May 7th, 2012 at 5:41 pm

Here are the facts of the economic case as I see them today:

–Much of Europe is in recession and the downturn is in no small part a function of austerity measures that, like bloodletting, are making things worse, not better.  While the new French president is certainly making the right sounds, it’s awfully hard to point to the actual implementation of helpful policy anywhere.

–The US is doing better but we too are failing to enact measures that would finally release the economy from the residual gravitational pull of the Great Recession.

–The latter point is showing up in lots of worrisome places: the economy is slogging along at too slow a growth rate (around 2%); the job market may be decelerating from an OK pace to a subpar pace; real paychecks are falling behind inflation. 

All of which begs the question, why are advanced economies so seemingly immune to correct diagnosis and prescription?  Why are we applying leeches instead of the contemporary medicine of combined monetary and fiscal stimulus in order to once and for all hit the escape velocity that’s eluded us thus far?

Here are some answers off the top of my head:

US Politics: there are those who so badly want to hammer the incumbent President, they’re willing to throw the economy under the bus to do so.  A potentially interesting wrinkle from Europe is: what if the electorate turns on the austerians?

Stimulus Doesn’t Work: There are also those who know two things: we implemented aggressive measures by the government and the Federal Reserve starting in 2009 and here we are, still hurting, in 2012.  Ergo, stimulus doesn’t work.  

The counter-argument that things would have been a lot worse without those measures, while true, is a very heavy lift.  Worse, adherents to this view then take it to the next level: if spending more doesn’t work, then spending less surely will.  They’ve convinced themselves that austerity will lead to growth, and though evidence to the contrary grows by the day, they’re unmoved by it.

Vested Interests: Obviously related to the first point above re politics, but here you’ve got wealthy people paying for the think tank research and politicians that will prevent progressive policies, including Keynesian stimulus other than high-end tax cuts.  But this too can be a bit of a riddle: it’s not obvious how opposing growth right now helps anyone.  It used to be—as recently as GW Bush—you could count on Republicans to at least temporarily become Keynesian in recessions.

Disdain for Gov’t: Another reason we’re stuck where we are is because too many people, including many in positions of power, simply disdain government’s role in an economy they view as exclusively private.  These are the “government doesn’t create jobs” crowd, though I’m not sure what you do with the 22 million people who work for government, the millions more private-sector jobs that at least partially depend on government spending (e.g., contractors), and the fact that a consistent drag on our current economy is the loss of state and local jobs.

(I should note here that a plank in President Hollande’s platform is the hiring of 60,000 more teachers.)

I know…there’s Solyndra and the crazy GSA party in Vegas.  The latter in particular is inexcusable (re the former, as carefully as you plan, some gov’t loans will default—that’s no reason to give up on helping clean energy overcome some of the initial market barriers it faces).  But these are tiny examples of things that went wrong,* compared to a ton of evidence that goes the other way, not the least of which regards the Recovery Act itself and the auto rescue, which together helped preserve millions of jobs.

Nervousness Regarding Debt Levels: If you’re already convinced that gov’t spending doesn’t work, you’re going to view doing more of it as simply raising the debt.  What’s so unusual about this moment, however, is that given the slack in the economy and the fact that borrowing costs to the government are ridiculously low, the opposite is operative: by strangling growth right now, we’re lowering GDP and diminishing our tax base.  I don’t want to push this too far: stimulus won’t pay for itself.  But even a cold-hearted cost benefit analysis—one that took account of the waste engendered by such high joblessness—would reject austerity measures right now.

I’m sure this list isn’t exhaustive.  Why do you think we’re stuck in the slog?

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16 comments in reply to "Stuck"

  1. foosion says:

    We’re stuck because Obama hasn’t pushed for useful measures and Republicans have blocked what little he’s tried.

    Krugman’s dark ages of economics line of thought is part of it. A lot of effort has gone into trying to ensure the economics profession unlearns basic economics.

