Republican Presidential candidate Mitt Romney has naturally built much of his campaign on the observation that recovery from the Great Recession has been too slow under Obama.  “This is not what a real recovery looks like,” Romney says, repeatedly.  He’s even compared Obama’s record to that of President Hoover, the last President to inherit a financial collapse and a staggering economy.  This is obviously meant to be a criticism of Obama and his economic policies.

All that said, Great Depression historian Gregory McElvaine of Millsaps College, says that most people don’t know that compared to Hoover’s record and policies, Obama’s have been remarkably effective.  From his article in the New York Times.

While everyone knows that the economic collapse that began in 2008 was a major disaster, most people have come to believe that it was not as dangerous as the one that began in 1929, the year after Hoover was elected president. Part of the reason for this impression is simply linguistic: the current situation has come to be called the Great Recession, which does not sound as bad as the Great Depression. More important, we now have a social safety net that somewhat eases the impact. And as the figures below will confirm, the truth is that our very bad situation today is not nearly as bad as things were eight decades ago, when Hoover was seeking re-election.

But it does not necessarily follow from the comparatively better situation today that the 2008 collapse was that much less severe than 1929’s. In fact, by many measures, what began four years ago this fall was even worse than what started in the fall of 1929. World industrial production, world trade and worldwide equity prices all fell more sharply in 2008-9 than they did in 1929-30. The prospect of a second Great Depression was very real when Barack Obama took office….

And, contrary to the charges made by his political opponents, the main reason that the Panic of 2008 became the Great Recession instead of the Second Great Depression is that the policies that have been employed by the Obama administration to combat it have been so much better than those undertaken by the Hoover administration in 1929. One major reason why the recovery has been so slow is that, thanks in no small part to Obama’s allegedly “failed stimulus policies,” the recession officially ended a scant nine months after the 2008 crash. In contrast, the economy was still in its deepening downward spiral more than three years after the 1929 crash. This difference means that the clock on recovery was started at much earlier point for Obama….

McElvaine then goes forward and documents the very different results Obama’s policies produced, compared to those of Hoover.  Romney’s policies very much reflect those held by Hoover, although in fairness to Hoover, he was not as ideologic as Romney.

Looking back on the past three years it becomes obvious that governments, when faced with imminent widespread bank collapse, strive first to maintain a nation’s banking system by bailing out the banks themselves.

This is a mistake.  It’s not the bank enterprise that needs saving, it’s the bank customers that need a lifeline.  Instead of funneling trillions of taxpayer money onto insolvent bank balance sheets, governments should nationalize the largest banks to insure not the bank balance sheets but the bank’s myriad  relationships with customers.  This saves the economy and avoids the problem of socialising losses for the rich.  This keeps the bank insolvency from migrating into the much larger and more critical economy at large.

As for the nationalized, insolvent banks, regulators can warehouse the imparied debt and over time sort out the wheat from the chaff.  Will there be immediate pain?  Of course.  Bank equity will be wiped out, hurting private investors including large pensions funds and insurance contracts.  Bank bondholders, particularly those holding unsecured debt, will see large losses too.  But these losses, although painful, pale in comparison to the losses that come from all the collateral damage exacted by the banks when they sever customer relationships in a desperate effort to survive.

Let the banks go and save the economy instead is the proper government response.    By saving customers, most of whom may have thriving businesses irrespective of the bank’s insolvency, government can lessen the depth and duration of the recession such a bank emergency will inevitably create.  Also, this government response allows bad bank debts to fall upon the shoulders of creditors who made unwise investments in the banks themselves–instead of ladling these bad debts onto the public accounts.

Thus the sovereign debt does not become overburdened by assuming private debt that went bad, as has been the case in the recent emergency.   Don’t save the bank, save the bank’s customers.

Economics professor Robert Reich, Secretary of Labor under President Bill Clinton describes our real problems and calls for Obama to reverse course and aggressively fight the great recession.

