What happened to the model of the Great Depression. When Barack Obama entered office, he was widely viewed as having the opportunity to replicate the success of Franklin Delano Roosevelt, to bring the progressive energy to a serious national crisis.
It turns out that the nation has benefitted from the laws past those seventy and eighty years ago more than it has from the immediate response to the financial collapse and recession. It is social security, unemployment insurance, bank insurance, and the remnants of the New Deal that have supported demand in the crisis.
Here panel one at the Economists for Peace and Security Bernard Schwartz Symposium visit the politics of this day and recall the difference. Heather Boushey concludes her remarks by reminding us that in the 1930s, the minimum wage was understood by the public as a strut under demand. Michael Intriligator reminds us that employment is still in the tank and the federal government is required by law to promote full employment, meaning hiring people. Intriligator also gets a gold star from Demand Side for his insistence that the NBER's recovery call was premature.
Good morning. It’s a real pleasure to be with you here today. I can see that this is going to be a war of alliteration, and it’s fantastic to follow Tom. I was also thinking about the timely, targeted, and temporary mantra that when I was working on the Hill a couple of years ago, and we were talking about that stimulus. If I heard that phrase one time, I heard it like 3000 times from people that had no idea really what it meant, but it stuck in their heads. I like substantial, smart, and sustained, but this morning and this past week, I was thinking of clear, comprehensible, and credible. I’ll get to that at the end. Let the alliteration go on.Richard Kaufman: The third final speaker is Mike Intriligator, who is Co-Chair of EPS, among many other titles that he holds.
It’s great to follow Tom because he said a lot of the things that I don’t have to say. I’m going to reference it – all of it - so the laying out of the problem is already clear. We clearly have an output gap here in the US economy. As a labor economist, what I focus on most each and every day is the massive number of unemployed folks we have, and the need to do more to get those people back to work, and to fill in that output gap. One of the things that I find striking is while we’re having these debates about deficits and tax cuts here in Washington, month after month, the National Federation of Independent Businesses, which is a membership organization of small businesses in the United States, puts out a survey, the front page of which, they talk about how we need tax cuts. When you actually look at what their members keep saying month after month after month, is that they don’t have enough sales. That is their major concern: they’re not seeing customers come through the door. I think that that is one of sort of the nicest, crispest pieces of evidence that you can point to, especially for policymakers who claim to really care about small businesses - that we have this massive output gap.
The question is, how can we fill it, how can we get back to full employment within this climate where we are concerned about deficits and where the mantra is now fast becoming concerns about tax cuts? I want to start my comments this morning in my brief eight minutes, by taking a few minutes to sort of remember how we got to this particular moment. Then I want to go back a little bit further in history. Back into 2008, when we elected President Obama, unemployment was already starting to rise. We were already seeing output falling. Over the transition, before he actually even took office, Christina Romer, who became of course the Chair of the Council of Economic Advisors, and Jared Bernstein put together a paper that laid out the administration’s view, what would become their view on what was going to happen. They did this over the Christmas holiday. I found it very annoying because that meant over the Christmas holiday, I had to read it and comment on it, but I also felt bad for them that here they were, they don’t even have their jobs yet, they’re not even being paid, and they’re doing this economic modeling for the country.
By the time that report was released, it was already too optimistic. Unemployment was already clearly going higher than what they had forecasted. They estimated that in the absence of stimulus that we would lose about five to six million jobs. Of course, we lost over eight million jobs over the course of the Great Recession, and unemployment went far higher than they had predicted. That model formed the basis of the various policy proposals that the administration looked at that January and that winter. The story is that Christina Romer had run a number of simulations on how much we needed to do to get the economy back on track - three of them. One, a recovery package about $600 billion; one for about 800 billion; and one for 1.2 trillion. Of course, Christina Romer was, in my view, at least, not really known as some radical, lefty economist before she took this job at the White House. But based on her analysis, and her understanding of the Great Depression, and work that she’d done, she came to the conclusion that it was the $1.2 trillion package that we needed to fill in a two trillion dollar output gap.
As we now know, however, that proposal really never made it to the President’s ear. That was not a part of the conversation that the folks in the White House had as they were trying to figure out what to do. Why? Right? Why wasn’t the one – even though we knew we had this output gap, we could see the labor market falling off a cliff, why weren’t we talking about it?
The three answers that have been given are, number one, Congress. The sticker shock of 1.2 trillion would just make everybody fall flat on their back, and there was no way that that was going to go through Congress. That’s probably a fair assessment.
