James Fallows, by way of recommending a news item, lays out the key problem with our political system, media structure and economic trajectory. We’ve been chronicling this for close to two years, but he condenses it into two paragraphs.
Since winning control of the House, the Republican leadership has been brilliantly successful in convincing some of the public, enough of the news media, and at crucial points the Obama Administration that the main threat to America is future deficits. Thus the debt-ceiling collision; thus the agreed-on cutbacks; thus the frenzy through these past few months about deficit projections.
Meanwhile, what business people, ratings agencies, financiers, investors, central bankers, and even most Republican economists (with a predictable exception) consider the real emergencies for the country — stagnant growth, very high unemployment, the prospect of worldwide recession yet again, which among other bad effects would drive deficits even higher — will only get worse because of the new austerity drive. These officials are all trying to wave the GOP leaders off their commitment, but the politicians don’t notice, don’t care, or don’t grasp the point.
I might pinpoint the source of the problem a bit earlier – the pivot to the deficit occurred with the 2010 State of the Union, when the first Catfood Commission was enacted. That started to move public opinion and focus media attention on deficits, at a time when the economy was still weak. But in general, this is correct. We’re having the wrong conversation. And we’ve been having it for some time. You could argue that having this argument squarely on GOP turf led to their sweep of the 2010 midterms, ensuring that the conversation and the policy outcomes would tilt in this direction for at least the next two years.
So when you read that this could be one of the longest and most difficult recessions in history, and that it’s due to the “unusual nature” of the financial meltdown, essentially the Ken Rogoff/Carmen Reinhart “This Time Is Different” analysis, understand that such an analysis ignores the self-inflicted wounds from Washington at a time when the economy could have been revitalized. We have a demand problem, and government didn’t do what was necessary to boost that demand. What’s more, to the extent that this is a balance sheet recession (and it is), reducing household debt, particularly through the largest source of such debt, mortgages, would be the appropriate response, and yet the housing policies have been utterly useless if not actively harmful. You can talk about structural factors, the particular past performance of financial crises, and what have you. Government had the ability to fix this – at the absolute least ameliorate this – and they chose not to.
In short, there is no deficit that cannot be plugged except for our political deficit. It sustains the defeatism of years of no growth, stagnant wages, high unemployment. The political tendency toward right-wing and corporatist policy ideas over the past 30 years, tied up with the cost of running campaigns, the failure of traditional media, the conservative movement’s public relations machinery, has widened that political deficit between what government can provide and what it will provide. And this is exacerbated in a recession of this type. Ben Bernanke, of all people, gets this right:
Rogoff and the Reinharts base their conclusions on research into hundreds of economic downturns around the world, and the 2008 book by Rogoff and Carmen Reinhart, “This Time Is Different,” has caught the attention of some White House officials.
The economists looked, for example, at the severe financial crises that played out in five industrialized economies: Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992 [...]
“Another possible explanation for the slow recovery from financial crises [in the other cases] might be that policy responses were not adequate,” (Bernanke) said.
Precisely. And Bernanke ought to know, he’s living through inadequate policy responses right now, through his own actions and that of the entire political class.