Before I turn to the President, though, let’s be clear: The lousy economy is due to insufficient demand. Consumers – who are 70 percent of the economy — can’t and won’t buy because they’re running out of cash. They can’t borrow against homes that are worth a third less than they were five years ago, and most consumers are bad credit risks anyway because they’re losing their jobs and their wages are dropping.  They also have to start saving for the kids’ college or for retirement, which will cut their spending even more.

 Without enough consumers, businesses won’t hire enough people and pay them enough to reverse the vicious cycle. So we’re dead in the water. Even the stock market has caught on to the truth.

Unfortunately for the economy, Reich hears President Obama has thrown in the towel and decided doing much about jobs is a non-starter given the Tea Party controlled House of Representatives.

Which gets me to the President. Even though the President’s two former top economic advisers (Larry Summers and Christy Roemer) have called for a major fiscal boost to the economy, the President has remained mum. Why?

I’m told White House political operatives are against a bold jobs plan. They believe the only jobs plan that could get through Congress would be so watered down as to have almost no impact by Election Day. They also worry the public wouldn’t understand how more government spending in the near term can be consistent with long-term deficit reduction. And they fear Republicans would use any such initiative to further bash Obama as a big spender.

So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia…..

There’s still time for political operatives in the White House – and the person they work for – to change their minds. If economic stresses increase, Americans may insist on government doing more. A CNN poll released Monday found 60% believe the nation remains in an economic downturn and conditions are worsening. Only 36% believed that in April.

But for now the President is being badly advised. The magnitude of the current jobs and growth crisis demands a boldness and urgency that’s utterly lacking. As the President continues to wallow in the quagmire of long-term debt reduction, Congress is on summer recess and the rest of Washington is asleep.

The President should present a bold plan, summon lawmakers back to Washington to pass it, and, if they don’t, vow to fight for it right up through Election Day.

Beezer here.  Incredibly, those who have predicted runaway inflation and counseled austerity as the cure, both in the US and Europe, are still being listened to by politicians.  Everything these people predicted has been totally wrong.  Interest rates have never been lower.  Inflation is subdued to the point of indicating disinflation, even deflation, could be lurking ahead.  Equity markets are struggling to regain their footing because investors know that government austerity and the total lack of any real jobs programs is bad for the economy, not good.    They know that this approach will make debts harder to pay down, not easier.  Bank analysts are busy marking down their predictions for future growth.  Paul Krugman, a leading proponent of larger stimulus and aggressive jobs programs, complains that even though his and Reich’s predictions (among many others including Nobel laureate Joe Stiglitz) have all been correct, political leaders still listen to those who have been wrong all along.

To be an economist of my stripe these days — basically a Keynes-via-Hicks type, who concluded as soon as Lehman fell that we were in a classic liquidity trap with all that implied — is a bittersweet experience, with the bitter vastly greater than the sweet.

The good news, such as it is, is that our underlying model has performed very well. Interest rates have stayed low despite large government borrowing; crowding out has been totally absent; huge increases in the monetary base have not been highly inflationary.

The bad news is that policy makers almost everywhere have failed dismally, and seem determined not to take on board the lessons of experience, either historical or what we’ve learned the past few years. As Joe Stiglitz says,

When the recession began there were many wise words about having learnt the lessons of both the Great Depression and Japan’s long malaise. Now we know we didn’t learn a thing. Our stimulus was too weak, too short and not well designed. The banks weren’t forced to return to lending. Our leaders tried papering over the economy’s weaknesses – perhaps out of fear that if we were honest about them, already fragile confidence would erode. But that was a gamble we have now lost. Now the scale of the problem is apparent, a new confidence has emerged: confidence that matters will get worse, whatever action we take. A long malaise now seems like the optimistic scenario.

Robert Reich, talking to people in the administration, says that there has been a deliberate decision to focus on the wrong issues, knowing that they’re the wrong issues:

So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia.