Government bureaucracy, how could we spend $1.2 trillion, and we see now as the recovery dollars have flowed through the economy, that that actually is a real concern; how fast can government pick up and throw that much money out into the economy in a way that’s smart and is targeted at growth? The third issue, of course, that Dr. Summers brought up at that time was deficits, and the concern that we would be here now with these deficits, and that would have impacts on the bond market, which of course, we haven’t seen in the negative way that we would think.
I want to be clear that the recovery package and the money that we’ve spent that has helped create the deficit has been important for the economy, but clearly we haven’t done enough. I’m going to an event that’s actually starting right now, but later this afternoon with a bunch of economists talking about all the things that we need to do to create jobs. Of course, most of them - and you look at those lists of things that we need to do, the kinds of things that Tom alluded to, the kinds of things that we talked about here in Washington every day - investments and infrastructure, investments and job creation, direct job creation, making sure that we’re maintaining demand by getting those unemployment benefits out into the economy. We spent over $75 billion on benefits for just the longer-term unemployed last year. That alone sort of, I think, makes Congress feel a little nauseous in terms of just how much money we’re having to spend.
But all of those require that we continue to deficit-spend. I think that the arguments that we had at the end of 2008 and early 2009 that set the framework for how we got from there to here, the fact that we didn’t put a package out that was big enough to begin with; and that we weren’t able to communicate to the American public effectively in any way, shape or form that we were doing something but we were only going half there.
I want to touch back on something Tom said, which is, this idea about the neoliberal two-step. There is this notion that the neoliberals tell us, “We’re doing these things, but we didn’t do enough of them so we need to do more.” That’s actually the exact same situation that we’re in. I was talking to a group of college kids last night, so here’s the analogy I used, so bear with me. It’s like you threw a party for 100 people, and you wanted to buy enough soda pop for everybody. You know you were going to need about $200 to do that, but your dad only gave you $100 for the party, so you’re only able to buy enough soda pop for half the people . Essentially, you threw a really crappy party, but it wasn’t your fault; it was because you didn’t actually funnel enough resources to actually do what you needed to do, to fill in that gap. That isn’t the conversation that we’re having now because nobody but those of us in this room actually understand that that’s what’s going on.
Here I come back to the notion of clear, comprehensible, and credible. This is the moment where I often think of people like my mom, who’s a good person, typically votes Democratic, not an economist, doesn’t get it. You can’t explain to her why we can have deficits from now until as far as the eye can see and that that won’t make something bad happen to the economy. You can’t connect with people with that message. As much as I completely agree with Tom, and I completely agree that we need to spend… I could bore you for hours with all the things that we need to do to get people back to work, and how we need to continue to deficit-spend, and the importance of Social Security, and Medicare. We’re not going to be able to do anything until we get to a place where the fact that Congress can’t comprehend that, because the public can’t comprehend that, isn’t our main sticking point.
Here I want to take the last of my couple of minutes, which hopefully I still have a couple left, to try to argue that I think we actually lost this debate a decade ago, or even longer. We are still sort of dealing with the aftershocks of it. The last time we had a surplus or projected surplus was in the end of the Clinton era. Then the national conversation became what to do with that surplus. The answer was, give it to rich people because they’re the ones that create jobs. We all know that that didn’t work. We gave massive tax cuts to the richest people in this country, and what that led to was a decade of McMansions and Hummers, the lowest investment growth in the post-World War II period, and the lowest growth in employment that we’ve seen in any economic recovery. The rich people didn’t invest, because basically you gave money to people like Paris Hilton. No diss on her, but didn’t really create jobs; it wasn’t targeted. The American public doesn’t understand that disconnect. Now we’re having a debate about tax cuts for the wealthy.
What the Republicans keep wanting to say is that those are tax cuts for small business owners. There’s facts, and we can have that argument, and we often do. But I would like to encourage us today to think about today how we’re going to communicate with people like my mom, and every other sort of normal person I talk to when I get out of DC and talk to folks around the country, who just can’t wrap their head around the fact that we need these deficits because the way that they have been told for ten, twenty, thirty years that the economy works is that what gets our economy going is rich people investing, and that they’ve got to cut costs and cut wages.
Back in the Great Depression when we passed all these great things that we’re always pointing back to – the Social Security Act, the Fair Labor Standards Act – the debate was different. They raised the minimum wage because people understood that workers bought stuff. That link isn’t there for most people these days. That is my sort of challenge to you, is we’re thinking about the deficit; how do we reshape that conversation so that people understand that if we don’t spend, people can’t buy? That means the economy doesn’t work, not just that we need to make sure to cut costs and have untargeted tax cuts for the wealthy. Thank you.
