Thursday, September 23, 2010

The economy, today, OR flapping around like a landed, dying fish

Two liberal economists whom I trust when they write about the national economy are Robert Reich, Clinton’s Secretary of Labor and now a Professor of Public Policy at UC Berkeley; and Paul Krugman, longtime columnist with the New York Times and 2008 recipient of the Nobel Prize in Economics.

Reich has a recent post in his blog with the lengthy, very descriptive title "Why No Amount of Fiscal or Monetary Stimulus Will Be Enough, Given How Small A Share of Total Income the Middle Now Receives" where he tells us what can’t happen and needs to happen to give the American economy some much-needed OOMPH.

The Fed interest rate is near zero, so there’s both little room to lower it more, AND there’s no purposeful reason to lower it since businesses have money already they aren’t spending (and, thus, aren't looking for loans). [Consumers aren’t buying much, so there’s not an incentive for businesses to spend money by expanding.]

The problem we have is consumption. And citizen consumers aren’t motivated to spend in these flat-as-a-pancake economic times.

Also, citizens are uncomfortable spending money since, generally, they already owe so very much.

Writes Reich,

After three decades of flat wages during which almost all the gains of growth have gone to the very top, the middle class no longer has the buying power to keep the economy going. It can’t send more spouses into paid work, can’t work more hours, can’t borrow any more. All the coping mechanisms are exhausted.
And, putting a cattle prod to China — to make that nation up the value of its currency, for one thing — won’t help because, well, China is simply intransigent, and any fix from China would be snail-slow developing, any how.

The answer to the fix we’re in, Reich tells us is …
… reorganizing the economy to make sure the vast middle class has a larger share of its benefits. Remaking the basic bargain: linking pay to per-capita productivity.
In other words, promise of more money to the middle class will spur citizen consumers to feel better about their lives, be more confident, and begin to spend, again. All of which will cascade into greater and greater feelings of confidence and happiness and all will be well.

A recent column by Krugman, "1938 in 2010," compares the economic situation that Obama has to figure out how to deal with to where Franklin Roosevelt was in 1938.

Roosevelt’s policies to save the nation from the Great Depression were too cautious two years into his first term as president, just as Obama’s initial policies to save America from the Great Recession were too cautious.

The policy of each president hadn’t accomplished enough and Roosevelt was publicly unpopular because of economic stagnation, just as Obama is, today.

Each president found himself in “a political trap”: More stimulation (or stimulus, in Obama's case) was desperately needed, “but in the public’s eyes the failure of the initial program to deliver a convincing recovery discredited government action to create jobs.”

So, what did FDR do? Nothing really; that is, he made no economic move. What happened was World War II, and with all the immense spending that came with that, the economy began to purr like a kitten, albeit during a time when massive amounts of  kill-and-be-killed was happening.

Obviously, the last thing America needs now is more war. But what?

Krugman concludes his column thus:
I had hoped that we would do better this time. But it turns out that politicians and economists alike have spent decades unlearning the lessons of the 1930s, and are determined to repeat all the old mistakes. And it’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.

But always remember: this slump can be cured. All it will take is a little bit of intellectual clarity, and a lot of political will. Here’s hoping we find those virtues in the not too distant future.
Krugman's optimism is nice, but the country sure doesn't seem to be moving in a direction of "intellectual clarity." It's hard for me to be hopeful.

I think both Reich and Krugman are right, I just don't see that which they righty see as what needs to be done getting done.

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