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.
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COMMENTS (6)
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 any ... view full comment
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.
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 "gover ... view full comment
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.
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 wag ... view full comment
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.
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.
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.
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. ... view full comment
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.
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.
view full comment
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-gover...