But What About the Slump?

Simon’s reaction to Obama’s speech last night is up at The New Republic.

I think Simon and I agree that the speech was strong on long-term issues, but did not shed much-needed light on how we can emerge from our short-term challenges. One way to position this is to say that if we really are facing a potential “lost decade,” then talking about the long term is a bit premature. Imagine ten years of zero real GDP growth as opposed to 2.5% real GDP growth (with population continue to grow at 1-1.5% or something like that). That would take decades to make up (if it is even possible) and could outweigh any well-meaning efforts to bolster our long-term government finances.

On the other hand, I’m a bit more positive than Simon, because I wasn’t expecting the details of the banking rescue plan in a major speech to the whole country, for both practical reasons (I don’t think they are ready yet) and political ones (Obama wants to keep some measure of distance from whatever Geithner does). If I have time later today I’ll say something about the long-term issues.

Update: Now it’s later. The main thing I liked about the Obama speech is that it reflected what I believe to be the true long-term economic priorities of the country. The day after Obama was elected, I listed what I think are our top four long-term challenges (economic and non-economic): global warming, terrorism and nuclear proliferation, retirement savings (both the insufficiency of retirement savings, and the fact that retiree benefits threaten to break the federal government’s balance sheet), and health care.

Obama’s speech yesterday was mainly about four things: energy, health care, education, and fiscal sustainability. That maps pretty closely to what I think our priorities should be. He was willing to say that these are urgent, serious problems. And when it comes to the government deficit and the national debt, he has chosen to forgo the gimmicks used in the past: not only keeping the Iraq War out of the budget, but also pretending that the AMT will not be fixed every year in the future.

Admitting you have a problem, and recognizing its magnitude, is a necessary, though not sufficient, step on the way to solving it.

14 thoughts on “But What About the Slump?

  1. No need to wonder if we will be facing a lost decade we’re just finishing one up.

    Stock and housing prices are near where they were a decade ago. Thus all those told to “invest” their IRA’s and 401K’s in stocks have gotten no returns. The same thing is true for those who were told to treat their home as an investment, especially those who planned to shift to cheaper housing after retirement and use the gains from their former residence to live on.

    Then there is the stagnation in wages over the period and the decline in net worth due to the increasing amount of debt taken on to finance essentials like post-secondary education.

    We have already had one lost decade, what you need to be concerned about is whether we are aiming for two.

  2. Wasn’t a key point in Japan’s lost decade the fact that they weren’t growing demographically through either population growth or immigration? I would expect demographic growth in the US to push up GDP growth somewhat even in the event of a lost decade. I’ve heard some make the point about Japan that with a shrinking population they don’t need much or any GDP growth to improve their standard of living. It seems to me that a decade of no real GDP growth in the US would be much, much worse than Japan’s lost decade.

  3. Robert: Great, but scary point: “No need to wonder if we will be facing a lost decade we’re just finishing one up.”

    Tucker: I keep hearing that solution — increased population will force up the GDP. How long till that happens? What if it doesn’t?

  4. @ robertdfeinman, Tucker : using income metrics instead of ROI metrics we are finishing the third of three lost decades. That pattern has to be stopped, especially the disparity between income results and ROI results.

    No economy can support itself on ROI, income is primary, ROI is derivative. Policies directed toward enhancing ROI at the expense of income can suppress income and consumption, and have done so, until that part of the ROI side depending on consumption fails due to the failure of the ability of consumers to fund their purchases by incurring more debt.

    Then there are two outcomes possible:

    Concentration of real assets, with a focus on non-productive amenity assets (eg. water rich and sportsmen’s land in Patagonia, Paraguay, and Montana) and establishment of a permanently income poor underclass to provide serfices to the new lords, or

    Shifting the allocation of national income from investment to earned income.

    Capitalists, as opposed to feudalists, should favor the latter, despite the one time impacts it has on values of assets..

  5. I’m intensely curious to see what the Gini coefficient looks like in 2009, as well as the overall wealth distribution. I expect we’re in the middle of a vast concentration of wealth.

    I also expect this concentration is in the top 0.1%, while the top 5% (the upper middle class) is finally being introduced to the real impact of Bush-o-nomics.

    This is how Morgan and Carnegie made their money – welcome back to the Gilded Age.

  6. So apparently Geithner just gave an interview with PBS NewsHour — nationalizing irresponsible banks is apparently not in his deck: http://news.yahoo.com/s/nm/us_financial_geithner.

    I know Simon said on Bill Moyers that he was for intense FDIC intervention. By comparison, Geithner’s plan seems well short. It doesn’t even sound bold. According to NY Times, banks have 6 months to get private capital. If they don’t, we’re just going to give them more money with common stock. How does this work? If they need extreme amounts, don’t we just end up owning them anyway? If you ask me, this is a big gamble to put all of Obama’s agenda at stake for Geithner’s incremental plan.

    Am I missing something?

