The recovery is two years old. Profits are great. The very rich are richer than ever. And yet, as the Wall Street Journal puts it, “Across a wide range of measures — employment growth, unemployment levels, bank lending, economic output, income growth, home prices and household expectations for financial well-being — the economy’s improvement since the recession’s end in June 2009 has been the worst, or one of the worst, since the government started tracking these trends after World War II.”
What went wrong?
- Policymakers in the administration were not only too close to the banks but prisoners of a conventional wisdom among economists about downturns and recoveries based on the post-World War II experience. Unfortunately, the Great Recession was far worse and more complex than anything their minds or the computer models could comprehend.
- The stimulus was too small and badly crafted to satisfy political ends. Much of it went to middle-class tax cuts, individually small, which were promptly used to pay down debt or save. Another big chunk back-filled state fiscal meltdowns. A much smaller portion went to infrastructure that would actually create jobs and enhance productivity, and even here the emphasis was on speed rather than programs that would help sustain and grow the economy through a long crisis.
- The federal government and Federal Reserve made panicked and improvised decisions to save the “financial services” sector no matter the cost, while the millions of average Americans ruined by the recession were left to sink. This is not a call for no action. But the system was saved pretty much as it was, unsound, dangerous and in many cases profiting from Uncle Sam. While depositors should have been protected, far more haircuts should have been given to Wall Street and the too-big-to-fail banks (which should have been broken up). Many more insolvent large institutions and their enormous bad bets should have been unwound in an orderly fashion. As the economist James K. Galbraith wrote in a prescient 2009 Washington Monthly article, “Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital.”
- The Obama administration spent a precious year and untold political capital on a health-care revamp that pleases petty much no one. To liberals, it is another giveaway to the private insurance companies. To conservatives, it is a government intervention guaranteed to have costly and ineffective consequences (and I’m not even getting into the Tea-Party “socialism” thing, because it’s not). Few understand it, and unlike FDR’s constant improvisations in the New Deal, it doesn’t provide immediate, tangible help to average Americans. That time could have been spent focusing on jobs and putting forth the programs for an unprecedented challenge. As Galbraith put it, there will be “not return to normal” as we’ve known it.
- Finally, complexity is our undoing. Scores of major discontinuities are hurting the economy. But so, too, is its incredible complexity even compared with 1991.
Faced with so much debt yet to unwind, so many households that are poorer and in many cases without jobs, a hollowed-out economy, paralyzed policy-makers and even average Americans in denial, just waiting for the next housing boom. Faced with all this and more, any great reset will take years, a generation. The instability from this adds yet another wild card.
Today’s Econ Haiku:
A milestone that writes haiku
Over Japan’s skies