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Fri September 9, 2011
Obama, Nation In Uncharted Economic Territory, Jobs Plan Or Not
Originally published on Fri September 9, 2011 1:23 pm
One of the most unsettling truths facing President Obama and the nation is that there really was little precedent in modern history for the financial crisis that hit the globe in 2007 and continues.
As economists Carmen Reinhart and Kenneth Rogoff note in "This Time Is Different: Eight Centuries of Financial Folly," their examination of economic crises going back eight centuries:
The most recent financial crisis — which we have termed the "Second Great Contraction" is clearly the only global financial crisis that has occurred during the post-World War II period. Even if the Second Great Contraction does not evolve into the Second Great Depression, it still surpasses other turbulent episodes, including the breakdown of Bretton Woods, the first oil shock, the debt crisis of the 1980s in the developing world, and the now famous Asian crisis of 1997-1998.
And because the most recent recession was caused by a banking crisis and not, say, soaring oil prices, it takes an economy on average a decade to return to its pre-crisis growth levels, Reinhart and Rogoff write.
So such crises are long, deep and painful. And this one is aggravated by the relatively huge debt burdens weighing down many consumers.
That, combined with anxieties about job security or joblessness itself, have made consumers reluctant to spend, which reduces demand and contributes to further resistance by employers to hire, creating a vicious cycle.
But what president wants to tell Americans all the downbeat facts, especially since he has to be concerned about what we can call the paradox of confidence?
If a president were to constantly present Americans with such gloom, that could destroy the very confidence needed for consumers to spend money again. He'd be accused of being the second coming of Jimmy Carter giving a malaise speech.
Presidents are elected to act in crises. Thus Obama opened up the fiscal toolkit in 2009 and got passed a stimulus package put at $830 billion by the Congressional Budget Office, spending constantly derided by Republicans as an ineffectual addition to the national debt.
And on Thursday night during his speech to a joint session of Congress, he offered another stimulus, though he didn't call it that, a jobs plan of around $450 billion.
But here's the rub. The situation the U.S. now faces is so rare, fortunately, that there really isn't much experience to go on when it comes to the effectiveness of stimulus in such situations.
Economist Mark Zandi estimates the president's plan could create 1.9 million jobs. Others come in lower. With the jobless rate at 9.1 percent and an estimated 14 million people who want to work unable to find jobs, something clearly has to be done.
Still, as William Galston at the Brookings Institution writes in response to the president's jobs plan, there could be a mismatch between the disease and Obama's proposed cure:
... Mr. Obama continues to rely on a diagnosis of America's economic woes that misses the heart of the matter. If financial crises really are different from cyclical downturns – as economists Kenneth Rogoff and Carmen Reinhart have argued – then traditional demand-side policy responses are palliatives rather than cures. (So are the supply-side tax cuts at the heart of contemporary conservative economics.)
If the epicenter of the current stagnation is excessive household debt, which more than doubled as a share of household income between 1982 and 2007, then we face a choice: Either we wait for deleveraging to occur on its own – a slow, painful process that will take another five years – or we can work to accelerate it by attacking household debt at its core. That would mean pressing creditors for reductions in principal amounts as well as interest rates mortgage debtors must pay – a step the administration has thus far rejected.
It's easy to explain why the administration has mostly declined to go in this direction. Pushing to restructure household debts in this way is a fairly radical idea that would face scorching resistance by creditors, Wall Street, many in Congress and millions of Americans with relatively clean balance sheets.
Still, as the president started traveling the nation, visiting Richmond on Friday, to drum up voter support for his jobs plan, his efforts occurred against the backdrop that we're all in this relatively uncharted territory together.