It is troubling, in the midst of an election campaign, to read books about our recent and continuing economic disaster. Certainly Nobel laureates Paul Krugman (End This Depression Now) and Charles Stiglitz (Free Fall) would prefer our current President to a guy who thinks that 14% is an obscenely high tax rate for a guy making only $25M a year, whose running mate spent 2011 trying to sabotage the recovery, but they remind us disturbingly of why Obama’s first years in office were so disappointing.
Krugman is a Keynesian, which is to say he believes in the importance of demand. In 2008, as in 1930, many people found themselves under water and unable to buy anything, while their creditors, afraid they wouldn’t see their money again, also decided to tighten their belts. But while belt-tightening might be a good idea for one person, it cannot work for everybody at the same time, because every dollar someone earns is a dollar that someone else spends: if nobody is spending, then nobody is earning. Companies that find no demand for their products lay off workers, and the laid-off workers then have no money to spend, which means fewer customers for other companies, in a downward spiral. To break the cycle, somebody has to spend some money.
The usual response is to pump money into the banking system, and rely on the banks to lend it out, but in the current crisis this failed Interest rates fell to near zero, and still the banks were not lending out the money. At this point, according to Keynesians, the government has to be the demand-creator of last resort, and the response must be of a size commensurate with the shortfall in the private economy. The best evidence for this theory comes from the Great Depression, when not only the US but each major European power began to recover when it entered the furious arms race that led up to WWII.
There were some in the Obama administration who advocated such a bold stimulus, such as Christina Rohmer (sp?), but most of Obama’s top economic advisors were either Bush-era holdovers like Tim Geithner or people from the conservative end of the Clinton admin, and the President ended up offering a package which, while much better than nothing, was too small to have the desired effect and also relied too much on tax cuts, which are a less effective stimulus if people are too worried to spend the extra money. Obama thought that if the first package proved insufficient, he could ask for a second package, but of course that’s not how it works. Instead, it became the “failed stimulus,” and in the backlash, we had a year of pointless and destructive deficit hand-wringing, which Obama somehow let himself get sucked into. Krugman still thinks there is hope for a real stimulus program, but I suspect that ship has sailed.
Stiglitz’s book is way more depressing; I haven’t finished it yet, but the early chapters tell the story of,.how the Great Depression led to banking rules that kept the financial system stable for many years until they were stripped away under Reagan and Clinton. According to Stiglitz, whenever he or Robert Reich argued for the interests of ordinary Americans as opposed to giant financial institutions, the Wall Street insiders in the Clinton admin, such as Robert Rubin, would accuse them of class warfare. Despite the warnings of party-poopers like Stiglitz, it could be argued that the financial system hadn’t collapsed yet, though the “prosperity” it supposedly enabled consisted mostly of the very rich getting very richer.
Once the pyramid of credit default swaps and other securitized shell games came crashing down, dragging the world economy with them, you’d think the game would be up. Surely a new administration, coming in at the height of the crisis, would start afresh. But no, Obama appointed insiders whose first priority was to safeguard the bonuses of the con men at AIG and Citibank, and to avoid asking that the taxpayers get anything in return for their $700 billion welfare check, ‘cause you know that would somehow be a violation of the sanctity of capitalism or something. I’m sure Larry Sommers and his buddies were sincere in their conviction that the sky would fall if Wall Street billionaires were inconvenienced; I think they managed to convince Obama to fear the reaction if they were antagonized. Really, though, it is the people who created this disaster who should have been afraid of us, not the other way round.
Perhaps the more populist rhetoric of this campaign means that Obama, if elected, will try to wean himself from the mesmeric dominance of hedge-fund managers and similar parasites. I am not holding my breath.
Both Krugman and Stiglitz combat the theory, popular among right-wing think-tankers, that the crisis was caused by the government encouraging and/or facilitating loans to poor people and minorities, rather than by predatory lenders and those who repackaged their toxic mortgages so as to conceal their riskiness. In fact, the quasi-governmental mortgages with the cute names were on the sidelines for most of the derivatives shenanigans. Also, the collapse was not centered on the places where poor people live, but was felt at least as much in the booming suburbs of Florida and Nevada, and in the commercial real-estate sector. If the conservatives cannot bring themselves to recognize that sometimes markets fail to police themselves, they could at least find a new scapegoat; we’ve picked on poor and dark-skinned people enough already.