POLITICS NOVEMBER 25, 2009
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If there was one thing that seemed certain about the Obama administration, it was their commitment to Keynesian deficit spending to boost the economy out of its slump. But Keynes beware: With unemployment at a whopping 10.2 percent, and probably rising, the White House has begun trumpeting its commitment to Hoover-style deficit busting. On November 13, the White House warned cabinet departments of a spending freeze. The next week, while in China, Barack Obama told an interviewer the United States could suffer from a “double-dip recession” if it didn’t restrain public debt. And just this week, the White House declared its displeasure with House Democrats’ plans for a new job stimulus.
If the administration does block a new stimulus program--either directly or by reinforcing Republican complaints about government spending--that will have severe repercussions, not only on the economic recovery but also on Obama’s political standing. In a Gallup poll last week, Obama’s popularity dropped below 50 percent for the first time. That reflected, perhaps, the turmoil on Capitol Hill over the health care bill, but it seems primarily due to rising unemployment--which, without a new stimulus, will continue to rise over the next year.
Many previous recessions have been cyclical events precipitated by government efforts to stem the inflation created by a boom or other external events, such as an energy crisis. The severe Reagan recession of the early 1980s, for example, came about when the Federal Reserve under Paul Volcker jacked up interest rates to choke off inflation. As inflation eased, the Fed lowered interest rates, and the private economy quickly revived.
But the current recession, like the depression of the 1930s, did not result from the Fed’s attempts to curb inflation. It was the product of a slowdown in industrial production, which was caused by global overcapacity and foreign competition. According to a recent report from the management consulting firm Deloitte, all American industries except for healthcare and aerospace/defense--both of which government heavily regulates and subsidizes--have suffered from declining rates of profit since 1995. A slowdown in the telecom and other core private industries contributed to the recession during 2001-2002. This slowdown--epitomized most recently by autos, but not limited to them in the least--underlies the current recession.
This recession is often described as a financial crisis--and it’s true that the bursting of the housing bubble did precipitate the sharp downturn that began in late 2008. But the bubble itself was a product of global savings (particularly from the Chinese) seeking investment outlets in the United States, finding few in industrial sectors, and turning instead to Treasury bills and derivatives from the inflated housing market. That is, again, similar to the depression of the 1930s, which was precipitated by the stock market crash, but which was underlain by a downturn in auto and other key industries of the 1920s.
This kind of core industrial downturn has proven resistant to the usual remedies for recessions. By drastically reducing interest rates and pumping money into banks that teetered on the edge of insolvency, the Treasury and Federal Reserve did prevent the kind of crash that leveled the financial sector during the early 1930s. But low interest rates and infusions of cash haven’t revived the industrial sector. That is evident from the Federal Reserve’s quarterly survey of bank lending practices. One would expect normally to find that the monetary easing has encouraged lending, but that has not occurred.
In the April and July surveys, 40 and 35 percent, respectively, of loan officers said they had tightened their standards for approving commercial and industrial loans, while 3 percent in the July survey and zero percent in the April survey said they had eased standards “somewhat”. In the most recent October survey, 14 percent of lenders surveyed by the Fed said they had tightened their standards, 86 percent said they had stayed the same, and exactly zero said they had eased. So over the last ten months, loan standards have generally tightened and not eased. What about the demand for loans? The survey showed that 34 percent of loan officers experienced weaker demand, only nine percent “moderately stronger,” and none “substantially stronger demand.”
This portrait of an ailing private sector is mirrored in figures from private investment. According to the Commerce department, private fixed non-residential investment has steadily declined from the second quarter of 2008 through the third quarter of 2009. So where is the growth in gross domestic product--now revised downward to 2.8 percent for the third quarter of 2009--coming from? It’s coming primarily from government spending and investment. Obama’s $787 billion stimulus proposal, which Congress passed last February, contributed some of the jobs as well as slowing the loss of jobs in construction. The principal areas of new employment have been in government-subsidized health and education.
We face an economy that, like that of the mid-1930s, depends primarily on government spending for its growth. Reduce government spending in order to curb the deficit--as Franklin Roosevelt did in 1937--and you’ll cause new and even greater job loss. This is why it is pure folly for the Obama administration to encourage talk about curbing the deficit. What’s needed is exactly the opposite: greater stimulus, greater deficits, and stimulus programs and budgetary expenditures directed not just toward creating jobs, but toward encouraging new areas of private industrial growth, without which the United States is never going to extricate itself from this slump.