And in Europe, says Kantoos Economics, a low inflation target has become a sacred icon even though all evidence – including the experience under the gold standard! — says that this will be fatal:

I sincerely do hope that I read the wrong newspapers and missed all those European economists and commentators screaming all these things (or even better: that I am wrong). But whenever I try to hear something, there is just silence – or Axel Weber lashing out at Olivier Blanchard. Meanwhile, European policy makers and central bankers are wrecking one of the most fascinating projects in human history, the unity and friendship among the countries of Europe. This is beyond depressing. Way beyond.

I’m still trying to make sense of this global intellectual failure. But the results are not in question: we are making a total mess of a solvable problem, with consequences that will haunt us for decades to come.

Beezer here.  Hat tip once again to economics professor Mark Thoma’s economist’s view blogsite.  Everyday Thoma’s site scours the internet landscape culling the best economic thinking and highlighting it at economist’s view.  A first must-read for anyone seriously interested in understanding our nation’s economy, and the politics of it all.

Rating agency Standard and Poors (S&P) downgraded the US credit rating from AAA to AA+ Friday.  We’ll see if it has any practical effect in the rates investors will demand from Treasuries due to the downgrade.  Our initial guess is it won’t have any effect because investors are not political they are practical and the simple fact is the US Treasury market is the only one big and liquid enough to trust.

As for the downgrade, S&P pointed out the debt ceiling bill didn’t include any revenue increases.  S&P knows revenue will have to be raised from  current levels, otherwise the goal of real deficit and debt reduction is not possible.  So it wasn’t just about cuts, the downgrade came after S&P made the common sense analysis that revenues are necessary as well.  Obama’s $4 trillion grand bargain with House Speaker John Boehner included $850 billion in revenue.  Boehner walked out when Obama moved the goal post higher, to $1.2 trillion in revenue over 10 years.  Obama did that because the ‘gang of six’ (3 Republicans, 3 Democrats)  in the Senate agreed to that number in their proposal. 

The truth is Boehner isn’t a real House Speaker and cannot control the  Tea Party controlled House Caucus.  He wasn’t going to get the caucus to agree to $850 billion in additional revenue much less $1.2 trillion.   So Obama unwittingly gave Boehner his ‘out’ and Boehner walked.   As a result the emboldened Tea Party demanded, and got, an all cutting no additional revenue bill.    A bill that didn’t satisfy S&P as it turned out.

The stock markets last week plunged more than 660 pts for the week as measured by the Dow index, a drop matched only by the weeks following the recession’s onset.   This was as we predicted here.   This drop had nothing to do with the debt ceiling fiasco, which was embarrassing but not significant economically because what short term cuts it included merely add to what is already a contractionary federal policy that ends stimulus. 

The reason for the equity market weakness is a growing fear that the summer softness may turn out to be something darker and more permanent.  Corporations reported very strong earnings, but executives warned analysts that future business may be weaker in the United States.  Europe still struggles with its economies, most conspicuously represented by debt issues in Greece and most recently Italy.   Add to that slowing growth rates in China and India and you have the rug getting pulled out from under equities.    

Cutting government spending is contractionary because it withdraws economic activity when the economy is already weak.   Raising the top marginal tax rates are not contractionary in our current situation, however.  The reason for this is fairly straightforward.  The country needs to produce millions of jobs and the private economy cannot do this right now, that’s why we have a huge output gap and millions of unemployed.    The country currently suffers from extreme income inequality as well.  The wealthy have never been as wealthy as they are today.  They possess more of the nation’s income than ever before.  But they aren’t investing and although they do consume a lot, they are simply too few in number to lift the economy by their consumption. 

