Blog on the Run: Reloaded

Tuesday, June 19, 2012 8:04 pm

Dean Baker sums up our economic, political and journalistic problems in three short paragraphs


Dana Milbank devoted his [Washington Post] column to the disenchantment of progressives with the current political situation. At one point he comments that “the still-lumbering economy has depressed President Obama’s supporters.”

While this is no doubt true, it is worth mentioning that just about all progressives said at the time that the stimulus would be inadequate to restore the economy to a healthy growth path. The collapse of the housing bubble destroyed close to $1.2 trillion in annual demand from construction and consumption. At its peak in 2009 and 2010 the stimulus only replaced about $300 billion in annual spending.

It is discouraging to see so many people suffering unnecessarily, but this outcome is exactly what our analysis predicted at the time. Unfortunately, having a track record of being right is not generally a factor in determining which views carry weight in Washington policy debates.

Somebody tell me again how the U.S. is a meritocracy. Or, as Driftglass famously observed:


  1. SOS–t Different year from the LEFT,

    “That’s all we’ve got “. Chortle

    What a scuzz ball

    Comment by Fred Gregory — Tuesday, June 19, 2012 11:57 pm @ 11:57 pm

  2. Is this an honest statement?:

    The collapse of the housing bubble destroyed close to $1.2 trillion in annual demand from construction and consumption. At its peak in 2009 and 2010 the stimulus only replaced about $300 billion in annual spending.

    Acutely focusing on the $300 billion stimulus while ignoring the full amount expenditures results in Milbanks obtuse observations.

    What if the bailouts/stimulus and other government expenditures (not including automatic stabilizers like unemployment or the QE’s) totaled closer to $13 trillion as PBS states they do? In fact they do. We have easily spent ten times the amount of economic destruction of 1.2 trillion, far more than any liberal or any Keynesian called for, with dismal results. They were wrong and that should be reflected in policy debates.

    Comment by Jeri Johnson — Wednesday, June 20, 2012 6:02 am @ 6:02 am

  3. Bank bailout money did little to address the primary problem, lack of consumer demand, because rather than using the money to write down mortgages, banks used it to go to the casino and boost their CEOs’ bonuses – exactly the outcome Baker and others (including me) foresaw when the bailouts were approved with no strings attached. The stimulus also was weighted far too heavily toward tax breaks rather than direct spending on job creation. The latter is much more effective at stimulating demand.

    Comment by Lex — Wednesday, June 20, 2012 7:21 am @ 7:21 am

  4. It is interesting that consumer demand is referenced as a problem when it is simply the result of a choice between engaging in economic activity at an inflated price point or not.

    Dumping $13 trillion dollars into the private economy does nothing to address that choice (regardless of where those dollars might flow) in that such action supports an inflated price point beyond which consumers feel comfortable.

    Until prices fall to expectation consumers will choose against consumption.

    That is what was learned from the past 5 years. That is what was learned from the Japanese perma-recession and what was learned from the Great Depression.

    Liberals arrogantly chose to ignore it.

    Comment by Jeri Johnson — Wednesday, June 20, 2012 8:55 am @ 8:55 am

    • Did you misread what I wrote, or are you simply illiterate? Almost none of that $13 trillion made it into the consumer marketplace. And inasmuch as consumer spending is between 65 and 70 percent of GDP, that’s kind of a serious problem.

      Consumer spending isn’t down only because prices are “too high.” It’s down because so many people are out of work, and have been out of work for so long, that they’re forgoing a lot of purchases at ANY price. This is not a “liberal” viewpoint; it is a simple fact on which all but the craziest and most corrupt economists agree. And what was learned from the Great Depression is that when you’re caught in a liquidity trap, as our economy currently is, increased government spending is the only way out. Consumer spending can’t help you, and business won’t. (U.S. corporations are sitting on a couple of trillion in cash right now NOT because prices are too high, NOT because of “regulatory uncertainty,” but BECAUSE PEOPLE AREN’T BUYING STUFF BECAUSE THEY’VE GOT NO JOBS AND NO MONEY. AND YES, I AM SHOUTING BECAUSE THIS IS A SIMPLE FACT THAT YOU ARE TRYING TO IGNORE THE WAY A GUY WHO WALKS OFF THE TOP OF A BUILDING IS IGNORING GRAVITY. And what was further learned in the Great Depression is that if you cut back too soon on that government spending, as we did in 1937 because of concerns about the deficit, you kill job creation all over again. We’rer seeing that happen in Greece and Ireland and the UK (which has officially entered a double-dip recession), and if Congress doesn’t wake the hell up pretty quickly, we’re going to see it here, too.

      Look, dude, even Alan Greenspan now admits he didn’t know what in the pluperfect hell he was talking about. How ’bout we follow the advice of Krugman, DeLong, Baker et al. — you know, the people who were correct?

      Comment by Lex — Wednesday, June 20, 2012 11:20 am @ 11:20 am

  5. Let’s posit that you are smarter than I am and pretend you’re an adult.

    It is not a fact that people are foregoing purchases “at any price”. It that were the case there would be no point in putting money in their hands, as they would not spend it. The fact is that there is a price at which people will buy, but prices have not been allowed to fall to that point due to an irrational fear of deflation.

    What we learned from the Great Depression is that increased government spending 50% under Hoover and another 30% under Roosevelt failed to solve the recession of the early 1930’s and actually lead to a second recession in 1937 at which point the recession earned the name The Great Depression.

