As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Monday, December 22, 2008

Either The Economy Is Fixed In 100 Days Or We Revolt!

Paul Krugman appears to be in contact with the Obama transition team, which is very positive news. It may be why the recovery package is expanding in the face of more bad economic news:

Faced with worsening forecasts for the economy, President-elect Barack Obama is expanding his economic recovery plan and will seek to create or save 3 million jobs in the next two years, up from a goal of 2.5 million jobs set just last month, several advisers to Mr. Obama said Saturday.

Even Mr. Obama’s more ambitious goal would not fully offset as many as 4 million jobs that some economists are projecting might be lost in the coming year, according to the information he received from advisers in the past week. That job loss would be double the total this year and could push the nation’s unemployment rate past 9 percent if nothing is done.

The new job target was set after a meeting last Tuesday in which Christina D. Romer, who is Mr. Obama’s choice to lead his Council of Economic Advisers, presented information about previous recessions to establish that the current downturn was likely to be “more severe than anything we’ve experienced in the past half-century,” according to an Obama official familiar with the meeting. Officials said they were working on a plan big enough to stimulate the economy but not so big to provoke major opposition in Congress.

Mr. Obama’s advisers have projected that the multifaceted economic plan would cost $675 billion to $775 billion. It would be the largest stimulus package in memory and would most likely grow as it made its way through Congress, although Mr. Obama has secured Democratic leaders’ agreement to ban spending on pork-barrel projects.

We can't afford to have a spending package less than this at this point. The economy has truly cratered nationwide, even in areas that didn't experience a housing boom, as the slump ripples through the greater economy. They're stopping jury trials because the states can't afford them, for crying out loud (how exactly does that not violate due process?). This, by the way, is why direct aid for state and local governments is as crucial as these public works investments.

But what about the state of things AFTER two years of deficit spending? We will be facing a world much different from the one that fueled economic growth in the 1990s and the early part of this decade. The bubbles will have been stamped out and unlikely to resurface, at least for a while. Consumer spending as an engine covering 2/3 of economic growth, so that our collective future depends on whether or not kids like the newest Elmo doll, is unsustainable, and since wages are stagnant, unlikely to continue. What is going to take the place of these drivers of growth? Krugman looks at this today as well.

A few months ago a headline in the satirical newspaper The Onion, on point as always, offered one possible answer: “Recession-Plagued Nation Demands New Bubble to Invest In.” Something new could come along to fuel private demand, perhaps by generating a boom in business investment.

But this boom would have to be enormous, raising business investment to a historically unprecedented percentage of G.D.P., to fill the hole left by the consumer and housing pullback. While that could happen, it doesn’t seem like something to count on.

A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.

That is the answer, in my view - a reindustrialization of America. The hope is that the investments in areas like alternative energy will spur innovation and create new industries that America can export. But that's not going to happen overnight. It's going to take at least a decade to get manufacturing where it probably needs to be to bring the trade deficit back into balance. The other question, which Krugman addresses separately, is who gets stuck with decreasing trade surpluses in this zero-sum game. Clearly, if the exports are related to energy efficiency and aternative fuels, the answer is the Middle East. But if it relates to the source of most of our trade deficit, namely China, I don't think they will allow it, and they've been buying up our debt for years and years to make sure they have at least a partial veto on the resurgence of American manufacturing.

Which means that restoring our economy will be a long, slow, drawn-out process, lasting not a year or two but much longer. And this entire time, Republican know-nothings will promote impatience and start blaming the solutions as the problem. You saw an early example of this when the right, aided by a compliant media, cherry-picked a large infrastructure request from US mayors, finding one or two pieces that are supposed to invalidate the entire idea of federal spending. There will be plenty more of that, solemn speeches on the floor of the Congress along the lines of John McCain's "OMG $3 million for bear DNA!" nonsense. Plenty of hack groups like "Citizens Against Government Waste" will pop up with every spending request to call it wasteful, Republicans in the Oversight Committee of the House will demand hearings, the Pete Peterson Foundation will put out lamentation after lamentation about the soaring deficit, a newly energized set of conservative radio talkers will hammer these themes day after day, and conservative revisionist historians will influence media groupthink by questioning whether all this public works spending can even help the economy. By this time Republican candidates for national office will be getting lots of attention by slamming all the "pointless budget-busting porkbarrel spending" that is hurting the economy. And this will only get worse as the years go on:

But once the economy has perked up a bit, there will be a lot of pressure on the new administration to pull back, to throw away the economy’s crutches. And if the administration gives in to that pressure too soon, the result could be a repeat of the mistake F.D.R. made in 1937 — the year he slashed spending, raised taxes and helped plunge the United States into a serious recession.

The point is that it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles. And until then, the economy is going to need a lot of government help.

This is not completely fated to happen, a technological breakthrough could spur new economic activity, and reducing wasteful health care or military spending would at least cool the deficit and make that money far more productive. But in general terms, failed conservative policies have put us into a ditch, and it's going to take a long time to dig our way out. Human nature in general is not exactly oriented toward unlimited patience or long-term planning. Conservatives are practically counting on that.

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