Days of Fear, Years of Obstruction

Via:  bob-nelson  •  10 months ago  •  8 comments

Days of Fear, Years of Obstruction
Why did the slump last so long? ..... Cynical, bad-faith Republican politics.

S E E D E D   C O N T E N T

merlin_62407844_35aece72c81343a3a2a3b459f2582c13superJumbo1.jpgJob seekers in line to meet prospective employers in New York in 2012.     Mike Segar/ReutersLehman

Brothers failed 10 years ago. The U.S. economy was already in a recession, but Lehman’s fall and the chaos that followed sent it off a cliff: Six and a half million jobs would be lost over the next year. It was a terrifying time.

Still, we didn’t experience a full replay of the Great Depression, and some have argued that the system worked, in the sense that policymakers did what was needed to avoid catastrophe.

But this is only half right. We avoided utter disaster, but nonetheless experienced a huge, sustained employment slump, one that inflicted immense human and economic cost — and may well have helped set the stage for our current constitutional crisis. Why did the slump go on so long?

There are multiple answers, but the most important factor was politics — cynical, bad-faith obstructionism on the part of the Republican Party.

One crucial point I still don’t think is widely understood is that, scary and damaging though it was, the financial crisis — the disruption of credit markets that followed Lehman’s collapse — was quite brief. Measures of financial stress, which include things like interest rate spreads on risky assets, spiked for a few months, but quickly returned to normal. The purely financial aspect of the crisis was basically over by the summer of 2009.

But the broader economic crisis went on much longer. Unemployment rose to almost 10 percent, then came down with painful slowness; it didn’t get back to 5 percent until seven years after Lehman’s fall. Why didn’t rapid financial recovery lead to rapid economic recovery?

At a basic level, the answer is that the financial crisis was only one symptom of a bigger problem: the collapse of a gigantic housing bubble. The bursting bubble exerted a powerful downdraft on the economy, both because it led to a plunge in residential investment and because it was a huge hit to household wealth, which reduced consumer spending.

What the crisis called for, then, were policies to boost spending, to offset the effects of the housing bust. But the normal response, cutting interest rates, wasn’t available, because rates were already near zero. What we needed, instead, was fiscal stimulus: increased government outlays and tax cuts for lower- and middle-income families, who would be likely to spend them.

And we did indeed get substantial stimulus. But it wasn’t big enough, and even more important, it faded out much too fast. By 2013, with unemployment still above 7 percent, government at all levels was providing barely more economic support than it had in 2007, when the housing boom was still running strong.

Why did the response to a depressed economy fall short? We can debate endlessly whether the Obama administration could have gotten a bigger, more sustained stimulus through Congress; what’s clear is that some officials failed to see the need for stronger policies. When Christina Romer, the administration’s top economist, argued for more stimulus, Tim Geithner, the Treasury secretary, dismissed it as “sugar.”

Beyond that, efforts to fight unemployment had to deal with a bizarre Beltway consensus that despite high unemployment and record low interest rates, debt, not jobs, was the real problem.

But the most important reason the great slump went on so long was scorched-earth Republican opposition to anything and everything that might have helped offset the fallout from the housing bust.

When I say “scorched earth,” I’m not being hyperbolic. Let’s not forget that in the summer of 2011 Republicans in Congress threatened to provoke a new financial crisis by refusing to raise the debt limit. Their goal was to blackmail President Barack Obama into cutting spending at a time when unemployment was still 9 percent and U.S. real borrowing costs were close to zero.

Now, Republicans claimed that their opposition to anything that might limit mass unemployment was driven by a deep commitment to fiscal responsibility. But this was complete hypocrisy — something that was obvious to anyone who looked at the actual content of G.O.P. budget proposals, which gave smoke and mirrors a bad name. You had to be extremely credulous to take fake G.O.P. deficit hawkery seriously; unfortunately, there were a lot of credulous pundits out there.