My talk is called “The Global Recession Continues.” Overview – the current financial and economic crisis is number one. Number two: I want to talk about the mistake of the National Bureau of Economic Research and their dating committee in dating the end of the recession in the US June of last year. This was a huge mistake, in my view, and it gave all the wrong signals to politicians and policymakers and so forth. Number three: it will take years before the current recession will end. I published on this last year, and our predictions are coming exactly right, what I stated last year. Finally: navigating out of the crisis and lessons for the future.
The current crisis began in December ’07, the collapse of the subprime mortgages spread to others, the financial system and the overall US economy. My view was still here; I’ll get back to that later. This crisis has spread to Europe, Japan, and transition economies, the rest of the world basically, with devastating effects worldwide. It affects virtually every country in the world. China is a major exception, but the rest of the world is still in the same crisis that we’re in. Recent financial crisis in Greece, huge demonstrations in Athens, also in Brussels, but also the crisis in Italy, Spain, Portugal, Ireland, and other countries as well – these countries are in deep trouble, as we are, in my view.
Mistake in the National Bureau of Economic Research. The National Bureau of Economic Research is a private organization based in Cambridge, Massachusetts. They were delegated the responsibility by the US Federal Government to date the beginning and end of recessions. They’ve been doing that for many years, and they have a very distinguished group of people who are in charge of that on that dating committee. Quite recently, on September 20, they dated the end of the recession as June 2009. But they also cautioned - and people forget this as an important caution - that this finding bears no relation to the current state of the economy, and is not a forecast. They made that extremely clear in their statement dating the end of the recession. But I don’t think that that date is correct. I find it doubtful, given the continuing high unemployment, now at 9.6%, much higher in other states. In my state of California, we’re the third highest unemployment rate, after Michigan and Nevada. Continued foreclosures all around the country; houses are being foreclosed. Bankruptcies, not only corporate bankruptcies, but bank bankruptcies. This is not well known. People see the big banks are doing well. They don’t realize the little banks are in deep trouble; many have gone belly up. Personal bankruptcies are enormous. Loss of savings, loss of equity, difficulty in getting credit, particularly for small business. All these things are true, and they continue to be true now, despite what the National Bureau has to say about this.
My view is that we have a continued recession worldwide, except for China. Some people ask me, “Are we going to have a double dip?” I say, “No, it’s not a double dip; it’s a single dip, we’re still in the single dip. It’s not a double dip, but we’re still in deep trouble.” It will take years before the current crisis will end. In my view, the recession will likely have a U-shape. This was fashionable a year or so ago to talk about the shape of the recession, whether it’s a U, a V, a W, or some such letter. I’m a U-shape person, with a prolonged downturn, rather than a V, rapid down, rapid up again, it will bounce back up again. One of my colleges at UCLA, Ed Lemur[?] who runs the Anderson forecast had this view that it’s a V-shape; we’ve had some arguments about that. And will take perhaps six to eight years to recover from its official start in December of 2007. That also comes from the National Bureau Dating Committee; that data, I agree with. It’s their ending date that I don’t agree with.
The normal recovery forces that we’ve seen in previous recessions won’t work. The fiscal problems of the states: virtually every state with only one or two exceptions, are in deep financial difficulties, particularly my state of California; huge deficits in our state. Cutbacks all over the place. My colleagues at the University of California have had to take salary cuts. We have these days where you’re not supposed to work, and they don’t pay you basically. We’ve had these cuts. Banks are not lending, particularly to small business. Big business is a different story, but small business, I talk to small business owners, they say they have all kinds of plans, they would love to hire people, put up new buildings or whatever, but they can’t get the loans; there’s no credit available for them. What do they do? Where can they go? It’s a difficult situation. Of course, that feeds the problem. There’s no international locomotive of growth. This was a theory we had in previous recessions that if we’re in trouble, some other countries will bail us out, whether it’s the European union, Germany in particular, or China, Vietnam, and some other countries, that they would be locomotives of growth, and we would sort of follow that locomotive kind of out of the recession. That locomotive doesn’t exist anymore with the exception of China. They’re not going to lead us out of the recession; they exacerbate the problem, in my view. We can talk about that later.
