Eco­nomic cri­sis: Days of fear, years of ob­struc­tion

Austin American-Statesman - - BALANCED VIEWS - Paul Krug­man He writes for the New York Times.

Lehman Bros. failed 10 years ago. The U.S. econ­omy was al­ready in a re­ces­sion, but Lehman’s fall and the chaos that fol­lowed sent it off a cliff: Six and a half mil­lion jobs would be lost dur­ing the next year.

We didn’t ex­pe­ri­ence a full re­play of the Great De­pres­sion, and some have ar­gued that the sys­tem worked, in the sense that pol­i­cy­mak­ers did what was needed to avoid catas­tro­phe.

But this is only half right. We avoided ut­ter dis­as­ter, but nonethe­less ex­pe­ri­enced a huge, sus­tained em­ploy­ment slump, one that in­flicted im­mense hu­man and eco­nomic cost. Why did the slump go on so long?

There are mul­ti­ple an­swers, but the most im­por­tant fac­tor was pol­i­tics — cyn­i­cal, bad-faith ob­struc­tion­ism on the part of the Repub­li­can Party.

One cru­cial point I still don’t think is widely un­der­stood is that, scary and dam­ag­ing though it was, the fi­nan­cial cri­sis — the dis­rup­tion of credit mar­kets that fol­lowed Lehman’s col­lapse — was quite brief. Mea­sures of fi­nan­cial stress, which in­clude things like in­ter­est rate spreads on risky as­sets, spiked for a few months, but quickly re­turned to nor­mal. The purely fi­nan­cial as­pect of the cri­sis was ba­si­cally over by the sum­mer of 2009.

But the broader eco­nomic cri­sis went on much longer. Unem­ploy­ment rose to al­most 10 per­cent, then came down with painful slow­ness; it didn’t get back to 5 per­cent un­til seven years af­ter Lehman’s fall. Why didn’t rapid fi­nan­cial re­cov­ery lead to rapid eco­nomic re­cov­ery?

At a ba­sic level, the an­swer is that the fi­nan­cial cri­sis was only one symp­tom of a big­ger prob­lem: the col­lapse of a gi­gan­tic hous­ing bub­ble. The burst­ing bub­ble ex­erted a pow­er­ful down­draft on the econ­omy.

What the cri­sis called for, then, were poli­cies to boost spend­ing, to off­set the ef­fects of the hous­ing bust. But the nor­mal re­sponse, cut­ting in­ter­est rates, wasn’t avail­able, be­cause rates were al­ready near zero. What we needed, in­stead, was fis­cal stim­u­lus: in­creased gov­ern­ment out­lays and tax cuts for lowerand mid­dle-in­come fam­i­lies.

And we did in­deed get sub­stan­tial stim­u­lus. But it wasn’t big enough, and even more im­por­tant, it faded out much too fast.

Why did the re­sponse to a de­pressed econ­omy fall short? Some of­fi­cials failed to see the need for stronger poli­cies. When Christina Romer, the ad­min­is­tra­tion’s top econ­o­mist, ar­gued for more stim­u­lus, Tim Gei­th­ner, the Trea­sury sec­re­tary, dis­missed it as “sugar.”

But the most im­por­tant rea­son the great slump lasted so long was scorchedearth Repub­li­can op­po­si­tion to any­thing and ev­ery­thing that might have helped off­set the fall­out from the hous­ing bust.

Now, Repub­li­cans claimed that their op­po­si­tion to any­thing that might limit mass unem­ploy­ment was driven by a deep com­mit­ment to fis­cal re­spon­si­bil­ity. But this was com­plete hypocrisy.

Any­way, the events of the past two years have made the re­al­ity of what hap­pened crys­tal clear. The very same politi­cians who pi­ously de­clared that Amer­ica couldn’t af­ford to spend money sup­port­ing jobs in the face of a deep, pro­longed slump just rammed through a huge, deficit-ex­plod­ing tax cut for cor­po­ra­tions and the wealthy even though the econ­omy is cur­rently near full em­ploy­ment. No, they haven’t aban­doned their com­mit­ment to fis­cal re­spon­si­bil­ity; they never cared about deficits in the first place.

Pol­icy failed be­cause cyn­i­cal, bad-faith Repub­li­cans were will­ing to sac­ri­fice mil­lions of jobs rather than let any­thing good hap­pen to the econ­omy while a Demo­crat sat in the White House.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.