Five Years Already

Amazing. It’s roughly five years since the economy tanked, since Lehmann folded, and since we began to discuss the worth or otherwise of bailouts. Five long years. Five fairly rotten years. In that time we have been stuck in more ways than one.

First: economic policy has been somewhere between pathetic and horrible. The Obama administration came into power after the bottom had fallen out and seemed to assess things wrongly from the start. The big error made by the White House – one that reverberates to this day – was that such a dramatic economic collapse would inevitably be followed by an equally dramatic recovery once the bleeding had been stopped. So the policy goal was to provide just enough help to stop the free fall, let the automatic stabilizers like unemployment benefits kick in, and wait for things to come screaming back.

So much for that.

It was a strategic error of monumental proportions and one which was easily avoidable had someone – anyone – in the administration paid attention to recent history. I am being too harsh, people like Christine Romer did pay attention. Unfortunately Larry Summers has a louder voice and seems top have won the day. From that moment forward economic policy was inadequate.

Compounding this was the deep connection between Tim Geithner and Wall Street. Come to think about it, Larry Summers has such a connection too. That Treasury department and Wall Street nexus prevented an effective response to the banking crisis that roiled the economy throughout 2009. Instead of nationalizing Citibank – something deemed too radical and de-stabilizing in the good old US of A – taxpayers were forced to ante-up and allow the shareholders off the hook for their deplorable oversight of the bank’s management. The behemoth banks were allowed to wallow in their own mess and gobble up fallen peer banks so as to fatten up and thus book profits sufficient to offset their prior lunacy. Bank reform when it did arrive was too little, too late, and ridiculously complex – the lawyers are still arguing over the fine print and mush of the “reform” is not yet enforced.

Yes, it has taken five long years for the bureaucrats to put in place an insipid and pathetically ineffective so-called reform. Yet the White House looks on approvingly. Heck the heavy odds are that the White House wants to bring Larry Summers back to run the Federal Reserve Board as if he is a conquering hero and not a stooge of Wall Street.

Five long years indeed.

Unemployment is still too high. The economy generates jobs at a tepid rate. We have had more false starts than I care to remember. Housing has only recently staggered back to life. Demand is weak. Consumers have paid down debt, but with wages languishing they are likely to build debt up again. General Motors is still alive. Yea! But largely because it now builds lots of cars in China. Boo!

We have health care reform styled along Republican party lines, yet opposed ferociously by the Republicans. We have a Congress so mired in dysfunction and subject to extremist blackmail that it cannot do anything to fix the economy. Not that the Republicans want to do anything because they are beholden to right wing economic theory that says the economy will correct itself if only the government gets out of the way.

Which brings us to today.

There is a debate going on about how correct that right wing theory is. Well, it is correct. Economies do del-correct. Eventually. Sometime. Maybe. That isn’t the proper focus of discussion though. What we ought to be talking about is just how desirable that self-correction might be. Let’s use an analogy: most diseases can be fought off by the human body. Eventually. Sometime. Maybe. But we don’t think it sensible to let that happen. We intervene with medicine and treatments. That shortens the period of illness, accelerates recovery, and thus limits the long term damage.

Our economic policy debate has been – or ought to have been – about whether we administer medicine or not, and about whether we shorten the period of illness or not.

The doctors lost. Indeed, they weren’t even consulted.

Let’s review a little history.

The crisis was caused by excessive debt and loose or exploitive banking. That debt build up was in the private sector, where households were struggling to maintain a lifestyle in the face of stagnant wages. Rising inequality syphoned off too much income for the wealthy and left the middle and lower end of wage earners no longer able to keep up. And, don’t forget, wages adjusted for inflation have been stuck for thirty years. The entire Reagan era has been terrible for workers and average families. So, just as happened prior to the Great Depression, the vast majority of workers reacted to wage stagnation by borrowing. And, just like it did in the 1920’s, the debt bubble burst. It had to burst. The cost of all that debt became too burdensome in the absence of wage increases. The real estate bubble was just one part – albeit the most noticeable part – of a wider and deeper malaise. The infamous 1% was trashing the rest and starving the economy of demand.

So the bottom fell out, and the private sector began a long period of lower spending while it shed debt. Cash was used to pay down debt instead of for buying stuff. That meant sales dried up and businesses fired workers. That drained even more cash from the economy, raised fear and uncertainty, and made the slump worse.

With demand slumping and the banks near bankrupt, the Fed responded with aggressive monetary policy. The problem was that interest rates were already low – the Fed had kept rates low during the early 2000’s because the economy was weak after the 2001 recession – and so could not go too much lower before they hit zero. A further problem was that even zero rates was not enough to induce anyone to borrow and then invest because they were too focused on getting debt burdens down.

We were trapped. Rotten economic policy from the 1980’s on, lowering taxes for the rich, pushing up inequality, favoring business, deregulation, and the reliance of markets instead of government, had combined to create an unsustainable economy. It was going to break down sometime. It came apart with a vengeance in 2008.

Five long years ago.

Since then right wing economics has, by and large, ruled policy. The stimulus of 2009, so reviled by the right wingers, was pathetically small. That inadequacy was born directly from the miscalculation I referred to above. It was designed to be a stop-gap, not a curative. The White House believed in market magic and the self-healing properties of the economy. They imagined a small stimulus would do.

It didn’t. It couldn’t.

It stopped the rot. It did not build a recovery. We were left discussing whether it worked because it was never designed to work clearly enough to be obviously successful. It was intended to be in the background while things returned to normal. Which they were never going to do quickly without lots more medicine.

The problem is this: an asymmetrical economy, one where profits boom as wages stagnate, where the top 1% get to rewards and the rest flounder, where deregulation allows banks to over-lend without consequences, where business is preferred to consumers, where the safety net is weakened to save the government money, and where government spending is cut even as the private sector shrinks, is one that will, eventually, implode. And when it does that vaunted self-correcting ability of right wingers love to talk about is seriously weakened. The economy’s immune system cannot function properly.

Yes, the classic right wing recovery will turn up one day. A weak upturn in investment is inevitable once all the old machinery needs replacing. But it won’t be sufficient to get us back on our feet alone. The elimination of strong wage growth will impinge on business investment plans. Why invest if there’s no one out there with cash to buy what you are making? The economy needs demand as well as supply.

On an emergency basis that demand has to come from the government going into debt and spending what it borrows. Simple. Simple medicine. A simple remedy.

And it needs wages to get back to their historic share of the economy so that workers have spare cash to spend and don’t have to crimp on everything. That means profits have to fall as a share of the economy – down from their current near historically high levels.

And it means we have to stop obsessing over budget deficits. Not that we will. The Federal deficit has fallen sharply, and Federal employment is dropping quickly too. The states are busy in deep austerity measures. Combined these things are slowing us down and costing us jobs. We are busy creating our own headwind. Policy is hurting not helping.

And we are now having a discussion about whether economies can self-correct? Really?

No, I mean: really??

After five long years of stagnation and policy failure?

After five wasted costly years?

Who cares if they self-correct?

Not the unemployed that’s for sure.