Won’t greater deficits lead to greater debt, which will burden our grandchildren with intolerable obligations? They will in the short term, but they are also the only way to avoid even higher debt in the longer term. The current deficits are much more the result of lost revenues than of increased spending--and they will begin to diminish only when revenues (wages and profits) begin to rise again. That won’t happen without deficit spending now.
Won’t greater deficits lead to higher interest rates, which will choke off investment? This might happen in the future, but not currently, as interest rates remain near or below zero and are not expected to rise until the private economy begins to grow. The Chinese and other foreign holders of dollars could, of course, force interest rates upward by dumping their dollars, but they would lose in the process, as the value of their existing holdings would plummet. So while greater deficits might imperil investment in the future, the United States still has a window of opportunity to use deficits to revive its economy.
Much of the current confusion about jobs, deficits, recovery, and recession may pivot on wrong-headed semantics. The economists’ definition of recession assumes that recession and recovery are mutually exclusive categories. If the economy is growing--even at an anemic pace, and from a deep trough--then it is no longer in recession. That would suggest that, with recovery under way, policy-makers can proceed as if there were no recession. But that’s a misleading conclusion.
It’s best to think of a recession, and particularly this one, as one might thinks of a severe illness and recovery. One can be recovering from pneumonia, for instance, but still be very sick with a very high fever and susceptible to a relapse, or, in the language of recessions and recoveries, a “double-dip” recession. The current slump is exactly of that nature. There are positive signs that a recovery is occurring, or could occur, but the underlying signs of weakness in private industry persist. If Obama and his economic advisors neglect them, they could put the country, and the Democrats’ political future, in peril.
John B. Judis is a senior editor at The New Republic and a visiting fellow at the Carnegie Endowment for International Peace.
10 comments
This may be true, but we were ALREADY engaged in massive deficit spending before the crisis even hit. If you factor in the off-budget spending and undo the various tricks, we were running deficits of several hundred billion dollars a year before the financial crisis and recession hit. So how much farther into deficit can we really go beyond what has already been done to stimulate the economy? My real worry here is that all of the supposed economic growth of the last decade has really been an illusion based on financial diddling, rising healthcare costs, and building or renovating houses based on borrowed money that can't be paid back. When you remove the illusionary growth, has there been anything real? If true, then it may take years of pain to get the toxins out of our economic system.
- JEFF FREY
November 25, 2009 at 12:41am
Much of the deficit spending comes from two un-winnable wars ($100B-200B/year in direct costs, probably $200-400B/year in total costs) and Tax cuts ($200-400B/year). Our economy was doing much better before THOSE stimuli!! Stop two wars and reverse tax cuts to the upper 1%, and all available evidence is that you WON'T hurt the US economy. Now you've got some real $ for spending on items that will stimulate current and long-term growth and reduce unemployment significantly, if Keynes is correct . And what's an alternative economic theory?? Nothing of which I am aware. The alternatives are ideological beliefs like "two legs good, four legs bad" (or was it the other-way-round??) or "government can't create jobs or organize a decent health care system", except of course for jobs in armed forces or health care for those over 65.
- gdbittner
November 25, 2009 at 6:25am
This is a Jobs recession. The Obama Administration came in and made some big decisions and saved a lot of Auto and Bank Jobs right off the bat. I believe the issue is the high wages and benefits, along with job security that is common in America. There are things the administration can do to effect the jobs front. I would start with concessionary contracts in the next round of bargaining with AFSCME, similar to what most private sector unions have accepted. Lower minimum wages a buck or so. Provide Employers tax benefits for offsetting some 401(k) contirbutions. These will not fix the economy directly, but they will send a message and lower expectations. And the government savings in wages can be used as stimulus.
- CRS9TNR
November 25, 2009 at 6:49am
I see Mr. Judis. The problem is Obama and his team are still under the spell of supply side trickle down economics, only under a new label (Main Street as dependent on Wall Street instead of trickle down economics) and under a new Wall Streeter (Geithner instead of Paulson) So it's socialism for Wall Street (supposing that everything Main Street will be the benefactor, as if the money wasn't spent in bonuses, luxury and foreign investment before average Joe having a glimpse of it...) and budget discipline for Main Street (supposing that it benefits from what it hasn't benefited...) As to if Obama has margin to undo what the last 50 years have provoked (which is basically ruin after the bankruptcy of the "spend your way to progress through dollar assets" formula), I really don't know. Where the hell is he going to get credit to be a Keynesian (a REAL Keynesian instead of the Wall Street supply side weird Keynesian that he has been) when the dollar is sinking and no one sane is betting on US actives? Perhaps you're up to some years of Argentina way of living... With Argentina like ruin and Argentina like class structure...