Raising their taxes diverts some of those idle savings to government which can then hire people by the millions.    Government doesn’t need to show a profit in order to spend money, which overcomes the primary impediment private corporations face when there’s a recession–they can’t profitably create jobs.   In fact, they must fire people in order to stay profitable.   Thus, raising revenues in our current situation effectively forces idle savings to be invested in the economy, creating jobs in meaningful numbers–which is stimulative.

Tea Partiers don’t understand this, but instead apply businesses metrics to government spending:  A fundamental misunderstanding of how national economies function.  

Investors understand how national economies work.  They see Washington DC being held hostage by an ideology they know doesn’t work in the real world.  Particularly in a  real world that is in recession. 

Unless something unexpected happens to change this political problem the markets will probably have a difficult time making much headway.   Contracting will be the default path, in other words, and that’s bad for stocks.

Over at economist’s view, economics professor Mark Thoma has asked readers to identify the biggest disinformation circulating right now, and how best to debunk it.

Not a bad question to ask, but there’s so much disinformation circulating right now that selecting one particular item misses the really big piece of disinformation that allows all the other disinformation to exist:  The Republican Party is a serious party.  The current version of the GOP is not only NOT serious, it’s darn close to being stark raving mad.  Consider just a few pieces of serious disinformation Republicans constantly cite.

• Tax cuts always pay for themselves.  Clinton left Bush with a budget surplus and eight years later, after giving tax cuts primarily directed to millionaires, the national debt went from $5.6 trillion to more than $10 trillion by the time Obama was sworn in office.   Totally not serious.
• The financial industry doesn’t need regulating and financial  markets self correct anyway.  Exhibit No. 1 here is the Great Recession.  Some self correction that one.  In addition to putting 11 million people  on the unemployment line government revenues plunged while expenses on unemployment insurance and other safety net spending soared, increasing annual deficits by $1.5 trillion so that three years after the collapse, the debt stands at more than $14 trillion.   Don’t regulate finance?  Not serious.
• Firing people creates jobs.  Huh?  Republicans believe if a lot of people are fired, preferably public school teachers, then they will go into the private marketplace and drive down wages there, which will somehow create jobs.  I’m not making this up.   It’s right in the Republican Budget created by Rep. Paul Ryan.  You know, the budget the House has already passed.  Completely not serious.
• Reject any raise in the national debt ceiling.  Default instead.  This is more than not serious, this is stark raving mad.
• Ending Medicare and shifting health costs more on to family budgets, without recommending any way to curtail health care increases, is not serious.    Ryan’s Medicare ‘fix’ provides the elderly with vouchers that are guaranteed not to keep pace with health care costs.  He figures old people will shop so well costs won’t increase.  If you believe in that concept, you are not serious.
• Obama doesn’t have any plan to slow the rise in health care costs.  Yes he does.  Health care reform passed last year over unanimous Republican opposition and, according to the non partisan Congressional Budget Office, if left alone the legislation will save as much as $200 billion the next ten  years, and much more than that beyond the next decade.   It’s 2000 pages long, which is too long, but calling this legislation ‘no plan’ is simply not serious.
• We must cut taxes more, particularly for the wealthy and the corporations they own, and keep billion dollar subsidies for immensely profitable oil companies.  And in order to still be able to balance the budget we must decimate Medicare, Social Security, Medicaid and just about all other government programs that don’t directly help the rich.  In other words, let the public at large pay for the tax cuts enjoyed primarily by the rich.  This advice falls into the stark raving made bin.
• We must keep $8 billion in subsidies to corn growers so we can use corn to make ethanol, a gasoline additive.   This means we now tie the price of food directly to the price of petroleum.  The only thing serious about this subsidy is that it’s seriously stupid.
• Facing rising short term deficits caused by tax cuts and not paying attention to what our financial industry was doing, Republicans want to ‘double down’ and cut taxes more while continuing to not regulate the financial industry.  Stark raving mad.  They don’t deserve our attention, much less our vote.

