What Real Economic Stimulus Looks Like

Via Brad DeLong and Jamie Galbraith, here’s what real economic stimulus looked like:

If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work? [E]conomist Marshall Auerback….

“[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.”

In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were.

If you’re in a hurry, check out DeLong… He will give you the shorthand. If not, and want a more in-depth view, be sure to read Galbraith’s column. He was one of a few progressive economists that called the game early (March 2009), and in hindsight was pretty much spot on in his analysis. Galbraith’s piece is both a good primer on the history of how Obama’s economic team reacted to the crisis, and a prescient analysis of Geitner’s banking plan, identifying weaknesses in the plan then now playing out. The article is invaluable for understanding why we are struggling still with high unemployment and little movement to implement policy to put people to work. The Obstructionistas in Congress and in the States have by choice given us a socially devastating slow recovery, instead implementing policy that cuts both revenue and spending, prolonging the crisis for millions rather than mitigating its effects on Main St and the middle class. Intent on shrinking government to the size it can be drowned in a bathtub, as Grover Norquist famously quipped, the Norquist tax pledge has held hostage the politicians who signed his pledge to cut taxes to draconian measures shouldered by the unemployed, the elderly, children, the poor and the sick.

Focusing on the short-term, the Obstructionistas have turned common sense and precedent on their heads, giving the American middle class stones when what they have asked for is bread. When government can borrow at negative real interest rates to finance infrastructure projects and help relieve cash strapped State and municipal budgets, there is no better time to take advantage of cheap credit to help create jobs, spur demand, and get people back to work. The prevailing “wisdom” runs counter to such common sense, and the suffering continues. By choice… The slow recovery is because of politics, little else… And from the politics comes this:

For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash—protected by deposit insurance and now desperately being conserved—the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare—illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.

Who, then, claiming to identify with the American middle class, would in their right mind propose cuts to Social Security and Medicare? As it turns out, the President’s Simpson-Bowles “cat food” Commission, the Tea Party caucus in Congress, a presidential candidate, and scads of candidates for lesser office… you get the idea… just about everyone except those progressives that have an appreciation for history and what has gone before.

More on recession dynamics here. And be sure to read this recent post, A Manifesto for Economic Sense.

Government Capture is the American Condition

American corporations today are like the great European monarchies of yore: They have the power to control the rules under which they function and to direct the allocation of public resources. This is not a prediction of what’s to come; this is a simple statement of the present state of affairs. Corporations have effectively captured the United States: its judiciary, its political system, and its national wealth, without assuming any of the responsibilities of dominion. Evidence of government capture is everywhere.
Six Symptoms of Government Capture:
  1. The “smoking gun” is CEO pay.
  2. Retirement risk has been transferred to employees.
  3. Corporate money now controls every stage of politics — legislative, executive, and ultimately judicial.
  4. Government Capture has been further implemented through the extensive lobbying power of corporations.
  5. The most powerful CEOs are above the reach of the law and beyond its effective enforcement.
  6. Government capture has been perpetuated through the removal of property “off shore,” where it is neither regulated nor taxed.
Government cannot and will not hold corporations to account. That much is now obvious.  Indeed, the dawning realization of this truth is what has informed the Occupy movement, but only the owners of corporations can create the accountability that will ultimately unwind the knot of government capture.
Continue reading here.

Another View on the Politics Prolonging the Lesser Depression

This VOXEU article discusses the politics that arise in the aftermath of financial crises on a broader scale, not just our current one.

Political environments appear systematically different in the aftermath of a financial crisis relative to before the crisis. This column argues that the ensuing gridlock and the delay in potentially beneficial policy reforms should come as no surprise.

Financial crises of all colours (banking, currency, inflation, or debt crises) leave deep marks on an economy. Deep economic contractions, both in output and employment, are systematic in the interim and in the aftermath of financial crises, as thoroughly documented in research by Reinhart and Rogoff (2009) and Reinhart and Reinhart (2010).

Sustained waves of volatility, often resulting in secondary crises (e.g. debt crises following banking crashes), are almost the norm in the post-crisis period (Reinhart and Rogoff 2011).

What exactly occurs in the aftermath of financial crises that makes recovering from such shocks so hard? This column argues that the answer may lie mostly with the politics, not the economics.

