Mike Konczal on 2011: The Lost Year for Obama Economic Policy
Mike Konczal:
The Lost Year on Economic Recovery: Starting in late 2009, the Obama administration started framing our economic crisis as a “dual deficit problem”… the administration wouldn’t push for a larger short-term deficit—spending more money to stimulate the weak economy, a key tenet of Keynesian economics—without also cutting the long-term deficit. Treasury officials told a reporter at The New Republic that the administration needed to show “some signal to US bondholders that it takes the deficit seriously” and that “spending more money now [on stimulus] could actually raise long-term [government] rates, thereby offsetting its stimulative effect.”… By buying into the now-conventional wisdom that it was economically unsound to grow short-term deficits without simultaneously decreasing long-term deficits, long-term deficit reduction was turned into a co-equal problem of economic woes. This is like a doctor telling a patient suffering from multiple gunshot wounds that he should have a healthier diet—it might be true, but there’s a much more pressing problem.
Want an example? In the 2010 State of the Union address, President Obama stated that he would freeze 2011 discretionary spending even though unemployment was projected to be above 8 percent, because, he said, if “we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery,” which “would have an even worse effect on our job growth and family incomes.” This conventional wisdom gave the Republicans the leverage they needed to destroy any pro-active economic agenda.
So the administration spent much of 2011 engaging in the wrong analysis of the economy, one that looked like that of the far right. Early in the year the administration brought in new advisers, notably Bill Daley as chief of staff, in order to repair relationships with business in the wake of financial reform. This incorrectly diagnosed the problem as a liberal government beating up on unappreciated job creators, instead of weak income and mass unemployment among workers….
Thus the Democrats spent 2011—which could have been a crucial year for the recovery—in a futile debate with the Republicans over the budget. From the original government shutdown in April to the debt ceiling fights in July, Republicans showed that they were capable of making even the most trivial changes to the budget costly to the Democrats. As time went on the administration became ever more willing to make huge concessions to get a deal and restart the economy, and each time was left at the table. When a ratings agency downgraded federal government debt, it wasn’t because of the long-term deficit but instead over this political gridlock….
In the midst of collapsing prices, President Franklin Roosevelt in a fireside chat in 1933 announced that “it is the Government’s policy to restore the price level first”—a signal to the markets that the New Deal was going to take monetary policy very seriously. President Obama has shown less interest in monetary policy, reappointing the moderate Republican Ben Bernanke to office and leaving seats open for years. Leaving vacant seats across the judiciary and in key regulatory agencies such as the Consumer Financial Protection Bureau, Obama’s lack of movement on recess appointments has left the Fed tilted to the right. Since the other people that sit on the Federal Reserve are hardline conservatives appointed by banks, getting people concerned about unemployment there is even more important….
The third important element of the recovery is restoring the housing sector. The burst of the housing bubble has left a quarter of all mortgages underwater and millions of foreclosures hitting every part of the country…. The most obvious way to deal with this is to allow courts to write down mortgage debt in bankruptcy, but the Obama administration passed on requiring bankruptcy modification, or “cramdown,” as part of the bailout…. The administration could have pushed hard on investigating the foreclosure market. Instead they pushed for quick settlement with the largest banks engineered by several attorneys general….
In 1938, shortly after premature fiscal and monetary tightening triggered a recession, the economist John Manyard Keynes wrote a worried letter to President Roosevelt. He was, he wrote:
terrified lest progressive causes in all the democratic countries should suffer injury, because you have taken too lightly the risk to their prestige which would result from a failure measured in terms of immediate prosperity. There need be no failure. But the maintenance of prosperity in the modern world is extremely difficult; and it is so easy to lose precious time.
