As the 2012 Presidential election campaign heats up, there is plenty of historical revisionism taking place with respect to the 2008 financial / economic crisis. Economist Dean Baker wrote an article for The Guardian, wherein he debunked the Obama administration’s oft-repeated claim that the newly-elected President saved us from a “Second Great Depression”:
While the Obama administration, working alongside Ben Bernanke at the Fed, deserves credit for preventing a financial meltdown, a second great depression was never in the cards.
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The attack on the second Great Depression myth is not simply an exercise in semantics. The Obama Administration and the political establishment more generally want the public to be grateful that we managed to avoid a second Great Depression. People should realize that this claim is sort of like keeping our kids safe from tiger attacks. It’s true that almost no kids in the United States are ever attacked by tigers, but we don’t typically give out political praise for this fact, since there is no reason to expect our kids to be attacked by tigers.
In the same vein, we all should be very happy we aren’t in the middle of a second Great Depression; however, there was never any good reason for us to fear a second Great Depression. What we most had to fear was a prolonged period of weak growth and high unemployment. Unfortunately, this is exactly what we are seeing. The only question is how long it will drag on.
Joe Weisenthal of The Business Insider directed our attention to the interview with economist Paul Krugman appearing in the current issue of Playboy. Krugman, long considered a standard bearer for the Democratic Party’s economic agenda, was immediately thrown under the bus as soon as Obama took office. I’ll never forget reading about the “booby prize” roast beef dinner Obama held for Krugman and his fellow Nobel laureate, Joseph Stiglitz – when the two economists were informed that their free advice would be ignored. Fortunately, former Chief of Staff Rahm Emanuel was able to make sure that pork wasn’t the main course for that dinner. Throughout the Playboy interview, Krugman recalled his disappointment with the new President. Here’s what Joe Weisenthal had to say about the piece:
There’s a long interview with Paul Krugman in the new Playboy, and it’s excellent.
We tend to write a lot about his economic commentary here, but he probably doesn’t get enough credit for his commentary on politics, and his assessment of how things will play out.
Go back and read this column, from March 2009, and you’ll see that he basically called things correctly, that the stimulus would be too small, and that the GOP would be emboldened and gain success arguing that the problem was that we had stimulus at all.
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At least as Krugman sees it, the times called for a major boost in spending and so on, and Obama never had any intention to deliver.
What follows is the prescient excerpt from Krugman’s March 9, 2009 essay, referenced by Joe Weisenthal:
The broader public, by contrast, favors strong action. According to a recent Newsweek poll, a majority of voters supports the stimulus, and, more surprising, a plurality believes that additional spending will be necessary. But will that support still be there, say, six months from now?
Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.
So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Obama finally concedes that a bigger stimulus is needed. But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.
In early July of 2009, I wrote a piece entitled, “The Second Stimulus”, in which I observed that President Obama had already reached the milestone anticipated by Krugman for September of that year. I made a point of including a list of ignored warnings about the inadequacy of the stimulus program. Most notable among them was the point that there were fifty economists who shared the concerns voiced by Krugman, Stiglitz and Jamie Galbraith:
Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.
Mike Grabell of ProPublica has written a new book entitled, Money Well Spent? which provided an even-handed analysis of what the stimulus did – and did not – accomplish. As I pointed out on February 13, some of the criticisms voiced by Mike Grabell concerning the programs funded by the Economic Recovery Act had been previously expressed by Keith Hennessey (former director of the National Economic Council under President George W. Bush) in a June 3, 2009 posting at Hennessey’s blog. I was particularly intrigued by this suggestion by Keith Hennessey from back in 2009:
Had the President instead insisted that a $787 B stimulus go directly into people’s hands, where “people” includes those who pay income taxes and those who don’t, we would now be seeing a stimulus that would be:
- partially effective but still quite large – Because it would be a temporary change in people’s incomes, only a fraction of the $787 B would be spent. But even 1/4 or 1/3 of $787 B is still a lot of money to dump out the door. The relative ineffectiveness of a temporary income change would be offset by the enormous amount of cash flowing.
- efficient – People would be spending money on themselves. Some of them would be spending other people’s money on themselves, but at least they would be spending on their own needs, rather than on multi-year water projects in the districts of powerful Members of Congress. You would have much less waste.
- fast – The GDP boost would be concentrated in Q3 and Q4 of 2009, tapering off heavily in Q1 of 2010.
Why did the President not do this? Discussions with the Congress began in January before he took office, and he faced a strong Speaker who took control and gave a huge chuck of funding to House Appropriations Chairman Obey (D-WI). I can think of three plausible explanations:
- The President and his team did not realize the analytical point that infrastructure spending has too slow of a GDP effect.
- They were disorganized.
- They did not want a confrontation with their new Congressional allies in their first few days.
Given the fact that the American economy is 70% consumer-driven, Keith Hennessey’s proposed stimulus would have boosted that sorely-missing consumer demand as far back as two years ago. We can only wonder where our unemployment level and our Gross Domestic Product would be now if Hennessey’s plan had been implemented – despite the fact that it would have been limited to the $787 billion amount.