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.