Party Like It's 1937!
On the heels of last night's great news, the Associated Press has more:
President Obama is poised to name a special commission to come up with a plan to curb the spiraling budget deficit, top Democrats said Tuesday evening.
The bipartisan, 18-member panel would be asked to report a deficit reduction blueprint after the November election that would be voted on before the new Congress convenes next year.
Obama has signaled that the White House is willing to tackle the deficit this year, and the deficit panel would allow him to signal resolve without recommending specific steps that might offend key interest groups.
This is not good news on at least two different levels. First, we know how well bipartisanship works out. We know that the Republicans aren't interested in solving problems, because they're really only interested in the next two election cycles. Which means trying to destroy the Obama presidency. They don't negotiate in good faith, and they don't compromise.
But the even worse news comes in Steny Hoyer predicting that Congress will "strengthen so-called pay-as-you-go budget rules," to help prevent increases in the deficit. Which is exactly backward. Unless we want to relive 1937.
As Mark Thoma warns:
The deficit hawks on the right have their sights set on Medicare and Social Security, and the administration seems far too willing to allow these programs to be used as bargaining chips in negotiations (and to give into the right's insistence that spending cuts - except for the military - take precedence over tax increases). Unless the administration takes a turn away from the tendencies it has shown in the past, this seems to be headed in that direction.
Which would be nothing short of disastrous. As Paul Krugman warned, in July:
We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on. Do you remember the administration’s plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.
All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level.
So have we failed to learn from history, and are we, therefore, doomed to repeat it? Not necessarily — but it’s up to the president and his economic team to ensure that things are different this time.
Krugman warned that we needed a bigger stimulus. Keynesianism. And while the Obama stimulus has averted another Depression, thus far, Krugman has been proven right that it wasn't enough. How bad is the economy?
Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can't make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.
And as I've been pointing out:
U6 unemployment is staggering.
Record foreclosures, last quarter.
A 32% increase in personal bankruptcies, last year.
Many of the same economists who predicted the collapse worrying that it's not over.
Polls showing a great deal of pessimism among the American people.
So, we still need more stimulus, and we don't need to be worrying about the deficit. In that July article, Krugman referred to a recent article by Christina Romer, the chairwoman of the Council of Economic Advisers:
...on the “lessons of 1937” — the year that F.D.R. gave in to the deficit and inflation hawks, with disastrous consequences both for the economy and for his political agenda.
The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.
However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19% (see chart). The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war. In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure.
Romer also refers to a monetary contraction. But the point is this:
The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow. In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.
And we know that all is not going well. And not only are we nowhere near full employment, we are actually still suffering from rising unemployment.
Romer did write that it's time to think about fiscal stability, over the long run, but:
To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession.
Which gets to the question of what the president and Hoyer really have in mind. Long-term planning would be great. But a bipartisan panel to focus on the deficit when we know that there is no such thing as bipartisanship, and we should be focused on stimulus, anyway?
Krugman, in July:
So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.
But it appears that the exact opposite may be happening. And on both policy and political levels, the results are likely to be the exact opposite of what we need.