's see what upcoming states do and especially Feb. 5.

It is not Edwards' "responsibility" to gain votes for Obama. My take is that he also takes votes from Clinton and blunts her momentum too. So Edwards gathering delegates, seeing if there is a shift in voter sentiment, and raises the issues he has been is a huge plus for Democracy.


[ Parent ]
As long as Edwards can pick up delegates (0.00 / 0)
he should stay in. And that could be a long time, since Democratic primaries are not winner take all.

As Kos pointed out some days ago, Obama supporters aren't doing themselves any favors by pushing, pushing, pushing against people who might actually be committed to their candidate out of principle.

I am in earnest -- I will not equivocate -- I will not excuse -- I will not retreat a single inch -- AND I WILL BE HEARD.  


[ Parent ]
About that stagflation (0.00 / 0)
The 1970's stagflation did follow on the (unfunded) Vietnam War.  Basically, inflation got out of hand (interest rates on the newly available money market accounts hit 18% at one point, IIRC) at the same time that the economy was stagnating because of, I believe, a cutback in spending and the rapid increase in oil prices when they were a much bigger factor in the economy.  Interest rates got that high because the Fed head (Paul Volcker) believed it was necessary to kill off inflation (and it was a major factor in costing Jimmy Carter reelection).

The world is very different now, however.  In those days Europe and Japan were still making a comeback, but most of Asia was underdeveloped.  There was not the free flow of capital we see now, and there was much more regulation at home, some for better, some for worse.  And it is extremely doubtful that any Fed head would do what Volcker did.  Bernanke is of the view that the raising of interest rates was a factor in how bad the Great Depression was, and he seems (if a bit tardily) trying not to make that mistake this time.  That will give us inflation, but the fear of inflation causes people to buy and hoard, which provides some stimulus.

But the biggest difference is the income and asset disparities we see now.  Then there was far less difference between those at the top and the rest, and people at the bottom were just beginning to see wage slowdown.  Moreover, there was not nearly the amount of debt, as credit cards were just coming in and people who remembered the Great Depression were still afraid of debt.  Inflation rewards borrowers (at least those who can pay back with cheaper dollars) so that is when debt started to seem "fiscally prudent."

IMHO credit card debt is going to be as big a problem as home equity loans and adjustable mortgages.

 

John McCain--He's not who you think he is.


On Stagflation and "Iraq recession"..... (0.00 / 0)
wars usually cause inflation, not recession, because spending spikes are financed by deficit spending and as economy approaches full employment, inflation picks up.

How exactly do you equate the current problems with the financial sector and debt with recession? More likely, the continued deficit spending in the last four years have contributed to some inflation. Low interest rates and excess liquidity in the financial sector led to a classic speculative bubble which has now collapsed.

Iraq fed into that speculative bubble with gov't. debt, I suppose. But the prescription of lower interest rates combined with targeted fiscal stimulus (short-term targeted toward groups who will quickly spend it) is an appropriate policy at this point.

Whether the supply-siders will assert themselves in Congress and skew the stimulus toward upper incomes or we pressure Congress to make sure it goes to lower income folks who are going to bear the brunt of the recession is the battle at hand now.

This is a very different environment than the 1970's. More like the late 1980's with the S & L banking crisis associated with a slowdown and panic like in 1987.


I think Iraq war has extracted alot of wealth from economy (4.00 / 1)
all this money is being pushed out by the Fed but it is NOT wealth and it is NOT wages.  The economy suffers from a lack of a real wage increase by the overwhelming majority of Americans.  Instead of pay increases that have kept up with the skyrocketing price of fuel, food and housing, this was supplanted by 'credit'.  A credit card is NOT wages, it is not a paycheck, it is a loan by a financial institution that will require you to pay back that loan or the financial institution will fail.  Since 2001, the Republicans have de-linked the production of wealth through wages by inflating money both by easy credit and phantom wages in the form of cheap credit.  Neither created true wealth.  Massive defense spending has not created an increase of wages nor wealth because it never has, the monies spent were ultimately destroyed.  That did not add to the wealth of the nation.  America has always experienced this contraction after a War.  this happened after WWI, WWII, Korea, Vietnam, and now the Iraq war.  The HUGE cost of the Iraq war is being extracted out of the average taxpayer by deflating the value of the home.  The upward spiral of cheap 'credit' to both buy homes and consumer items has corroded basic financial fundamentals.  The problem is one of solvency, the average consumer is not solvent enough to pay off existing debt and increase spending to grow new wealth into the economy.  A great deal of wealth has been squandered in the sands of Iraq.  Additional liquidity will not solve this problem until wages can increase to once again sustainably grow the economy.  Lowering interest rates may help some consumers with fixing or lowering their monthly payments but with some lenders unwilling to refinance some consumers who are to far "underwater" the rate cut will have very limited impact.