    A weak economy means lower labor costs, even though the weak economy may also hurt revenues. Lower labor costs are cash today; whether better policy would lead to higher revenues is an open question. A lot of current policy is aimed at weakening workers’ ability to get paid more, such as cutting the safety net, increasing competition from other countries, anti-unionism, anti-inflation hysteria, etc., etc.

  2. PhillyCooke says:

    Perhaps this simply falls out as a special case of US Politics, but I certainly believe that the “anything but what Obama wants” camp accounts for a large part of what’s happening. If McCain were president right now, most of the anti-stimulus people would loudly be proclaiming the need for new bridges. I don’t think it’s simply a desire to win in November. That’s why I think it’s more than just politics.
    There’s a deep-seated belief that President Obama simply must be opposed, regardless of the results or source of that opposition.
    It’s what has made the past 3.5 years so hard to watch. There is absolutely nothing that Republicans believed four years ago that they would not gladly deny and call a Communist plot to take over the universe if President Obama endorsed it.
    Cap-and-trade, the individual mandate, banning light bulbs, ending the war in Iraq. The commitment to oppose everything they previously endorsed has simply become absurd (and painful) to watch.

  3. Tom Hickey says:

    Do the sectoral balances. The domestic private balance, the external balance and the govt balance always sum to zero as an accounting identity. If non-govt is running a surplus, then govt must run a corresponding deficit. A non-govt surplus means that non-govt is net saving, and saving results in demand leakage.

    Non-govt can only save what govt will fund with it its deficit. If the deficit doesn’t make space to fund non-govt saving desire at full employment, then the economy contracts due to lack of effective demand. The deficit is too small given saving desire. Of course, increasing net exports would reduce external saving in USD, but that is not about to happen given the global economic situation. Therefore, the federal govt must increase its deficit to offset the demand leakage resulting from increased saving desire in a “balance sheet recession” resulting from an unsustainably high level of private debt to restore effective demand to a full employment level, i.e., adopt a full employment budget.

    Check out the many papers on this at The Levy Institute —

  4. Tom in MN says:

    I think we are stuck because we never adequately addressed the root cause of the financial crisis: lousy home loans. If the bailouts of the banks had required that they also take serious hair cuts on the bad loans they made and in turn bailout home owners, then we might be much better off. As it is, fiscal stimulus has faded out and home prices have yet to find the bottom. This also keeps low interest rates from being stimulating as no one wants to buy houses until the prices stop falling. This might fall under your vested interests category, as the bank lobby got what it wanted in spite of being the cause of the problem.

  5. Richard M. Mathews says:

    I think you come very close to it, but there is a common underlying cause to all of the problems you list.

    US Politica is part of it. While there are people who want to go after Obama at any cost, I think the vast majority of them have convinced themselves that this will actually be a good thing. They don’t think they are destroying the economy, but the facts don’t matter to them. Showing them that they are destroying the economy makes no difference.

    Then there are the people who think stimulus does not work. Again, facts don’t matter. You can’t convince them that the beliefs they have formed are wrong.

    There are the vested interests, the rich people who look shortsightedly at wanting a tax cut. They don’t see the facts that rich people have had higher after-tax income when there are higher tax rates.

    And there is a lot of disdain for government. People see others getting government benefits but fail to see the benefits they themselves get. They don’t see that the Internet came from government, along with all the business that created. They don’t see they the products they sell come through government ports on the basis of government trade agreements. They don’t see that their customers arrive on government roads. These facts just don’t matter. All that matters to them is their belief that government must be bad.

    And it is the same with evolution. With global warming. With ecology. With food safety. With all of these things, facts don’t matter. We are living in an increasingly high-tech but anti-tech world. And there is no way to reason with these people.

  6. Nick Batzdorf says:

    All these problems come down to one big problem: most people are too lazy to become informed, and/or they find reality uncomfortable and don’t want to deal with it. So it’s much easier to sell them simplistic bumper sticker solutions to the complicated problems of the world than it is to explain what’s actually going on.