I might disagree with the authors that the Occupy movement is primarily a “leftist” movement, but the overwhelming weight of this analysis that the politics of the extremes are at play here is difficult to dismiss. With the dominant culture favoring the corporatist alignments of corporation, wealth, and the elite political class the extreme politics prolonging the current Lesser Depression, as Paul Krugman describes our present economic status, can be best described as that which favors inequality at the expense of the vast majority of the public in the world’s nations today. Austerity in Europe is pushing the EU into a recession, and while the Federal government in the US has largely avoided the drastic austerity crippling Britain, Spain, Ireland, Portugal,  and Greece states and local municipalities in the US are being forced into austere budget cuts that defy logic, are counter-productive to growth, largely rooted in extreme political economics espoused by both parties that for the past 40 years has helped create the difficulties and inequality we are now experiencing.

 

Jefferson vs Lincoln: On Inequality and the Lack of Social Mobility

America’s failed promise of equal opportunity

By Alex Gourevitch and Aziz Rana

Americans are increasingly aware that the ideal of equal opportunity is a false promise, but neither party really seems to get it.

Republicans barely admit the problem exists, or if they do, they think tax cuts are the answer. All facts point in the opposite direction. Despite various tax cuts over the past 30 years, not only have income and wealth inequality dramatically increased, but the ability of individuals to rise out of their own class has declined. Social stagnation is increasingly the norm, with poverty rates the highest in 15 years, real wage gains worse even than during the decade of the Great Depression, average earnings barely above what they were 50 years ago, and more than 80 percent of the income growth of the past 25 years going to the top 1 percent. In fact, since 1983, the bottom 40 percent of households have seen real declines in their income and the same goes for the bottom 60 percent when it comes to wealth. We know what the economic status quo does: It redistributes upwards.

Continue reading here:

V Recessions, U Recessions, and L Recessions

Jared Bernstein does a nice job showing the relative recovery dynamics of several recessions suffered in the US since June of 1969. As he briefly explains the role of business cycles on his blog, and with a great graphic showing employment as a share of population (from the Bureau of Labor Statistics), recoveries take form based on how quickly employment numbers rebound. V recessions hit bottom with recovery in jobs showing a relatively quick rebound. Re-hires or easier mobility between jobs tend to work to the benefit of the unemployed here after the initial storm is weathered and the economic adjustment kicks in. U recessions rebound more slowly, and in the early 90’s and 00’s were viewed as “jobless” recoveries. Not as easily explained, but clear to have been the dynamic for these two recoveries.

Where we are now is in one of the more insidious recoveries, described by the L profile. The long-term unemployment in this dynamic is ensuring for some, especially for older workers, that they will not enter the workforce again at the same level of income or with the same level of work as when they left it. That is the tragedy of such a loss of utilizable capacity, or in more human terms, a tragedy of the loss in terms of human dignity for those that have worked all their lives, played by the rules, only to be pushed out of the job market as they approach their retirement and are unlikely to be able to return to meaningful work.

For those in that case, without sufficient savings with which to retire, either through a loss of savings in the financial crash, not having been able to save, a divorce, foreclosure, or medical crisis that ate up savings, this portends a difficult end of life scenario for those caught on the foot of the L…

Look around. Many of your neighbors are in just this predicament. Connect the dots as to why: a failure to enact effective fiscal and monetary policy to speed recovery (thanks to anti-revenue, “business-friendly” corporatists), off-shoring of jobs to boost profits, reliance on automation to boost profits, down-sizing and consolidation to boost profits, technological advances that make re-training difficult for many. Efforts to weaken already weak safety nets leave these under-utilized workers scrambling at the end of their lives (also thanks to anti-revenue, “business-friendly” corporatists). While Bernstein doesn’t delve into the role of inequality in our current L shaped recovery neither the preferential tax benefits for those making a living from capital gains and dividends (the corporatists), nor the race to maximize profits is to be ignored.

Source: BLS

Stiglitz on the Perils of 2012

Joseph E. Stiglitz of Columbia University, winner of a Nobel Prize in Economics, paints a fairly dismal portrait of this year if we continue chasing snopes through the forest — those ideas that our short term debt and deficit crisis requires unprecedented austerity and draconian budget cuts — and fail to enact economic policy that stimulates growth.