- luispc
November 25, 2009 at 10:08am
The Obama administration is reading the polls. The administration has made two major mistakes. The first, turning the details of the stimulus package over to the Democratic congress, resulted in a huge expenditure that has had less impact than it might have, because it was loaded with pork. The second mistake also involved turning policy over to to the Democratic congress. Instead of focusing like the proverbial laser on the immediate economic crisis, the Democrats have acted like they want to fulfill all their dreams right now; the economy doesn't even appear to have the principal claim on their attention. Appearances matter in politics.
- lsernoff
November 25, 2009 at 1:15pm
I'm affraid the effort to keep up appearances is impossible when cash is desperately needed.... And cash was desperately needed last year... From my perspective, the stupidity lied in giving it away the way the "Democratic" Congress gave it. The absurd dimension of the stupidity and sinfullness involved still amazes me! Shame on them! And even more shame on them if they back a plan as the one being proposed now (by who else? Geithner and Summers!) to balance the budget, right after covering Wall Street with a cozy and warm blanket with public dollars... Dollars from which no one benefited (and no one will ever benefit) except Wall Street... Precisely because supply side doesn't work and never did work... Precisely because the idea of "insulating Main Street from Wall Street" (through giving trillions of dollars to Wall Street!!!!) was never but an ideological absurdity, made up by the "Wizards" who are still f#"$%"$"%", not only America but the rest of the world... Through deception and ideological manipulation promoted by the man who promised "Change that matters"
- luispc
November 25, 2009 at 2:04pm
My comment above provided a political perspective, similar to those I have often delivered before. This comment will speak to the lay of the land as this moderately-conservative Republican sees it. First, what has past: I see the late-Bush/early-Obama responses to the financial crisis as a continuum, which has succeeded in preventing Great Depression II. Mistakes were undoubtedly made in the year past, but the entirety was a success inasmuch as the worst was avoided. Second, the fallout from a financial crisis to the "real" economy has yet to be resolved. In my view, the Keynesian response was correct, but mis-handled, as noted above. Where do we go from here? The 1937-38 analogy repeats. We have a deeper, and more persistent, downturn than was expected and the response of both parties has been populist, from both "sides". My view is that we need to provide incentives for the private economy to see some sunshine ahead , with some "season" of regulatory stability that will encourage private investment. The place for public investment, in my view, is in targeted, and productive, infrasructure investment, which appears to be a non-starter in current government actions. I see no sign that politicians of either party see the situation as I do. They have created a lot of safe-districts. Don't look to them to be statesmen.
- lsernoff
November 25, 2009 at 8:06pm
"The first, turning the details of the stimulus package over to the Democratic congress, resulted in a huge expenditure that has had less impact than it might have, because it was loaded with pork. The second mistake also involved turning policy over to to the Democratic congress." Why not skipping the entire democratic process? Yes, Argentina like way of living, Argentina like class structure and Argentina like system of government!
- luispc
November 26, 2009 at 2:07am
Today, the events in Dubai are only confirming the absurdity of all this. The absurdity of maintaining as sacrosanct a financial sector with the only purpose of generating money out of artificial phenomena such as Dubai, that inevitably crash... The absurdity of believing that the artificial maintenance of such highly privileged sector with Persian style privileged and unproductive people (even if always "very busy") will anyhow generate the well being of common folks...
- luispc
November 26, 2009 at 9:49am
Stop undercutting your own argument. 1. We are not burdening our children with anything. Our children can decide how societies resources are divided when they are in power, we as collective society cannot use a time machine and some how consume future production in the present. And whatever imports we make, typically go to foreign countries that have no intention of ever actually spending their dollars, since they all try to maintain fixed exchange rates. 2. Government spending adds reserves to the banking system, that drives down interest rates. On top of which, the Federal Reserve sets interest rates, and so larger deficits aren't correlated in any way with interest rates. http://neweconomicperspectives.blogspot.com/2009/06/will-run-up-in-government-debt-doom-us_17.html
- acria multa
November 27, 2009 at 1:14am