    That’s especially true of macroeconomics, which is largely counterintuitive. Moose-headed people find it much easier just to shout that Keynesian arguments are stupid (“duh you can’t borrow your bray way out of debt”) than to use their brains. And of course you get the entire Republican party egging them on.

    Reason is futile.

  7. JCD says:

    Steve Randy Waldman had a great post on this, arguing that “[w]e are in a depression because it is our revealed preference, as a polity, not to remedy the problem”. He says that “the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer”, and that “[t]heir overwhelming priority is to protect the purchasing power of incumbent creditors”, and “[a]ll other considerations are secondary”.

    Very interesting reading:

  8. perplexed says:

    –”Vested Interests: Obviously related to the first point above re politics, but here you’ve got wealthy people paying for the think tank research…”

    A free and independent press is critical to the operation of a democracy. The loss of ours has greatly magnified the power of what is nothing other than propaganda while we remain oblivious to the fact that our form of government may not be able to function without it (see

    “it’s not obvious how opposing growth right now helps anyone.”

    For the wealthy, life in a stagnant economy is no different than life in a growing one. In fact, its much easier to deal with a powerless labor force than having to compete for scarce talent. Having a safe place to store your wealth until the “storm blows over” is more important than taking a chance on these safe havens becoming less secure just to achieve greater employment, and having inflation erode the real value of your assets is much more troublesome than high unemployment. There’s really no incentive to risk it, how much better could life really get for you if it works anyway?

    -Closed Minds

    The real pain is concentrated among a powerless minority that has no choice but to endure it based on existing laws. If the costs of an output gap were paid for by the entire population, there would be much greater political will to do something about it. There are no unemployed among the decision makers. If the markets were forced to be open to all participants or the victims to be fully compensated for having the markets closed to them, the pressure to act would be overwhelming. Having the ability to dump the entire cost on a small powerless group creates a disastrous and inequitable incentive structure for those with the power to implement solutions.

    We refuse to even discuss alternatives that challenge the existing beneficiaries of our rigged system. While we talk of improvement through competition, protection from competition through monopolies and copyrights is largely what generates the profits for our oligarchs. With the exception of Dean Baker, there appears to be no serious discussion of the wisdom of granting these government windfalls to the wealthy and whether or not any public benefit we get out of proving these freebies cannot be better achieved at a much lower cost. We need to get our oligarchs off the government doles so that they can experience the “dignity of competition” (as Mitt Romney would probably put it).

    “We” have nearly $60 trillion in wealth and $15 trillion in annual income. We don’t really have a money problem, we have a money distribution problem. If the “bond vigilantes” become a serious problem down the line we can always implement wealth taxes to pay the debt down and eliminate the problem. “We the People” have the power to solve these kinds of problems just like the kings of old did. We don’t really need to fear a water pistol when we’re holding a machine gun.

    -Currency Manipulation

    We generate more demand than any other country in the world and yet we face a demand shortfall from an employment standpoint because others manipulate their currencies so they can solve their problems by exporting to us? Maybe we’d think twice about this if we had to actually compensate the unemployed that have their income reduced to $0 because of this.

    Many of our solutions are likely to come from options we refuse to discuss.

  9. Michael says:

    Nothing changes until Obama stops making policy to assuage the people who hate him.

    This is a personality thing. If you hate Obama, he wants to please you. It’s a terrible fit for a high executive position.

  10. Th says:

    Let’s start with Summers and Romer (and you?) going wobbly and not making sure Obama knew that the stimulus did not cover anywhere close to the short-fall. First rule of business is never over-promise and under-deliver. Recovering from that is a real b. Also, recovery starts by admitting you were wrong and when has Obama ever done that?

  11. William Bennett says:

    To “beg” a question means to take something as proven that is not proven but merely asserted. I think you mean “poses” the question.