Falling Into the Chasm

https://www.nytimes.com/2010/10/25/o...n.html?_r=1&hp

The New York Times
October 24, 2010
Falling Into the Chasm
By PAUL KRUGMAN

This is what happens when you need to leap over an economic chasm — but either can’t or won’t jump far enough, so that you only get part of the way across.

If Democrats do as badly as expected in next week’s elections, pundits will rush to interpret the results as a referendum on ideology. President Obama moved too far to the left, most will say, even though his actual program — a health care plan very similar to past Republican proposals, a fiscal stimulus that consisted mainly of tax cuts, help for the unemployed and aid to hard-pressed states — was more conservative than his election platform.

A few commentators will point out, with much more justice, that Mr. Obama never made a full-throated case for progressive policies, that he consistently stepped on his own message, that he was so worried about making bankers nervous that he ended up ceding populist anger to the right.

But the truth is that if the economic situation were better — if unemployment had fallen substantially over the past year — we wouldn’t be having this discussion. We would, instead, be talking about modest Democratic losses, no more than is usual in midterm elections.

The real story of this election, then, is that of an economic policy that failed to deliver. Why? Because it was greatly inadequate to the task.

When Mr. Obama took office, he inherited an economy in dire straits — more dire, it seems, than he or his top economic advisers realized. They knew that America was in the midst of a severe financial crisis. But they don’t seem to have taken on board the lesson of history, which is that major financial crises are normally followed by a protracted period of very high unemployment.

If you look back now at the economic forecast originally used to justify the Obama economic plan, what’s striking is that forecast’s optimism about the economy’s ability to heal itself. Even without their plan, Obama economists predicted, the unemployment rate would peak at 9 percent, then fall rapidly. Fiscal stimulus was needed only to mitigate the worst — as an “insurance package against catastrophic failure,” as Lawrence Summers, later the administration’s top economist, reportedly said in a memo to the president-elect.

But economies that have experienced a severe financial crisis generally don’t heal quickly. From the Panic of 1893, to the Swedish crisis of 1992, to Japan’s lost decade, financial crises have consistently been followed by long periods of economic distress. And that has been true even when, as in the case of Sweden, the government moved quickly and decisively to fix the banking system.

To avoid this fate, America needed a much stronger program than what it actually got — a modest rise in federal spending that was barely enough to offset cutbacks at the state and local level. This isn’t 20-20 hindsight: the inadequacy of the stimulus was obvious from the beginning.

Could the administration have gotten a bigger stimulus through Congress? Even if it couldn’t, would it have been better off making the case for a bigger plan, rather than pretending that what it got was just right? We’ll never know.

What we do know is that the inadequacy of the stimulus has been a political catastrophe. Yes, things are better than they would have been without the American Recovery and Reinvestment Act: the unemployment rate would probably be close to 12 percent right now if the administration hadn’t passed its plan. But voters respond to facts, not counterfactuals, and the perception is that the administration’s policies have failed.

The tragedy here is that if voters do turn on Democrats, they will in effect be voting to make things even worse.

The resurgent Republicans have learned nothing from the economic crisis, except that doing everything they can to undermine Mr. Obama is a winning political strategy. Tax cuts and deregulation are still the alpha and omega of their economic vision.

And if they take one or both houses of Congress, complete policy paralysis — which will mean, among other things, a cutoff of desperately needed aid to the unemployed and a freeze on further help for state and local governments — is a given. The only question is whether we’ll have political chaos as well, with Republicans’ shutting down the government at some point over the next two years. And the odds are that we will.

Is there any hope for a better outcome? Maybe, just maybe, voters will have second thoughts about handing power back to the people who got us into this mess, and a weaker-than-expected Republican showing at the polls will give Mr. Obama a second chance to turn the economy around.

But right now it looks as if the too-cautious attempt to jump across that economic chasm has fallen short — and we’re about to hit rock bottom.

All that sounds great until you remember the recent NYT article that reported that over 80% of Wall Street and Big Business CEO's vote DNC, because that's where the money comes from (the politicians they bought).

The RNC is little better, but the myth that it is the party of the rich is no longer true, because the rich, and the really rich all turned to the Donkey a decade ago when Clinton was giving them your tax dollars and de-regulating everything while saying we needed more regulation.

It's funny how you can only find a handful of economists that would agree with this article, the rest of them, and especially the good ones who are never wrong on the trends (like Noriel Rubini) are in complete disagreement with the concept of spending your way out of debt. It didn't work in the 1930's (The war saved FDR, which is why he pushed for it), and it won't work now.

The blame for the economic mess can be laid squarely at the feet of the American people, who believed the lie that there is a free lunch. Nothing is free, to give to one, you must take from another...

Karen, your post is pure, unfounded junk. Please cite your sources so that people can read for themselves that what you are saying is not true. Your "views" are based on unfiltered, reactionary ideology that Republicans love to spew before an election.

Edward

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Posted in reply to the post by Karen the KAT:

All that sounds great until you remember ...

The blame for the economic mess can be laid squarely at the feet of the American people, who believed the lie that there is a free lunch. Nothing is free, to give to one, you must take from another...

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Quote:

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Posted in reply to the post by Karen the KAT:

The blame for the economic mess can be laid squarely at the feet of the American people, who believed the lie that there is a free lunch. Nothing is free, to give to one, you must take from another...

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Ayn Rand, anyone??
just to add a fresh perspective for those who think in terms of wealth as something created by virtuous effort and taken by parasites: that's maybe a good way to think of a clay-pot and woven-basket driven civilization, but most societies quickly move to a state where gatekeepers and middlemen control most of the economic activity. The value they've added is harder to quantify. Middlemen who are distributors clearly can add value, as can those with specialized knowledge who share it (thus the patent system - which is NOT primarily to ensure control to the inventor but to ensure he'll eventually make his ideas available to everyone). But those who make their money by controlling access to assets that they "own" by historical accident, and never created; or amass wealth by other forms of gate-keeping, haven't cooked the lunch you think the American people want to eat for free.