Anyway, the events of the past two years have made the reality of what happened crystal clear. The very same politicians who piously declared that America couldn’t afford to spend money supporting jobs in the face of a deep, prolonged slump just rammed through a huge, deficit-exploding tax cut for corporations and the wealthy even though the economy is currently near full employment. No, they haven’t abandoned their commitment to fiscal responsibility; they never cared about deficits in the first place.

So if you want to understand why the great slump that began in 2008 went on so long, blighting so many American lives, the answer is politics. Specifically, policy failed because cynical, bad-faith Republicans were willing to sacrifice millions of jobs rather than let anything good happen to the economy while a Democrat sat in the White House.

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography.

CoC Rule

4. Stay on topic per the article


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Bob Nelson
1  seeder  Bob Nelson    10 months ago

The topic here is the post-2008 economic slump, and why it took so long for it to end.

Krugman documents his position in detail - that's what all those links are there for.

I hope that all NT Moderators will enforce respect of Rule N° 4 of the CoC: Stay on topic per the article.

Sean Treacy
2  Sean Treacy    10 months ago

Barack Obama and the Democrats could have done literally anything they wanted to "help" the economy without a single Republican vote.   You name it, Republicans were powerless to stop any policy Democrats put forward. No party in generations had as much control of Congress and the Executive as the Democrats did between 2009-2011.  That was the key period and that's where the failure occurred. 

It was Obama and the Democrats, and Obama and the Democrats fault alone, for somehow mismanaging what should have been a booming recovery.

A. Macarthur
2.1  A. Macarthur  replied to  Sean Treacy @2    10 months ago

Possibly you missed the recovery during the Obama years, Sean. Where was the Dow in Bush’s last year of being office ... check the graphs showing the jobs numbers before and during Obama ... if you don’t post the specifics by tonight at sunset, when I get off the Trout streams, I will.

I am aware of the bullshit right wing faux righteous indignation making the rounds claiming so-called Obama-audacity for his taking credit for his part in the economic recovery. Reality, Sean, Trump is riding that Obama momentum ... and Trump’s tax cuts will ultimately hurt the working person as corporations use those cuts to buy back their own stock shares.

See you at sundown.

Sean Treacy
2.1.1  Sean Treacy  replied to  A. Macarthur @2.1    10 months ago
Possibly you missed the recovery during the Obama years,

Maybe you didn't read the article. The topic is why the "recovery" was historically terrible.  If you want to claim, against all evidence, that the recovery was robust, take it up with Krugman. 

3  WallyW    10 months ago

Please explain to us again exactly what Obama did to take credit for. Was it the stimulus, or the QE, or what? We await your expert opinions, hopefully in normal fonts. It amounted to the most anemic recovery in history

Bob Nelson
4  seeder  Bob Nelson    10 months ago

Presidents, regardless of party, usually have very little impact on the economy. The Fed does.

Obama got a Stimulus, but too small and too indirect. Otherwise, he let the Fed do its job, and Trump did the same.

The problems that I see are not strictly economic, but social. Krugman wrote some years ago that the economy could work quite well with a very few rich people and a lot of poor people, and no one in between. That's where America is headed.

Krugman is complaining about the harm caused to ordinary people. We have a DOW at record levels, and a GDP that looks just fine.

We also have stagnant wages. That's why the average family income is hardly better than it was ten years ago...

Dean Moriarty
4.1  Dean Moriarty  replied to  Bob Nelson @4    10 months ago

That's not where America is headed. The middle class is shrinking because more people are moving up the ladder. Not very few rich people the reality is many rich people.

4.2  Sunshine  replied to  Bob Nelson @4    10 months ago
We also have stagnant wages. That's why the average family income is hardly better than it was ten years ago...

It has made good gains under Trump in one year.

President Donald Trump's first full year in office saw gains that easily outdistanced any year for his predecessor, Barack Obama, whose best showing was the 2.2 percent increases in 2016 and 2014. Six of Obama's eight years in office saw gains of 2 percent or less.

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