This year is set to be even worse. It is possible, of course, that the United States will solve its political problems and finally adopt the stimulus measures that it needs to bring down unemployment to 6% or 7% (the pre-crisis level of 4% or 5% is too much to hope for). But this is as unlikely as it is that Europe will figure out that austerity alone will not solve its problems.   On the contrary, austerity will only exacerbate the economic slowdown. Without growth, the debt crisis – and the euro crisis – will only worsen. And the long crisis that began with the collapse of the housing bubble in 2007 and the subsequent recession will continue.

If the right policies and points of view are taken, it is not all doom :

Meanwhile, long-term problems – including climate change and other environmental threats, and increasing inequality in most countries around the world – have not gone away. Some have grown more severe. For example, high unemployment has depressed wages and increased poverty.

The good news is that addressing these long-term problems would actually help to solve the short-term problems. Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth, and job creation. More progressive taxation, in effect redistributing income from the top to the middle and bottom, would simultaneously reduce inequality and increase employment by boosting total demand. Higher taxes at the top could generate revenues to finance needed public investment, and to provide some social protection for those at the bottom, including the unemployed.

The Obama administration rode in with much hope, but stacking his cabinet and economic team with those that created the conditions that led to disaster, and marginalizing those whose proscriptions are proving out to be what is needed to speed recovery and reduce unemployment, a repeat of the same old program does not bode well for the near future, nor the far.

Governor LePage Is Not Helping

The drag that state and local budget problems are contributing to the economic recovery looks dismal, as in depression economics dismal. The contribution to real GDP from states and local economies is in negative territory with the pain of cutbacks being shouldered by real people in the form of cuts to education and lay-offs of police, fire fighters, teachers, draconian cuts to the elderly, the disabled, the poor. This policy of focusing on cuts rather than raising revenues to balance state and local budgets is being done under the baseless notion that austerity and tax cuts to business will grow the economy, but the numbers, over and over and over, tell a story diametrically opposite to that “business-friendly” narrative.

The irony here is that there is nothing “business friendly” about it. Small businesses are suffering through the lack of consumer demand these policies contribute to. Laid-off workers don’t buy goods and services. Small businesses feel the brunt of this stifling of demand, laying off their workers, foregoing new investment to grow their business, purchasing less inventory. Those that benefit from the tax cuts already enacted add little to growth as the wealthy to whom these cuts go either save their windfall or invest for their own benefit. Again, the numbers show state and local contributions to real GDP are negative – putting the brakes on the economic recovery. These mythological “job-creators” are not creating jobs, and to consider this the only way to grow Maine’s economy is wrongheaded.

st_locgdp

                                                          Source: Bureau of Economic Analysis

As a vocal proponent of this austerity in the face of budget shortfalls Governor LePage is more the problem than the answer. Selling our future short for the temporary gain to the wealthiest in Maine is not in the interest of the long term prosperity of our State. Repeating the meme that it is so does nothing to make it so. But the Governor seems completely innoculated against that logic. As noted previously, even the Maine Revenue Services acknowledges that fairer taxation that brings the wealthiest Mainers into line with other taxpayers would cover the DHHS shortfall.

And the infection of this idea is not just a disease confined to the Blaine House. Senator Snowe has been a vocal proponent of a federal balanced budget amendment, the very thing that has hog-tied state governments creating this scenario of cutting benefits that serve the interest of all people, the 100%, although primarily the middle and lower income families while cutting the taxes on the wealthiest, not because it is good policy but because it is what they demand and have the resources to get. This Congress is, after all, the best that money can buy…

Paul Krugman puts this problem of destructive austerity from state and local budget cuts while failing to raise sufficient revenues more starkly:

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

What an utter disaster.

An Idea Whose Time Is Not Now, and Likely Should Never Be

Unlike other ideas which do come in their appointed time and then spread like wildfire – the Occupy Movement comes to mind – this idea proposed by House Republicans to require a high school diploma or GED, or enrollment in courses to obtain one or the other, or alternatively, adult education courses, to be eligible to receive unemployment benefits seems another example of the short-sightedness endemic in House Republicans these days. Yet another attack on middle class workers that have long been in the work force, played by the rules, and find themselves out of work through no fault of their own. Hard to see what justifies this type of tinkering-around-the-edges policy proposal, but with the current majority in the House this certainly isn’t the first piece of legislation, nor will likely be the last, that leaves one scratching their head (if not cursing profusely). Read more here from Robert Greenstein at the Center on Budget and Policy Priorities.

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