I published an article in August last year, about a year ago, with Kyle Martin, a colleague, in The Huffington Post called “The Rise and Fall of Artificial Wealth.” This was very widely quoted, [unintelligible], reproduced amazing number of places. Here’s our prediction. We talked about artificial wealth that, particularly housing, equity in homes, rose to a new unbelievable values, and we have to sort of work through that problem in the system before we can solve the recession. Our prediction was this: the GDP we realized in 2008 of $14.26 trillion will not be achieved again on an inflation-adjusted basis until 2013. In other words, the recession didn’t end last year in June; it’s going to end in three years’ time - 2013. We also predicted the unemployment would not fall back to a level of 6.25% - which we had before the recession, which is considered a normal value for unemployment; now it’s, of course, 9.6%, higher in other states - until 2016. We have another three or six years to go before this recession ends, in our opinion. Say this has tracked well.
How do we navigate out of the current crisis? What are the lessons for the future? False choice in economic stimulation, I agree with the previous speakers about the need for fiscal stimulus; that’s very important. But [unintelligible] regulation, we need to do both. It’s not one or the other; it’s both. We require a greater transparency and limits on leverage for banks, which was one of the major causes of this recession. The leverage that they were using, the leverage ratios were incredible. They were taking real risks with themselves and their depositors or owners. We have to rethink the remainder of the stimulus funding by requiring specific actions, including new investments. We did this bailout of the banks; basically, we followed Gordon Brown in Britain, who had the idea: recapitalizing the banks. That was his idea, and we basically borrowed his idea. Lack of ideas of our own, perhaps, but we followed the British on this. We capitalized the banks, and we put a lot of money into banks and other large financial institutions – AIG and some others. What’d they do with the money? The theory was that they would provide more lending opportunities in the economy; they did not do that. What did they do with the money? They paid themselves big bonuses, they had big parties, they took cruises to Bermuda – almost everything but what we hoped they would do with the money. If we’re going to have more stimulus funding, there should be some specific requirements on people who get the money that they use it for some valuable things.
In my view, we made a mistake of working from a top-down idea, bailing out these huge financial institutions, corporations. We should move to a bottom-up approach instead. Family housing vouchers – I published a piece on this also in The Huffington Post. Guaranteed mortgage assistance, support for small and medium-sized businesses. We have this big small business administration here in Washington. They don’t seem to be active in providing credit to small business, which they desperately need. We have to extend unemployment and health insurance, student loans, aid to states and localities. States are in deep, deep trouble, as I said, unprecedented deficit in my state in California, but many states face that problem.
What’s our major problem? Our major problem - and the previous speakers have talked about this as well - is unemployment, which is required under the laws of this country. We passed a bill in 1946 called the Employment Act of 1946, which calls for the Federal Government to promote full employment. That was followed up by the Humphrey-Hawkins Bill, the Full Employment Act of 1978. These are two laws that are still on the books. They said that the intent, objective of the United States Federal Government is to promote full employment. We’ve not done that. We’ve let unemployment rise precipitously. We need a government guarantee for a portion of the commercial investment bank loans, as in Small Business Administration guarantees. Mind you, if banks don’t provide credit, then we should use closer supervision by the fed with their restructuring, by receivership or even nationalization, as a last resort. The word “resort” didn’t get in there, but it’s the last resort.
We have to set up investment banks. When we let Lehman Brothers fail, this was a huge blow to our economy, and a signal to the rest of the world. That was one of the major reasons the rest of the world ended up in recession. Lehman Brothers had operations all over the world. When they failed, virtually overnight, those other countries were in deep trouble; that was a big mistake. Compare what we did with Long-Term Capital Management, where they were in trouble at one point, another big hedge fund, and we bailed them out basically. The New York Fed brought the banks together to bail out Long-Term Capital Management. We did not do that with Lehman Brothers, and I think that was a huge mistake. I have a suspicion that it was due to Paulson. Paulson was the chairman at Goldman-Sachs; his whole career was at Goldman-Sachs. Their arch competitor was Lehman Brothers. Lehman Brothers gets into trouble. What does he do to help them? He doesn’t help them. He claims that they tried everything, that it didn’t work. I have some doubts about that, I have to say.
Then I believe, as a last resort, if businesses don’t provide jobs, the government should, as the employer, last resort, like we did in the Great Depression under FDR. We had these various programs: the Works Progress Administration, the Stability and Conversation Corps, the whole host of other things that they set up during the Great Depression, and we benefited from that. We still benefit to this day from things that went back to the ‘30s. Many of our roads, post offices, public buildings, arts, conservation, national parks, and so forth, a lot of that we inherited from happened during the Great Depression under FDR’s program as the Great Depression. I think we should resume some of those programs. That’s part of the government being the Employer Last Resort; this is one way we can employ people. Anyway, that’s my presentation. Thank you very much.