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.
No Consensus About the Future
As the election year progresses, we are exposed to wildly diverging predictions about the future of the American economy. The Democrats are telling us that in President Obama’s capable hands, the American economy keeps improving every day – despite the constant efforts by Congressional Republicans to derail the Recovery Express. On the other hand, the Republicans keep warning us that a second Obama term could crush the American economy with unrestrained spending on entitlement programs. Meanwhile, in (what should be) the more sober arena of serious economics, there is a wide spectrum of expectations, motivated by concerns other than partisan politics. Underlying all of these debates is a simple question: How can one predict the future of the economy without an accurate understanding of what is happening in the present? Before asking about where we are headed, it might be a good idea to get a grip on where we are now. Nevertheless, exclusive fixation on past and present conditions can allow future developments to sneak up on us, if we are not watching.
Those who anticipate a less resilient economy consistently emphasize that the “rose-colored glasses crowd” has been basing its expectations on a review of lagging and concurrent economic indicators rather than an analysis of leading economic indicators. One of the most prominent economists to emphasize this distinction is John Hussman of the Hussman Funds. Hussman’s most recent Weekly Market Comment contains what has become a weekly reminder of the flawed analysis used by the optimists:
Hussman’s kindred spirit, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), has been criticized for the predictiction he made last September that the United States would fall back into recession. Nevertheless, the ECRI reaffirmed that position on March 15 with a website posting entitled, “Why Our Recession Call Stands”. Again, note the emphasis on leading economic indicators – rather than concurrent and lagging economic indicators:
Unlike the partisan political rhetoric about the economy, prognostication expressed by economists can be a bit more subtle. In fact, many of the recent, upbeat commentaries have quite restrained and cautious. Consider this piece from The Economist:
A great deal of enthusiastic commentary was published in reaction to the results from the recent round of bank stress tests, released by the Federal Reserve. The stress test results revealed that 15 of the 19 banks tested could survive a stress scenario which included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices. Time magazine published an important article on the Fed’s stress test results. It was written by a gentleman named Christopher Matthews, who used to write for Forbes and the Financial Times. (He is a bit younger than the host of Hardball.) In a surprising departure from traditional, “mainstream media propaganda”, Mr. Matthews demonstrated a unique ability to look “behind the curtain” to give his readers a better idea of where we are now:
When mainstream publications such as Time and Bloomberg News present reasoned analysis about the economy, it should serve as reminder to political bloviators that the only audience for the partisan rhetoric consists of “low-information voters”. The old paradigm – based on
campaign fundingpayola from lobbyists combined with support from low-information voters – is being challenged by what Marshall McLuhan called “the electronic information environment”. Let’s hope that sane economic policy prevails.