Seven Points on the Economy
1. The most important short-term problem is jobs. The human and social costs of unemployment are crippling – you stay poorer for a far longer time, your health is worse, you die younger, your children do worse in school, your family is more likely to break up, you are more likely to fall into poverty, you lose your trust in public institutions, and the social bonds that knit communities together dissipate. During this recession, unemployment spiked, and it hasn’t really fallen. This is a jobless recovery, quite different from the trajectory of past recoveries. There are a number of reasons for this. First, demand is still in a slump, and so firms are not producing. This is not too surprising in the aftermath of a major collapse in housing and financial markets. Second, the sorry state of the housing market is inhibiting mobility – it has become much harder to follow the jobs. So clearly, fixing the problems in the housing market is a priority. Other policies include direct hiring subsidies, payroll tax holidays, or a spurt of labor-intensive public investment in needed infrastructure. Sadly, none of these items are on the agenda. Instead of being the most important policy challenge, it is being ignored.
2. The fiscal deficit is not the central short-term problem. The debate here is so incredibly skewed. Despite popular conceptions, there has been no burst in spending. The current deficit arises primarily from the collapse in revenue that came with a recession of this magnitude. What happened was perfectly predictable. The problem was that the starting point was too weak, and this was caused mainly by the Bush tax cuts and military adventurism. Simply restore the tax rates to those of the Clinton years (boom times!) and cut back on military spending, the there is no longer a deficit problem. The real issue is that the Republicans are using the current enormous deficit to push through a radical social agenda of paring back state involvement in social spending (and yes, social spending seems all they care about cutting), and continuing to reward the wealthy is risky tax cuts.
3. Health care costs are a key long-term problem. We hear about this mainly from the budget side, where the main fiscal challenge will be rising health care costs (not social security). But this is a primarily a private sector problem, where costs are rising a lot faster (and have been for 30 years or more). Simply shifting health care off the government balance sheet will not solve the problem – in fact, it will only make it worse, as we saw with the CBO’s assessment of the Ryan plan. Like it or not, Medicare is cheaper than private alternatives as it can bargain down prices and keep overhead costs at a minimum. So the best way to control long-term costs is a single payer system. The second best way is to rely on the private sector – twinning an individual mandate, some form of community rating, and subsidies to make everything affordable. In other words, the Affordable Care Act. Of course, there is still some way to go on cost control.
4. Poverty and the lack of health care is a scandal. The United States has some of the highest poverty rates, and the most marginalized and economically vulnerable people among the advanced economies. As we learned during the Great Recession, social safety nets are inadequate. Poverty rates, homelessness, and uninsurance rates jumped up dramatically. This human misery is simply unacceptable in a country of such wealth. There is a direct correlation between poverty rates and social spending. Ane while the Affordable Care Act goes a long way toward universal coverage, its full implementation is still many difficult years down the road.
5. Inequality is the leading long-term economic problem. The facts are by now all-too familiar. Over the past quarter century, the share of income going to the very rich (top 1 percent or less) has skyrocketed, while real median wages have stagnated. Rising inequality is bad for the economy, bad for stability, and bad for cohesion. We need policies to make sure that, once again, the dividends of growth accrue to the entire population, not just the top. It used to be that way, and it must be again. Key policies include investment in education, a restoration of collective bargaining rights, re-regulation of the financial sector, and a return to a more progressive tax system.
6. The financial sector still threatens stability. As we saw during the Great Recession, a run-away financial sector has the ability to bring down the entire global economy. A key problem is a violation of subsidiarity – financial firms are too big, which makes them too dangerous. Their huge size leads them take too many dangerous risks (the “too-big-to-fail” moral hazard problem), allows them to corrupt the political system, and encourages them to seek maximum personal profit instead of serving the real economy by bringing together savers and borrowers. The answer is greater regulation, and a break-up of the Wall Street firms, which are now larger and more dangerous than ever. It is only a matter of time before this volcano erupts again…
7. The United States must invest in the future. The future economy needs green investment, new infrastructure, and high-speed trains. It most certainly does not need more incentives to invest in oil and gas. Other countries are already far ahead of the United States here. Americans must also accept that they can no longer over-consume energy. The era of MacMansions and SUVs must end. It is time to put a price on carbon, either by taxation or cap-and-trade.
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Great post, MM. I would add an addendum to point 5 – namely, that the increasing wealth at the top has allowed the wealthy to rig the whole game in their favor.
The most important short-term problem is jobs.
I agree completely. President Obama’s abdication on this issue is frankly stupefying. Waiting forever to even nominate anyone to fill the open Fed seats when unemployment is near double digits and the economy is flirting with deflation is not only contrary to the nation’s interest, it’s contrary to Obama’s political self-interest.
Ummmm….you have Senate Republicans saying they will fillibuster sight-unseen the President’s nominees for key financial agencies. The President is in the sad situation of having to work very strategicly to overcome the near-treasonous tactics of what once was the loyal opposition and now seems to be an element working for our nation’s economic downfall.
Kurt,
Obama didn’t nominate anyone to fill the Fed vacancies until April of 2010. Two of his three nominees were unanimously confirmed in September of 2010. Peter Diamond’s nomination was held up on spurious grounds (although technically he *was* ineligible for the post) and was withdrawn. I don’t believe Obama has even nominated a replacement.
