October 27, 2010

Redefining "Small"

An Economic Disaster

By DEAN BAKER

The economy is a goddamn disaster and President Obama deserves much of the blame. Sorry, I am not on the Dems' payroll so I couldn't contain myself when I read Bernard Avishai's trashing of Paul Krugman.

Avishai's basic narrative is about 150 percent wrong. He describes the differences between Krugman and the Obama Administration as "small." Right, and it depends on what your definition of "is" is.

Let's pick just a few of these differences.

Krugman loudly and clearly complained that the stimulus package was too small from the onset. Avishai tells us that the brilliant political strategists in the Obama Administration calculated the maximum amount that they could get through Congress and adjusted their request accordingly.

Perhaps this is true; perhaps there is no way that Obama could have gotten another dime out of Congress. But every person who knows economics knew that the stimulus was less than half the size it should have been. Given this, why on Earth did Obama and his minions start running around with their talk of "green shoots of recovery," instead of laying the groundwork for more stimulus?

The line the day after the stimulus passed should have been: "This is a good start, but we lost $1.2 trillion in annual demand from the private sector because of the collapse of the housing bubble. The net stimulus from the government sector will be $150 billion a year ($300 billion from the federal government, minus $150 billion in cutbacks at the state and local level). Since $1.2 trillion in lost demand from the private sector is much larger than our $150 billion net stimulus from the public sector, we can't expect to get back on our feet without doing more."

Would Obama have been able to prod Congress for more stimulus by telling the truth? Who knows, but at least then he would be putting forward a coherent story on the economy.

What is his story now? He has managed to completely discredit the idea of stimulus even to millions of Democrats when this is the only force that can be counted on to restore the economy to full employment any time soon.

Avishai claims that Obama took steps to keep people in their home. Really? The most obvious effect of HAMP is to keep people paying their mortgages to the bank until they get foreclosed.

If Obama was actually interested in keeping people in their homes the obvious tools would have been cramdown legislation or Right to Rent. Obama has not been seen in the neighborhood of either since he took office. In fact, his latest line is that the government should not do anything to slow the robo foreclosures. He claims these are necessary for the stability of the housing market. Yet there is already a huge shadow inventory of foreclosed homes that are being held off the market until the supply diminishes. It is hard to see any end being served in this story than the banks' desire to clean up their cesspool as quickly as possible.

Avishai seems to take pride in his ignorance: "It is still not clear just what state action will produce the kinds of sustainable jobs and wages Krugman takes for granted when he speaks about, say, the Japanese government acting against the liquidity traps of the 1990s."

Sure it's clear. The government needs to spend money. People work for money - it's an old economic principle. In the long-term we have to get the dollar down so that our trade deficit gets closer to balance. The high dollar and the resulting trade deficit led to the fundamental imbalances that provided the basis for the stock bubble in the 90s and the housing bubble in the last decade. Of course the high dollar policy was designed Robert Rubin and Larry Summers back in the 1990s, which may be part of the reason that President Obama is reluctant to ever present a clear picture of how we got into our current economic morass.

If he wants to go after the rich and combat inequality why isn't President Obama pushing a financial speculation tax. The financial sector is a gigantic source of economic waste and a main promulgator of economic inequality. Even the IMF has argued that the financial sector is a source of economic rents and should be taxed more.

Instead of going after the financial sector, President Obama sets up a deficit commission where the Democratic co-chair is a board member of a bailed-out bank who gets paid $340,000 a year for having lunch four times a year. Immediately after being appointed, Erskine Bowles, the Morgan Stanley board member, announced that he wants to cut Social Security benefits for ordinary workers.

The differences between a progressive economic agenda and President Obama's policies are hardly small, at least measured in terms of the range of U.S. political options. They are a gigantic chasm. Krugman has tried to educate people on the key economic issues facing the country. He has consistently been fair and even generous to the Obama Administration. (He even has repeated the nonsense about preventing a second Great Depression.) The truth might hurt sometimes, but that doesn't make it any less true.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

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