Now that we are counting up the days of the sequester instead of
counting down, it would be a good time to cast blame. And my candidate
is President Obama.
President
Obama speaks about the sequester with emergency responders at the
Eisenhower Executive Office building in the White House complex last
week. (Photo: AP)
I'm not blaming Obama for the reasons that Bob Woodward came up with
in his fantasyland. I am blaming President Obama and his administration
for trying to be cute and clever rather than telling the public the
truth about the economic crisis. The result is that the vast majority of
the public, and virtually all of the reporters and pundits who deal
with budget issues, does not have any clue about where the deficit came
from and why it is a virtue rather than a problem.
The basic story is incredibly simple. Demand from the private sector
collapsed when the housing bubble burst. We lost $600 billion in annual
demand due to residential construction falling through the floor. We
will not return to normal levels of construction until the vacancy rates
return to normal levels. Vacancy rates are still near post-bubble
record highs.
We also lost close to $500 billion in annual consumption spending due
to the loss of the $8 trillion in housing-bubble-generated equity that
was driving this consumption. This demand will also not come back.
This creates a gap in annual demand of more than $1 trillion. The
stimulus, which boosted demand by roughly $300 billion a year in 2009
and 2010, helped to fill part of this gap, but was nowhere near big
enough. Furthermore, stimulus spending fell off quickly in 2011 and the
stimulus is now pretty much gone altogether. This means that we are
still faced with a huge hole in private sector spending.
We know the Republicans love the Job Creators and President Obama has
gone out of his way to show his love also. But in the real world,
investment in equipment and software has never been much above its
current share of GDP except in the days of the dot.com bubble. This
means that unless we drug investors so that they are willing to throw
hundreds of billions of dollars into the stock of worthless companies,
we are unlikely to see any substantial rise in investment.
As a result we are stuck with an economy that is mired well below
full employment. President Obama's top economic advisers from his first
term all claim that they understood this point. But they said that they
could not get a bigger stimulus package through Congress.
That assessment may well be true, but the real issue is what
President Obama did after the stimulus package passed. He could have
told the country the truth. He could have said what all his advisers
claim they told him at the time: the stimulus was not large enough and
we would likely need more. He could have used his presidency to explain
basic economics to the public and the reporters who cover budget issues.
He could have told them that we need large deficits to fill the hole
in demand that was created by the collapse in private sector spending.
He could have shown them colorful graphs that beat them over the head
with the point that there was very little room for investment to expand
even under the best of circumstances.
He could have also explained that consumers would not go back to
their bubble levels of consumption since the wealth that had supported
this consumption had disappeared with the collapse of the bubble. The
public would likely understand this point since most homeowners had
themselves lost large amounts of equity and understood that they were
much poorer as a result of the collapse of the bubble.
In this context the only choice in the near term is between larger
budget deficits and higher unemployment. The people who clamored for
cuts in government spending and lower deficits are in fact clamoring to
throw people out of work and slow growth.
We will never know if President Obama could have garnered support for
more stimulus and larger deficits if he had used his office to pound
home basic principles of economics to the public and the media. But we
do know the route he chose failed.
He apparently thought the best route to get more stimulus was to
convince the deficit hawks that he was one of them. He proudly announced
the need to pivot to deficit reduction after the passage of the
stimulus and then appointed two deficit hawks, Erskine Bowles and Alan
Simpson, to head a deficit commission.
This set the ball rolling for the obsession with deficit reduction
that has dominated the nation's politics for the last three years.
Instead of talking about the 9 million jobs deficit the economy faces,
we have the leadership of both parties in Congress arguing over the
debt-to-GDP ratios that we will face in 2023.
This would be comical if lives were not being ruined by the charade.
The unemployed workers and their families did not do anything wrong, the
people running the economy did.
Now the sequester comes along, throwing more people out of work,
worsening the quality of a wide range of government services and denying
hundreds of thousands of people benefits they need. Yes, this is really
stupid policy and the Republicans deserve a huge amount of blame in
this picture.
But it was President Obama who decided to play deficit reduction
games rather than being truthful about the state of the economy. There
was no reason to expect better from the Republicans in Congress, we had
reason to hope that President Obama would act responsibly.
Reprinted with permission of the author
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