I call it the ‘double down’ strategy.  During the Bush presidency we cut tax rates for the wealthy and for investors and what regulations we had were not enforced, particularly for financial institutions.  And look what we got:  The most severe economic downturn since the Great Depression and the first decade  since the Depression where the average working class family income was lower at the end than at the beginning.

Anyway, Washington Post columnist Ezra Klein spells out why Republicans may be insisting on a ‘double down’ strategy and why we should stop listening to them. 

Academic books pack about 600 words to a page. Normal books clock in around 400. Large-print books — you know, the ones for kids or the visually impaired — fit about 250. The House GOP’s jobs plan, however, gets about 200 words to a page. The typeface is fit for giants, and the document’s 10 pages are mostly taken up by pictures. It looks like the staffer in charge forgot the assignment was due on Thursday rather than Friday, and so cranked the font up to 24 and began dumping clip art to pad out the plan.

Which is odd, because there’s nothing in this plan that hasn’t been in a thousand other plans. When I asked David Autor, an economist at MIT and a specialist on labor markets, to take a look at the substance, he pronounced it a classic case of “what Larry Summers would call ‘now-more-than-everism.’”

“Here’s how it works,” Autor wrote in am e-mail. “1. You have a set of policies that you favor at all times and under all circumstances, e.g., cut taxes, remove regulations, drill-baby-drill, etc. 2. You see a problem that needs fixing (e.g., the economy stinks). 3. You say, ‘We need to enact my favored policies now more than ever.’ I believe that every item in the GOP list that you sent derives from this three step procedure.

“That’s not to say that there are no reasonable ideas on this list. But there is certainly no original thinking here directed at addressing the employment problem. Or, put it differently, is there any set of economic circumstances under which the GOP would not actually want to enact every item on this agenda? If the answer is no, then this is clearly now-more-than-everism.”

If you just read Autor’s answer and then guessed at what’s included in the plan, you’d probably get it about right. The GOP wants a separate congressional vote on every significant regulation. They want to cut taxes for corporations and small-businesses headed by individuals. They want a tax break for profits that corporations earn overseas. They want to pass pending trade agreements, increase domestic production of oil and enact spending cuts. The only two proposals that you couldn’t have guessed sight unseen are patent reform and visas for the highly skilled.

But even if you think every item on that agenda is a grand idea, this isn’t exactly fast-acting medicine. “At best, an agenda like this is meant to improve long-term growth by a couple of tenths of a percentage point,” says Larry Mishel, president of the Economic Policy Institute. “It takes a really long time to move the dial. It’s not a response to a cyclical downturn.”

That’s okay, because the document doesn’t believe in cyclical downturns. It only believes in deviations from the Republican agenda. The first page sets out the GOP’s narrative of the country’s current unemployment crisis. See if you recognize what’s missing here: “For the past four years, Democrats in Washington have enacted policies that undermine these basic concepts which have historically placed America at the forefront of the global marketplace. As a result, most Americans know someone who has recently lost a job, and small businesses and entrepreneurs lack the confidence needed to invest in our economy. Not since the Great Depression has our nation’s unemployment rate been this high this long.”

Four years ago, of course, George W. Bush was president. And he was, as you might remember, a Republican, not a Democrat. As for Wall Street, well, Wall Street who?

But it’s not just that you could read this jobs plan without knowing the financial crisis ever happened. You could read it without knowing the past decade ever happened. As Mishel says, “if lower taxes and less regulation was such good policy, then George W. Bush’s economy would have been a lot better. But under Bush, Republicans cut taxes on business and on investors and high-income people and they didn’t add many regulations and that business cycle was the first one in the post-war period where the income for a typical working class family was lower at the end than at the beginning.”

That, however, is the agenda the House GOP thinks we need. And now more than ever.

Beezer here.  Having a serious discussion about getting our economy back on track means honestly looking at what didn’t work before.   The Republicans simply cannot do that–even after confronted by the dismal failure of their policy prescriptions when they were implemented.