  7. Please have a look at Paul Craig Robert’s (former Assistant Secretary of the Treasury in the Reagan administration) recent words on the root causes of the crisis. This has been ignored for too long. Recapitalizing the banks will be an utter failure if we do not recognize that the root cause of the crisis that led Wall Street to for ways to make money playing Russian-Roulette was that there was no more value to be found in an outsourcing-oriented economy that was destroying its source of wealth for short-term and unsustainable profits:


    The trade deficit is the true issue. Until the US does everything it can to eliminate it, recapitalizing the banks will lead us to another crisis no more than two years later. For the financial system to be stable, the US needs a strong economy. That means the US must create a LOT OF JOBS.

    You are trading with the biggest protectionists of the past decades, and it is killing your economy.

  8. Given Petersen’s sponsorship, you and Simon do not have a great deal of immediate credibility when addressing Social Security. I fail to see why this well funded, self adjusting program that is the envy of most other modern western industrialized societies should be treated as a pressing problem and question why anyone other than an ideologue would spend time on it given the very real and immediate problem with medical care costs.

    You and Simon have some sound ideas and it would be unfortunate if your credibility were irreparably damaged by ideology.

  9. @Phil

    Here’s an easy way to deal with trade imbalances – devalue the currency. Only massive ForEx and debt holdings by the chinese govt. and soveriegn wealth funds has prevented this.

    The hardcore advocates of “free” trade contend that China is not buying our debt to keep the Yuan artifically low, but rather because China simply has an “appetite” for US debt.

    “Appetite” is the modern code word for “cannot be explained by economic theory”.

    Some countries have an appetite for wine, some for sushi, and some for holding 2 Trillion dollars in US foreign currency.

    But that said, we must not blame everything on trade barriers – India has relatively few trade barriers, but is a preferred location for oursourced jobs.

    Arguing that China is the root cause of all of our problems is self-serving. China is suffering too, and there are many causes.

  10. I agree China suffers too, but the reason is tied to the same reason the US is suffering:

    The cheap-goods for loss-of-jobs system is unsustainable:

    1- For every job that is lost in the US to China, a few Chinese workers get a new job: cheaper goods.

    2- For every job that lost in the US to China, a few Chinese workers lose their jobs: drop in demand.

    See what I mean? Unsustainable. The impact of this process has only be hidden because we were swimming in credit, which can keep the above system going for as long as credit flows. Once credit stopped flowing, the illusion came to an end, and now we see how unsustainable it is for both the US and China.

    The solution is better working conditions and salaries in China, so that an equilibrium can be reached, and forbid trade with countries that seek to keep the working class’ salaries and working conditions excessively low for the benefit of their GDP.

  11. This is my first visit to this blog (I don’t visit blogs much); I must say that the quality of dialogue here is excellent. I hope my contributions are of the same quality.

    All of the comments above seem, in one sense or another, accurate and correct–you’re all right. A Japanese economist noted on NPR, yesterday, that this recession is a “balance sheet” recession. Until we fix our balance sheet, we’ll be in recession. Robert’s comment flags the signs along the road to where we are. Jim’s comment points to a critical part of the solution. We leverage up to improve ROI, but, we also increase risk and divert otherwise productive income to debt service. Fixing your balance sheet isn’t about improving ROI, it’s about improving income, investing cash flow productively and, eventually, paying down debt. Note that income growth and productive investment must precede debt repayment or the “enterprise” is liquidated. Fortunately, we’re talking about a sovereign nation with the capacity to tax its population and print money (so to speak). The investment part of the solution is available. Redistributing income out of financial assets into productive assets (such as the population via education, science and training) is also available through taxation and fiscal policy as well as through regulation that will help improve decision-making by reducing or eliminating critical information asymmetries and by balancing market power in such markets as labor and, again, information. If our trading partners among the developing nations invest similarly, we can all lift ourselves out of this recession.

  12. What indication is there that his talk about financial prudence is anything more than talk? As far as I can see, the Fed is going to have to monetize about $1T in debt this year and the same the next year and so on.

    What if the Obama Administration doesn’t care about the economy at all? From what I can see, their priorities are income equality followed by global warming with everything else a distant third.

    It’s not like they don’t know what will happen to foreign investors when they have to print $1T+ to cover the debt.

    Would you buy stock in a company that issues an endless stream of shares?

  13. I’d say K T Cat has it right. Enough “credible” economists are giving spendthrift politicians cover to spend as they’ve always wanted to but never been able to. This “economic advice” is irresponsible and nothing more than social policy masquerading as economic stimulus.

    Giving politicians in Washington (and around the globe) further license to spend is like putting an alcoholic in a liquor store and telling him to go to it – you’ll be back in a few years to get him into rehab before he dies / you’ll be back with more insidious advice in a few years to inflate away and hurt everyone even more.

    Term limits would force politicians to live with the consequences of their decisions. It’s the long term answer. If we continue to spend and deter growth as we appear to be doing now, the short term pain will last much longer term than it should.

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