    As to the nonsense that people are not spending because they’ve got no jobs and no money, let’s assume unemployment is 8.0%. That means that 92% of those who want jobs have jobs and, hence, money. This is obvious. It is also obvious that if prices are allowed to fall to the point at which those individuals who do have jobs and money will buy then actual, real economic growth can begin. It is at this point demand for work and jobs increases. Supporting bubble economy prices hinders this process and not only increases the length of recessions as exemplified by Japan’s experience from 1990 to present, but increases the likelihood of a recession within a recession as exemplified by the Great Depression.

    As for corporations, they will sit on their reserves in preparation for genuine expansion, an expansion that will only begin when prices have normalized, when the bubble has passed, and when consumers are prepared to spend. Keynesian solutions, though, hinder this process by artificially inflating prices. Again, this is obvious.

    We can see this detrimental process played out across Europe today by comparing nations that chose increased spending or feigned cuts in combination with tax increases against to those nations that chose actual cuts in government. This graph makes obvious what is denied by those not wedded to Keynesian ideology. Debt is detrimental to growth and weakens the long term health of nations. By contrast debt avoidance and cuts to government lead to economic health and vitality.

    Comment by Jeri Johnson — Wednesday, June 20, 2012 9:33 pm @ 9:33 pm

  6. I’ve got a better idea: Let’s posit that I’m not necessarily all that smart but that I live in the real world.

    In the real world, nominal unemployment (that is, the “official” rate) was 8.2 percent in May, but it was only that low because a bunch of people have stopped looking for work. In the real world, unemployment is more like 10%-plus, and unemployment plus underemployment (people who seek full-time jobs but can’t find them) is about 17 percent. In the real world, payroll grew by 69,000 jobs in May, less than half the number needed simply to keep pace with routine growth in the labor force.

    In the real world, people who have been unemployed for six months or more make up almost half of all the “officially” unemployed and probably well over half the people who’ve stopped looking for work. In the real world, those people are burning through savings and are spending money only on necessities. In the real world, about 15% of all American households didn’t have enough to eat at some point in the past year.

    In the real world, given suppressed demand, the “artificial fear” is of inflation, not deflation. In the real world, interest rates are so low on 10-year Treasuries right now that, adjusted for inflation, it is literally cheaper for the U.S. government to borrow money and pay it back over 10 years than it is for the government to pay cash. Indeed, even Ben Bernanke, the Fed chairman and a guy with impeccable inflation-hawk credentials, is, here and now in the real world, saying that the Fed has done all it can do to stimulate the economy and that Congress must use government spending to stimulate it further and bring down unemployment.

    In the real world, deficit spending under Roosevelt didn’t cause the 1937 recession. In the real world, it was caused by Roosevelt’s attempt to reduce deficit spending too soon. And, yes, in the real world, World War II was what finally got us out of the Depression … because it was Rooseveltian deficit spending on steroids.

    In the real world, what’s playing out across Europe is that 1) your chart implies that different countries have pursued significantly different paths when in fact the European Central Bank is driving the action, and 2) “austerity” is leading to more economic downturns, not job growth. In the UK, it has caused a double-dip recession. In the real world, Ireland, which has tried harder than most EU countries to close its deficits, has been rewarded with higher borrowing costs than Spain and Italy. (In the real world, you know who’s recovering nicely? Iceland. Why? They let their banks fail and banks default on their bonds, they devalued their currency. In the real world, if Greece left the Eurozone and returned to a sovereign currency, it could do the same thing and be much better off.)

    In the long term, yes, we need to control our deficits. And you know how you do that? By not giving unnecessary tax cuts to the top 0.01% of earners. By CREATING JOBS, via government spending if necessary (and, dear God, is it necessary right now). And by running surpluses during good economic times. By not maintaining a defense budget larger than the rest of the world’s combined.

    I say again: Everyone’s entitled to his own opinions, but not his own facts. Grow up, son. If you come back here again with that bullshit, I’m bouncing you.

    Comment by Lex — Thursday, June 21, 2012 11:11 am @ 11:11 am

  7. It is a fact that we agree on Greece, however I could be accused of claiming that fact as my own as you laid out the observation fist within this thread.

    It is a fact that Japan has tried spending its way out of its liquidity trap for 20 years to no avail. The policies instituted by Japan in an effort to stimulate their economy paralleled Krugman’s advice over that period and it is enlightening to review just how wrong Krugman was about Japan 10 years ago. Now 10 years later an entirely new generation is entering the Japanese workforce, one that has never known anything but recession and the endless Krugman pain.

    It is a fact that our nation has pumped more wealth into the private sector from from the public sector than was lost to the recession. (Video above).

    It is a fact that Ireland, UK, (and all EU nations but Estonia, Latvia, Bulgaria, and Luxembourg) feigned austerity while raising taxes and have paid the price in increased debt.

    And it is a fact that those EU nations that chose government expansion or feigned cuts have increased their debt burden to the point that growth is nearly impossible and in some cases to the point of requiring external national bailouts (links not necessary) while those like Estonia have benefited from cutting government and taxes find themselves in the enviable position of having their credit ratings raised times multiple within a three month period.

    It is a fact that spending increased under Hoover and FDR to no avail and it is a fact that, instead of growth, the 1937 recession followed those massive increases in government growth and spending.

    The reality is that any government unwilling to cut government and lower taxation during economic hardship is a government that will be unwilling to forego the chance to grow into surpluses when the economy is healthy. That is western experience that is embraced as a feature rather than a bug by the Krugmans of our world.

    These facts are not claimed by me; they are simply facts free of opinion.

    Comment by Jeri Johnson — Friday, June 22, 2012 12:31 am @ 12:31 am

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