FIGHTING THE DEPRESSION
Golfito, Costa Rica, Wednesday, 24 February 2010

I am constantly amazed at the intensity of right-wing vitriol about the course the Obama Administration is steering to end the down-cycle. The government has stimulated consumer spending, arranged extra-ordinary government spending for roads or bridges, downside protection for families so they are not kicked out of the houses they bought at inflated prices and/or because they have lost their jobs and incomes. The U.S. Government has tried to save a decrepit General Motors (and therefore jobs making cars nobody either wants or can afford) and thrown huge amounts of money at the big banks to prevent their collapse in the now vain hope that the banks would resume lending. The stimulation package, though huge, has been too little, as even Nobel Prize economists have pointed out. Support for the inflated and dangerously out-of-control financial sector has largely been a waste of money when viewed from the point-of-view of the public good. The only real beneficiaries have been their shareholders, their senior executives and those employees who have managed to keep their jobs. Indeed, with government backing, the banks seem to have been able to taken even greater risks, and have been speculating at tremendous profit in the currency, bond and commodity markets.

Ideally everyone would prefer that there be no economic cycles. But we also know that, left on its own, the capitalist system will have periods of rapid growth followed by rapid downturns in economic activity. Not infrequently, the up-ticks are really speculative ‘bubbles’, i.e., based upon subjective values. One famous historical bubble/collapse was the fabulous prices offered for Dutch tulip bulbs; another was the inflated prices paid for radio stocks in the run-up to the Great Depression of the 1930s. The real-estate bubble in the U.S.A. is a more recent and potentially more damaging bubble. Bubbles are exacerbated by readily available and relatively cheap credit. The bigger the bubble component of economic growth, the greater the extent and speed of the resultant collapse of economic activity. Stock prices fall, asset prices decline, consumer or industrial demand falls away, workers and employees are laid off, etc. etc. and general economic activity slumps. Economic problems also create social problems: unemployment, homelessness, increased crime, lack of medical attention, no money for schools or basic government services like police and fire-fighters. They can also become serious factors leading to political stability as the losers become angry at their betrayal and impoverishment. They turn either to the ballot box, and when that fails, to direct action.

Basic knowledge about how to manage an economic cycle has been around for seventy-five years. There are three, or perhaps four, main tools to even out the cycles”

• Interest rates
• Tax rates
• Government spending
• Do nothing

Do nothing. This is apparently what conservatives in the U.S.A. mean when they say there is too much government. For the government to do nothing will not meet the demand that government keep the economic alive and well, nor will it protect persons from the social impact that a serious decline in economic activity brings in its wake (e.g. unemployment, debt, homelessness, lack of medical treatment, etc. etc.) the conservative purists claim that the economy is self-regulating and eventually things will turn to the better. And, in fact, they are probably correct. But, the down-cycles (depressions or recessions) can and often are seriously painful for more and more in the society, and the period until an up-cycle begins again can be very long indeed. Meanwhile there is manifold hardship in the lives of more and more people. In the 1930s people were starving and the numbers of homeless and the numbers of children going to bed hungry is rising shockingly at present.

Since at least the end of the Second World War doing nothing has not been seen as a viable option for government. Governments in every industrialised country have accepted the responsibility vis-à-vis their voters of managing the economy. The conservative movement led by the likes of Barry Goldwater, Ronald Reagan and Margaret Thatcher can be seen as a revolt against this responsibility, not least because the well-heeled have been able to convince the aspiring and comfortable middle class that their taxes are unjustifiably going to support the ne’er-do-wells in society. Along with turning their ire against the so-called beneficiaries of government programmes, i.e., against racial minorities, the economically and socially dispossessed, many voters have also swallowed whole the argument that ‘Government is not the solution to your problems. Government is the problem’. Once conservatives came to power, governments at all levels would magically somehow be more-or-less abolished (i.e., ‘shrunk down until it was so small that it could be dragged into the bathroom and drowned in the bathtub’). Conservatives therefore seem to feel no great obligation to state what their administrations actually intend to do beyond cutting taxes. This they have done, which of course have benefited those most with the greatest incomes and is one of the causes of this depression.

Taxes and interest rates. Fighting a depression with tax tools is generally of little value since the tax base (i.e., incomes) will have shrunk sharply; cutting taxes for the unemployed or unprofitable businesses helps no one. Interest rates, once they have approached zero, where they are at present, can surely no longer be a viable tool. And anyway, both tax and interest rate tools take a long time to work themselves through the economy. Cheap credit will not get companies to build new plants or build up inventories if they predict that consumers are unlikely to be spending. Consumers, on the other hand, are trying to limit their spending, clean up their credit-card debt, trading down to more modest cars and housing.

