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Friday, February 5, 2010

Transcript: 353 President's new budget rollout with Orzag and Romer, fails to meet the challenge of Galbraith and Stiglitz

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Today Peter Orzag and Christina Romer rolling out the President's new budget. We introduce Orzag and Romer with the two top economists in the U.S. today, James K. Galbraith and Joseph Stiglitz. Their words, our voice.

Of course, Demand Side disagrees with the scale and scope of the budget, as well as its apparent fever about the deficits and unwillingness to raise revenue. There may be political constraints, but we'll discuss that next week.

Here, first, from a print interview we'll put up on the blog tomorrow, James K. Galbraith. Quoting

...I’ve always taken exception to the constant reference to “stimulus” as the policy objective, because implied in that word is the idea that all one needs to do is to undertake one or more relatively short term spending sprees, on whatever happens to be available at the moment, and that this will somehow return the economy to its pre-crisis state, putting it on a path of what economists like to call “self-sustaining growth.” I maintain that in the present environment there is no such thing as a return to self-sustaining growth. There will be no return to the supposedly normal conditions, which were in fact, from a historical point of view, highly abnormal, of the 1990s and 2000s.

What one needs is to set a strategic direction for renewal of economic activity. We need to create the institutions that will support that direction. Those institutions are public institutions, which create a framework for private activity. This is the way it is done. It is the way countries have always developed in the past and, to the extent that they are successful, they will always do so in the future or they won’t succeed. Seventy years ago when we were in the Great Depression, they built a national infrastructure: roads, airfields, schools, power-grids - this kind of thing was the priority. In the post-war period, the creation and maintenance of a large middle class with social security, with medical care, with housing programs, universities - these were the priorities of the post-war period.

Now we clearly face an enormous challenge with energy and climate. It’s a challenge that requires us to think in very creative ways, in very ambitious ways about how to change how we live, so as to make life on the planet tolerable a century or two centuries hence. This is a huge challenge. It requires design, planning, implementation, something with enormous potential for providing employment because things have to be done, enormous potential for guiding new public and private investment because one has to provide people with the means of making it realistic for individual activity to support this larger objective. And that is the way to move toward a renewed economic expansion. This strikes me very far from being a stimulus proposal. It is a proposal for setting a new strategic direction for the economy and doing so over a relatively long time horizon with a view that you’re sustaining effort for 15, 20, 30 years. That’s the way I think you need to think about this.

Why can’t we go back to the pre-crisis period? The answer is that restructuring of the private household debts is an enormous task which necessarily takes a very long period of time. During that time, the pre-crisis pattern of increasing debt will not resume. The asset against which the American household sector collateralized its debt for 15 to 20 years, its housing, has radically fallen in financial value. The houses are still there but you can’t sell them for nearly as much as you could have three years ago. And that is a structural impediment to returning to the previous pattern of economic expansion. And that impediment isn’t going to be removed in any short period of time for the simple reason that the houses remain there as an excess supply on the market and they remain therefore as a drag on housing prices.

James K. Galbraith

Now, put down your iPod, pick up Joseph Stiglitz book FREEFALL, and read. Here from Chapter 3: A Flawed Response, abbreviated.

When Barack Obama and his advisers took the helm in January 2009, they confronted a crisis of unprecedented proportions. Thankfully they recognized that they couldn't restore the banking system to health without doing something about the real economy.
The single most important idea in dealing with the aftermath of a crisis is a simple one: crises don't destroy the assets of an economy. The banks may be bankrupt. Many firms and households may be bankrupt. But the real assets are much as they were before -- the same buildings, factories, and people; the same human, physical and natural capital. What happens in a crisis is that confidence and trust erode, the institutional fabric of a society weakens as banks and firms go into or approach bankruptcy, and the market economy jumbles ownership claims. It is not always clear who owns and controls particular assets, as ownership, for instance, is transferred from shareholders to bondholders in the normal process of bankruptcy. In the run-up to a crisis, resources are wasted -- putting money into building houses, for instance, rather than to more productive uses. But this is water over the dam -- or, as it is sometimes put, bygones are bygones. The key question is, How will resources be used after the bubble is broken? This is typically when most of the losses occur, as resources fail to be used efficiently and fully and as unemployment soars. This is the real market failure, and one that is avoidable if the right policies are put into place. What is striking is how often the right policies are not put into place, and the losses during the bubble are compounded by the losses after it bursts.


And then Stiglitz moves into what a response should look like, using the term "stimulus program," but organizing his thinking to the goal of economic recovery in the broad sense.

And now that we've set them up for ridicule, please open your minds for Peter Orzag and Christine Romer.


Demand Side suggests that long-term high unemployment is wasted American lives and lost time in recovery. Timidity is no virtue in the current economic crisis.

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