What are your thoughts on the unusual job growth in Texas?
oil and oil services.
Explicated further here: http://www.star-telegram.com/2011/06/14/3152456/story-of-texas-job-growth-not.html
Oil, cheap land, and myth:
http://krugman.blogs.nytimes.com/2011/01/05/texas-update/
Let’s also remember some of the lowest spending on education and one of the highest uninsurance rates.
The interesting correllary to Krugman’s datum that TX unemployment is about the same as NY unemployment, despite half the net job creation in the country being in Texas, is that this indicates the extent to which more people are going to Texas.
I can speak to the education spending issue. In the 1990s Texas adopted the “Robin Hood Plan” for school funding whereby school districts with “excess wealth” were required to give a portion of there property tax revenues to poorer school districts until all were equal.
The result, predictably, was a collapse in the tax base for education spending.
So when MM condemns Texas for its poor education spending, he is really condemning it for putting Obama’s “spread the wealth around” philosophy into practice (in their defense, the Robin Hood Plan was more or less forced on the Texas legislature by the courts).
Austin has had a booming tech sector which is responsible for a lot of growth (economic and population). Not sure how much of the overall state job growth this is responsible for.
FWIW, it’s perhaps an interesting gauge of what does and does not divide our country that I’d agree with just about all your bold italics (though I’d question the extent to which 3 and 4 are solvable) while disagreeing with probably the majority of what you say after each of those statements.
1. I probably agree with your prescriptions the most, though I’d question the realism of trying to “fix” the housing market, at least to the extent that what a lot of people seem to mean in this regard is basically re-inflate the bubble just a big rather than allowing the prices to finish adjusting.
On something like 6, I have the same fears but almost the opposite reaction in regards to policy: It seems to me that if the Obama administration has taught us anything it is that trying to regulate the financial sector more will just result in more regulatory capture and crony capitalism.
On 6, I’d agree on dropping subsidies for oil and gas, but think we should avoid them for “green” energy, high speed rail, and all the other urbanite toy projects as well. The aspect of the future that most needs to be invested in in the US is our future generations, which means everything from mending out culture, stablizing the institution of marriage, and vastly improving our public education — that last perhaps requiring quite radical change to how we think about public education as a “system”.
The last paragraph applies to 7 not 6.
Darwin, I had the same reaction more or less. But I think you gave the wrong reason for it. It’s not about the national divide. It’s simply a matter of (a) the headings being very broad, and (b) the analyses under the headings being unsubstantiated. I don’t say that to be mean; there’s just no A-B-C in them, and that allows error to creep in.
As to #6, financial markets always provide greater stability with an increased possibility of disaster. Always. It’s like Godel’s theorem – no system can be created that is completely protected from risk, tulips or T-bills.
FWIW, it’s perhaps an interesting gauge of what does and does not divide our country that I’d agree with just about all your bold italics.
Me too, though I wonder what the alternative to #7 would be (investing in the past?)
1. Fixing the housing market does not mean re-flating bubbles. It removes removing struggling homeowners from the burden of debt. We can all play the game of righteous Calvinist self-responsibility, but (yet again), this approach is bad for the economy. If we can bail out banks from the consequences of leverage, why not households?
2. How can you argue that the Obama administration’s attempts to regulate the financial sector makes things worse? The issue is that the financial sector is so dominant financially, that no politician dares to cross it (no surprise that Wall Street made all kinds of promises to Republicans who voted for gay marriage in New York). From my perspective, Dodd-Frank is too timid, but by no means toothless. And the capital requirements from Basel 3 will bite. It’s appalling that nothing has been done to arrest the too-big-to-fail problem. I would have taken the “Iceland solution” – taken over all the big banks, fired the management, broken them up, and re-launched them as smaller and safer entities. But could you imgaine the tea party nuttery in response to this?
1. I tend to think we shouldn’t bail out either — but I do tend to favor easy bankruptcy. Those households that truly need writedowns are generally in such incredibly bad shape from a leverage point of view that bankruptcy rather than writedown is probably the right answer. (While in a “Calvinist” society, may suggest some sort of moral taint, the whole point of the easy bankruptcy laws that the US has always had — compared to places like the UK — is to allow people to start over after financial mistakes.)
2. Looking back, I think “too big to fail” was mainly a self serving fiction, on the part of the banks that didn’t want to suffer for their mistakes and the regulators who thought they’d gain power through coming to the rescue. While at the time I was tentatively in the “it’s worth a few hundred billion in case they’re right” camp (and I don’t think it was the worse thing we ever did — it certainly made more sense than bailing out the auto companies) I think the best solution would have been to cut the banks down to size by letting the shaky ones go down.
I hadn’t realized, from your previous writing, that you were so sanguine about Dodd-Frank. My friends who are afficianados of The Nation and Mother Jones have been bombarding me for months with articles about how Obama has turned out to be a crypto-Republican in relation to Wall Street, and from his actions thus far I’d tend to agree in most respects. If people want Wall Street to have less power, it seems to me that libertarianism rather than progressivism is probably called for, as it seems pretty clear that the people heading up Treasury and the regulatory agencies will usually be Goldman Sachs alumni and similarly connected types. Somehow, though, the progressive idea always seems to be that if someone would only give them enough power they could tame the beast rather than being carried off by it once they got on its back.