Obama and the Story of the Great Recession: Rejoinder to Avishai
TPMCafé, October 28, 2010
See article on original website
I'm glad to see that Bernard Avishai decided to respond to my criticism of his attack on Paul Krugman. For my rejoinder, I will stick to defending points that I made, since Krugman is a smart guy who can defend himself if he chooses. Avishai makes a number of different points; I will deal with the ones I consider most important.
First, it is easy to dispel the issue on which Avishai and Krugman agree, that we risked another Great Depression. The faulty logic on this can be easily demonstrated. The vast majority of economists agree that it was the massive deficits associated with World War II (at $4.0 trillion annually relative to the current economy) that got us out of the first Great Depression.
Suppose Japan had bombed Pearl Harbor in 1931 instead of 1941. Then presumably we would have begun spending a ton of money to win World War II in 1931 and the Great Depression would have been just a steep recession. Of course there is no magic to spending on war as opposed to spending on infrastructure, education or anything else. The trick to getting out of the Great Depression was spending money. We just needed the political will to do it.
Just as Dorothy in the Wizard of Oz always had it in her power to go home to Kansas (she just had to click her heels together and say "there is no place like home"), we always had it in our power to end the Great Depression. We just had to spend money.
This is the same story now. This is what President Obama should have been explaining to the public. There is zero reason that 25 million people have to be unemployed or underemployed, we just need to spend the money needed to get them back to work. The problem is simply a question of inadequate demand. (Note that the issue is a lack of demand - I will come back to this.)
As I said in my prior piece, I don't know whether Obama could have gotten more stimulus out of Congress if he had asked. But, given that this is our only plausible route out of an economic disaster, it was really bad judgment to start singing about the green shoots of recovery when Congress gave him a stimulus that Obama's own economists told him was much too small. The point is that the day after (note the word "after") the stimulus passed Obama should have said the stimulus is great, but we will need much more given the size of the hole the economy is in - and he could have gotten out the charts and graphs to prove it.
Avishai has a number of other comments that are just peculiar. He argues that consumption is small, what we really needed was trillions of dollars of investment. This seems a bit confused. We certainly wanted more physical investment in equipment and software, but this would not be "trillions," since in a typical year we only get around $1 trillion in such investment.
Avishai probably means asset purchases - money invested in stock, bonds, commercial paper, etc. - not investment. The Fed can actually supply this money directly, and in fact did exactly that at the peak of the crisis when it bought hundreds of billions of dollars of commercial paper directly from non-financial companies.
Avishai seems to think it's important that we are in a globalized economy now. It is, but it is also important that we breathe oxygen; neither globalization nor our attachment to oxygen means that stimulus won't work.
Often the next step in this sort of argument is that we need foreigners to buy our debt. Suppose they don't. The dollar will then plummet and all our exports will be hyper-competitive since they will be way cheaper than anything else around. This would be the sort of huge boost to demand that is exactly what the economy needs. Where's the problem?
Avishai tells us that the United States will never again have manufacturing in the U.S. where labor accounts for more than 25 percent of the cost. He also tells us that: "As if products that scale up with smart automation (e.g., battery cells) will ever need enough unskilled laborers to bring unemployment down to where it was--as if the problem for an increasing number of American is not chronic unemployability in an economy that has been transformed."
It is not clear where these assertions come from. There is certainly no economic evidence for them. It might be useful to note that Germany pays its manufacturing workers 40 percent more than we do and enjoys a huge trade surplus. The U.S. workers whose pay are most obviously out of line on a global scale are its CEOs and its highly paid professionals (e.g. doctors, lawyers, and accountants) not its manufacturing or construction workers.
Avishai also has a story that the recovery was moving along just fine until the European sovereign debt crisis. This slowed our recovery how exactly? Interest rates in the U.S. plummeted as people turned to the dollar as a safe haven and it is pretty hard to find much evidence of a negative export shock in the trade data. Exports to euro zone countries to date are up by almost 10 percent from 2009.
Avishai also tells us that he wishes that HAMP had turned out better as well, keeping more people in their homes. Well, we all presumably hoped that the Bush tax cuts actually led to solid growth and created millions of jobs. However, the failure of both was predictable. HAMP was designed to help banks, not keep people in their homes. We had policies that could have done the latter; Right to Rent and cramdown. Obama rejected them.
Finally, I would argue that having a coherent story about the economy matters both to Congress and the larger public. Avishai is worried that his handyman is being pushed to the right by the rants of Rush Limbaugh and Glenn Beck. I share the concern. But a coherent argument makes us much better positioned to fend off the ranters than the hopey changey stuff. Not everyone is as gullible as a Washington pundit.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.