Of the three active tools available to economists eager to stimulate the economy, only government spending can have any reasonably quantifiable and immediate impact The more the spending the greater the impact. It almost doesn’t matter what the money is spent on, public works like roads, airports, new post offices or unemployment benefits, healthcare, etc. Compared to tax relief (meaningless if you have lost your job) or lower interest rates (meaningless if you are not borrowing or if the rates are already so low as to be negligible,), only spending can stimulate the economy. And government is the only body that can do it because it is the only institution that can raise money.

If the government has not saved money during past good times and reduced national debt, it will have to raise money by borrowing in the form of government bonds. Of course, if they over-borrow and therefore over-stimulate there will be inflationary effects down the road. This is what conservatives keep pointing to in their critique of the Obama Administration. It is almost beside the point that they also act as if it had been the government who created the depression in the first place, when it in fact private investors playing the real estate get-rich-quick or the now-you-see-it, now-you-don’t financial game (in the few years before the real estate bubble burst, for example, 75% of the house purchases in the U.S.A. were being made by persons who had no intention whatsoever of living in them, i.e., they were just buying cheap and selling dear, i.e., widespread speculation that created the bubble). All this was ably assisted by the Fed with its cheap money policies. So far from exhibiting any caution about it, the Fed even denied there was a real estate bubble, which kinda tells you how astute sainted Greenspan, Bernancke, Geithner, Paulson and all were. Their cohorts at the big banks were no better. But, even middle class players were in the market trying to make a killing.

The conservatives seem to deny that government has any role to play in the economy. But, without an active government role in the economy, who is left to stimulate the economy in a depression? Who acts as the protector of the ‘public good’, whatever that is defined to mean. Who can create legal structures to prevent future excesses? The Clinton Administration got rid of the Glass-Steagal Act and various other controls over banking excesses; they were thus declaring a hands-off role for government. The George W. Bush Administration helped drive the economy into depression with its massive tax cuts for the rich along with hugely expensive military adventurism abroad. Even Ronald Reagan, who legitimized decades of anti-government rhetoric and ostentatiously cut income taxes, had finally to admit that you cannot have a 600-ship navy without tax income. Reagan therefore subsequently raised income taxes three times. Clinton who placed a balanced budget above whatever liberal principles and projects he had promised, who balanced the accounts and even began to reduce the debt at the cost of social programmes like welfare. Nowadays, only oil countries have surpluses; countries even like Canada. Just as orthodox neo-conservatives have demanded, George W. Bush made the government a mendicant. The Fed tried to steer against it with cheap money. It led to the real estate bubble.

To date, the Obama regimes’ only real initiatives have been the $700 billion stimulation package (too little and too late) and an attempt to introduce universal healthcare, the aim of which should be to give everyone access to the medical system while at the same time protecting them from financial disaster. By taking the public option off the table for whatever tactical political reasons even before starting the legislative initiative, the whole point of it seems to have been lost in the shuffle. Now it looks like a life-support system for the corporations, delivering customers to them in droves. The healthcare package, on the other hand, does also have some economic stimulation benefits.

In the debate about how to get the economy going again, the Democrats, including the President, do not seem to be convinced of their own policies. The economic advisors, (not for the moment mentioning the those who advise him on foreign policy) are after all nearly all conservative re-treads from the Clinton regime (I don’t mean they have failed to be influential or even make a lot of money or a name for themselves; I mean only that they have failed to manage the economy to the benefit of anyone but their buddies and perhaps themselves, certainly it is now manifestly clear not the public good). Advised by Yesterday’s Men, Obama is beginning to pay the price; the first hit was the loss of a secure Democratic Senate seat in Massachusetts. A greater punishment awaits him in November’s mid-terms. The progressives, the young and the black and perhaps the idealistic middle class who voted for his promise of Change You Can Believe in are disillusioned and cynical.

Why isn’t Obama making this into a great moral crusade the way the Republicans have been doing? There is a tremendous moral and even economic argument for healthcare and a resurgent economy. After their cronies crashed the economy, the Republicans now have the audacity only to bitch about taxes and put forth phoney non-arguments about death panels and the like. They haven’t got any real suggestions at all and still they make the running. The same people who advised Bill Clinton to become more conservative in his second term are pushing Obama to do the same. In other words, to eat the promises he made to become president.

Perhaps it’s too late. But, Obama still has a chance to win back broad popular support. He won his office by getting people to the polls who do not ordinarily vote at all. They will stay home in November unless they can be roused again. Obama should not leave the moral arguments to the right.