It looks like déjà vu all over again in the political dialogue of 2010. On the economy front, Republicans blame an overreaching, overspending federal government for nearly all of our current ills. Mitt Romney had the gall to imply that the stimulus package worsened the nation’s unemployment rate. Disaster averted is a hard thing to prove. Economists will debate the point for years to come. But the charge that profligate government spending is responsible for all our ills seems sticky enough to anticipate it will become one of the top two issues this fall.
That makes the present moment look a lot like 1936-37, when the Democratic administration got cold feet about recovery spending and brought on the Roosevelt Recession of 1937-38. A panicky, self-doubting reaction to intense public criticism led the administration to cut popular, effective programs like the WPA, cut the monetary supply, and raise interest rates in a manner that choked off the economic recovery just as the nation regained parity with the pre-Depression conditions of 1929. This second swoon led to a renewal of government intervention in 1938, but the pall was cast to last; the nation remained locked in a swoon until World War II kick-started the economy.
Are we heading that way again?
A talk presented at the Commonwealth Club of California last week by Nobel Laureate in Economics, Dr. Joseph Stiglitz of Columbia University offered a few glimpses into how current dynamics might veer in that direction. The talk, hosted by Salon.com’s Andrew Leonard, offered a compelling display of common sense, professional insight, historical perspective, and political acumen on the part of Dr. Stiglitz. Salon offers the video here.
Stiglitz in Davos, 2009
The former Clinton advisor and author of the new book, “Free Fall” can be described as a practical, somewhat conservative Keynesian, who knows where the bodies are buried. As per the topic du jour, he was asked how the Tea Party movement will affect the debate on our future economic direction. His response? Government actions saved the U.S. from a depression.
Stiglitz observed that people confuse TARP, which benefited the banks, with the stimulus package, which he saw as too limited but successful in averting further catastrophe. Here’s how Stiglitz rated federal interventions to date on four fronts:
- Stimulus: Too little
- Mortgages: Too little
- Banks: Too much
- Financial Regulation: No decision
The Damaging Hangover of Bank Bailouts
Stiglitz saw the Tea Party, or, more broadly, populist reaction to the bank bailout as justified in terms of process, perceptions, and outcomes. And he pointed out that the bank bailout was largely the handiwork of the prior administration, a point also lost on most Tea Partiers. How, he asked, are we to accept an $89 billion AIG bailout that doubled to $180 billion when we did not even know where the money was going? Then, when we found out where it was going, we saw that Goldman Sachs, shadow broker of the deal, received $13 billion, the largest single chunk of cash. Goldman was followed by German and French banks. The amount of the bailout equals the amount spent on aid to developing nations by all developed nations over two years. And it was done in the dead of night. “Quite frankly,” he said, “We got cheated.” What’s not to be angry about?
That is water—a tsunami really—over the bridge. If we pull back now, at a point when only 40% of stimulus funds have been expended according to Pro Publica, we stand to cause a double dip recession. The Obama administration’s biggest error in judgment, according to Stiglitz, was to underestimate the depth of the recession, especially unemployment. Though this led to unfortunate government projections, he points out that political realities left Obama no opportunity to implement an even larger stimulus package, which Stiglitz would have favored.
A Showdown of Narratives
In the end, it all comes down to a story. Stiglitz offers a compelling story of the meltdown and its intended remedies in “Free Fall.” The Republicans, be it Sarah Palin, Mitt Romney, Ron Paul, or Tim Pawlenty, offer a story diametrically opposed in all its threads. If the public buys their story, the story of what you might call the Cato School, we may be hopping into the Wayback Machine for the good old days of Roosevelt’s second inauguration, the Hindenburg, Amelia Earhart, Joe Louis, and gangsters galore. Oh wait, I forgot to mention the Depression, Act Two.
Roosevelt flinched that year. His rollback of governmental supports proved to be the biggest folly of his political career (well, okay, he did try to pack the Court). Obama seems suspiciously subject to flinching. If he were to face a Republican majority in either house, as now looks more likely than two months ago, maybe he too, like Roosevelt, would adopt Jim Bunning’s pay as you go mantra for a while.
The theory that government spends in times of need and retrenches, or perhaps saves, in good times seems lost on us since Clinton. (Not that I am, or Stiglitz, is letting Clinton and Larry Summers off the hook for repealing Glass-Steagall.) Those of us on the progressive side of the fence cannot understand how it is that Disenfranchised Patriots have only now, after eight years of an unfunded war and profligate tax breaks, taken up the call for budgetary responsibility—even as so many of their demographic are benefiting from the extension of federal benefits on a variety of fronts. Be that as it may, we are not likely to stem the tide of discontent regarding the current trajectory of economic remediation despite the aid of old lions like Stiglitz.
Republicans in the Wayback Machine: “The stick is jammed, we’re going down! What year is it out there?”
We will face more foreclosures in 2010 than 2009. Shall we pull the plug on government support? Employers will continue to lay off workers in many categories even as anemic hiring commences. Shall we pull the plug on government support? States are flirting with budgetary doom loops. Shall we pull the plug on government support? People with no recourse are going to become more desperate. Shall we pull the plug on government support?
I rue the fact that Democrats govern as if they were still the opposition and Republicans oppose as if they were—well, I’ll let you finish that sentence. Without muscle behind us, thinkers like Stiglitz will be shouted down in the town square despite this undeniable fact about their narrative: it rings true.
I suppose it is his fate, Paul Volker’s too, to be painted as (my favorite Republican modifier here) wild-eyed Keynesians, when all these experts want—all we progressives want—is sufficient regulation of our banks, insurance companies, and brokers to prevent them from gambling with the house’s money. For this we will be hounded down, while the Cato types in LaLa Land seem to reside in a purely theoretical universe. This never ceases to amaze me; that their prescriptions are unsullied by the real world. This is why I was so disturbed a year ago to find that so many signers to their cockamamie anti-stimulus manifesto [here] served in positions, past or present, related to the Fed.
We are arguing with the wall here, even if the Old Guard of Wall Street, like John Reed, John Bogle, and others are largely in agreement. If Stiglitz is right, this meltdown was caused by “reckless, unfettered, risk-taking;” and to refuse to respond with government regulation is reckless. The new opposition, the one that wants us to put the brakes on sensible recovery strategies, brings the fervor of an eighth-grade debating team with none of the subtlety.
Stiglitz boils it down to this question: does pursuit of self-interest improve society? His answer, nuanced as it is, is No. Stiglitz calls out unfettered self-interest, unregulated self-interest, irresponsible self-interest. The opposing narrative says give us a tax cut and a promise the market will fix it. But the market will not fix this. The market will not make us whole. The market will not reinflate the bubble. The market will not correct its own distortions; instead it may magnify them.
And in its wake, as left to its own devices, we may find ourselves crawling out of a deep double dip recession. I don’t think we are ready to imagine that just now. I think if we were to experience one of any severity, the wheels might just come off—or part way off—this little experiment of ours. Some nations turn left in times of crisis. Ours veers to the right.