Weak, weak, weak (0.00 / 0)
The arguments I've gotten from the Obama camp on FISA are that he has scheduling problems with coming to DC, so we'll see, if it's accurate he'll be in town, whether he can make time to help Dodd protect the Constitution.

It's the U.S. Constitution and he has scheduling problems?

I think it's pretty telling that if Obama can't demonstrate leadership here by coming back to town and appearing at Dodd's side, it raises serious questions of just how committed Obama will be for any just cause.


Take out Obama and put in any of the candidates' names (0.00 / 0)
If they can't make it to D.C. to protect the law of the land.

You think if you asked Clinton and she didn't vote for the filibuster that she wouldn't say it was something like "scheduling problems"? Or even Edwards, if he didn't go to D.C. and just implore the people there to stop the bill?


[ Parent ]
Then can we stop hearing about professor of Constitutional Law thing? (0.00 / 0)
Hillary doesn't play that card.

Obama's supporters constantly do.

So, when push comes to shove, he can show whether his Harvard education and his professorship meant anything, or whether they were empty.

I am in earnest -- I will not equivocate -- I will not excuse -- I will not retreat a single inch -- AND I WILL BE HEARD.  


[ Parent ]
The McCain-Bush response, well described... (0.00 / 0)
From a commenter over at the excellent market-analysis blog The Big Picture:

The question is, will the president and Congress put aside politics to get the job done?"
No. The Democrats will never pass on a chance to bash George Bush no matter how much colateral damage that does to the country.
Posted by: Max | Jan 23, 2008 9:28:17 AM

It's comments like this that make me think that the US is in for a long hard road. Stiglitz speaks the truth but because it goes against the conservative belief system, he must be demonized as a 'liberal'

Here's a memo: society is like a pyramid, if you mine the bottom long and hard enough, everything comes down. Everything is coming down now, are you going to shore up the base of the pyramid or piss an moan that it goes against your politcal beliefs?

The reson no stimulus package will make it is because President Bush, the leader of the Republican Party, will not compromise on his hard core conservative ideology and with the conniving of his republican collegues in the house and senate will only allow a bill to come forward if it has massive tax decreases for corporations and high net worth individuals; exactly what is not called for by the facts of the crisis.

Ideology over Country. Republican conservatism in action. You wait and see, it will go down like that. No tax cuts for the top 10%ers, no tax cuts for Exxon, no stimulus for the American People. And the Republican Party will let the nation go to hell before they compromise. And the American media will help the GOP by not reporting the story accurately for fear of being called 'partizan' or taking sides. They would rather lie and keep the peace then tell the truth. They know who their paymasters are.

Also check out the chart porn they have up over there comparing the 1930, 1962 and 1987 crashes to what's happening now...


Solomon (0.00 / 0)
After a moment the king said, "Bring me a sword." They brought the sword to the king.

  25 Then he said, "Cut the living baby in two-give half to one and half to the other."

  26 The real mother of the living baby was overcome with emotion for her son and said, "Oh no, master! Give her the whole baby alive; don't kill him!"

  But the other one said, "If I can't have him, you can't have him-cut away!"

Republicans have a big advantage over us on these kinds of debates.  They'll but the baby in half before caving in.

ACitizen will claim this is just an excuse, and most of the time he'd be correct.  Democrats have developed habits that lead them to not fight when they should.  But we'll never cut the baby in half.


[ Parent ]
Investment and "hope" vs. Iraq, oil-dependency and fear (0.00 / 0)
Fascinating post Matt.  I've been impressed with NAF for their relatively innovative and systemic policy thinking, including their leadership on spectrum issues (especially the broadcast white space), which is an area I think and care a lot about.

Its nice to hear that David Sirota has had some direct influence on Goolsbee re: trade policy.  It reminds me that Karen Kornbluh, another of Obama's key economic advisors, wrote a paper early in the decade (when the Internet and telecom sectors were having their meltdown) that advocated "structural separation" for local access networks, which is a more fundamental approach to achieving the overall goals of network neutrality--and one that would likely be fought with even greater intensity by incumbents. 

Though I don't know what Kornbluh was saying or doing when she worked for Rubin during the Clinton years, her structural separation proposal strikes me as embodying a healthy combination of progressive "common sense" and political courage, expressed at a key transition point in the telecom and tech sectors.  If it had been adopted then, the broadband market would probably look very different than it does today, with more service providers and probably lower and more varied and flexible pricing.

At a broader level, your post highlights one aspect of what I'd like to see the Dems focus on in their response to what's likely to be a prolonged period of economic strain and, as you note, probably stagflation.

My simplistic view of stagflation is that its mainly caused by high energy prices, which flared up sharply at multiple points in the 1970s.  While the question of short-term fixes is obviously an important one, I'd also like to see the Dems begin to present a longer-term policy vision that distinguishes "investment in America's citizens and communities" from "fear-based and wasteful spending on failed military adventures," with Iraq being a very dramatic and consequence-rich example of the latter.

This approach would clarify the strong connection between Iraq and our nation's economic woes.  One way to do this fairly vividly would be to lay out a short list of key "investments" we could have made in this country (e.g., in healthcare, education/schools, basic infrastructure like bridges, roads and energy grids, green energy technologies, universal high-capacity broadband, etc.) if we hadn't pissed away that money in Iraq.  As Obama suggested during the debate, you could accomplish a hell of a lot for the hundreds of billions (or $1-2 trillion, depending on what you include) pissed away in Iraq.

With the economy's fundamental problems reemerging during this election season, it seems like an ideal time for Dems to begin some "paradigm-shifting" in terms of the issues now on the political table and how they are viewed by citizens and addressed by politicians.

One important but seemingly mundane element of this would be to change the Federal government's budgeting approach to distinguish investment from consumption.  This is a very important distinction, as anyone involved in business knows.  The fact that its not part of the federal budgeting process strikes me a fundamental symptom of what's wrong with our national economy.  Investment is designed to create new value.  This contrasts sharply with spending in Iraq, which is not only "consumption of value" it is actually "destruction of value."  Yet it is treated no differently than investment in education, infrastructure, etc. in the federal budget.  This is a fundamentally flawed approach to public policy, and one that feeds into Congressional irresponsibility and lack of accountability.

A policy approach that focused on "investing in America's citizens and communities" could encompass the themes of security (broadly defined, but also including real security against terrorist attacks), real and sustainable economic growth, universal dignity and expanding and more equitable opportunity, innovation and entrepreneurship (e.g., in green energy tech and other areas), community (investing in the core infrastructure we all rely on), among others.

This approach to public policy is a fundamentally positive and hopeful one, as well as being very practical and financially responsible.  In both respects it stands in sharp contrast to the massive fear-driven (you could add greed-driven, if you like) spending in Iraq, and the Republican view that we need to continue down this failed path, which drains our nation's wealth to support our oil addiction and is fueled by misguided and manipulated fears.

The fact that the economy may be in for a very tough (and prolonged) period can, on one hand, push people into even more irrational fear that could feed more Bush-like policies (basically, the primary Republican strategy and message).  Or it can be used to make the connections I outline above and to shift Americans' attention to a worldview that is much more positive and hopeful, and also fundamentally more economically sound.

My sense is that Obama is trying to make this part of his message, though I don't know how well he's succeeding or can succeed.  But putting specific candidates aside, I think a more fleshed out and refined version of what I'm suggesting here is where the Dems should be heading--not only for the sake of their/our political future, but also for the future health of this country.

And to bring this back to NAF, my occasional reading of some of their policy papers gave me the impression that some of their "research fellows" have talked about various components of what I'm pointing to.  This suggests to me that an effort to stitch these proposals together into a broadly integrated policy would be a useful exercise, which I hope they're already working on.  And I hope some of the Dem candidates are seriously reviewing these proposals as well.


I dont' see how (0.00 / 0)
we get out of this unless we cut back on our national security state (check our Chalmers Johnson's "Going Bankrupt" at common dreams or truthout), and unfortunately none of the candidates is agressively calling for that. I think we know why.  We can barely get them to say they'll start a pullout in Iraq.  Think any of them are going to call for a cut in military spending? A smaller army?  How can we pay for national health care and spend a $trillion a year on the military?  Talk about a mess! 

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