Now that we are counting up the days of the sequester instead of counting down, it would be a good time to cast blame. And my candidate is President Obama.
I’m not blaming Obama for the reasons that Bob Woodward came up with in his fantasyland. I am blaming President Obama and his administration for trying to be cute and clever rather than telling the public the truth about the economic crisis. The result is that the vast majority of the public, and virtually all of the reporters and pundits who deal with budget issues, do not have any clue about where the deficit came from and why it is a virtue rather than a problem.
The basic story is incredibly simple. Demand from the private sector collapsed when the housing bubble burst. We lost $600 billion in annual demand due to residential construction falling through the floor. We will not return to normal levels of construction until the vacancy rates return to normal levels. Vacancy rates are still near post-bubble record highs.
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We also lost close to $500 billion in annual consumption spending due to the loss of the $8 trillion in housing-bubble-generated equity that was driving this consumption. This demand will also not come back.
This creates a gap in annual demand of more than $1 trillion. The stimulus, which boosted demand by roughly $300 billion a year in 2009 and 2010, helped to fill part of this gap, but was nowhere near big enough. Furthermore, stimulus spending fell off quickly in 2011, and the stimulus is now pretty much gone altogether. This means that we are still faced with a huge hole in private-sector spending.
We know the Republicans love the Job Creators and President Obama has gone out of his way to show his love, also. But in the real world, investment in equipment and software has never been much above its current share of GDP, except in the days of the dot-com bubble. This means that unless we drug investors so that they are willing to throw hundreds of billions of dollars into the stock of worthless companies, we are unlikely to see any substantial rise in investment.
As a result, we are stuck with an economy that is mired well below full employment. President Obama’s top economic advisers from his first term all claimed that they understood this point. But they said that they could not get a bigger stimulus package through Congress.
That assessment may well be true, but the real issue is what President Obama did after the stimulus package passed. He could have told the country the truth. He could have said what all his advisers claim they told him at the time: the stimulus was not large enough and we would likely need more. He could have used his presidency to explain basic economics to the public and the reporters who cover budget issues.
He could have told them that we need large deficits to fill the hole in demand that was created by the collapse in private-sector spending. He could have shown them colorful graphs that beat them over the head with the point that there was very little room for investment to expand even under the best of circumstances.
He could have also explained that consumers would not go back to their bubble levels of consumption since the wealth that had supported this consumption had disappeared with the collapse of the bubble. The public would likely understand this point, since most homeowners themselves lost large amounts of equity and understood that they were much poorer as a result of the collapse of the bubble.
In this context, the only choice in the near term is between larger budget deficits and higher unemployment. The people who clamored for cuts in government spending and lower deficits are in fact clamoring to throw people out of work and slow growth.
We will never know if President Obama could have garnered support for more stimulus and larger deficits if he had used his office to pound home basic principles of economics to the public and the media. But we do know the route he chose failed.
He apparently thought the best route to get more stimulus was to convince the deficit hawks that he was one of them. He proudly announced the need to pivot to deficit reduction following the passage of the stimulus and then appointed two deficit hawks, Erskine Bowles and Alan Simpson, to head a deficit commission.
This set the ball rolling for the obsession with deficit reduction that has dominated the nation’s politics for the last three years. Instead of talking about the deficit of 9 million jobs the economy faces, we have the leadership of both parties in Congress arguing over the debt-to-GDP ratios that we will face in 2023.
This would be comical if lives were not being ruined by the charade. The unemployed workers and their families did not do anything wrong – the people running the economy did.
Now the sequester comes along, throwing more people out of work, worsening the quality of a wide range of government services and denying hundreds of thousands of people benefits they need. Yes, this is really stupid policy, and the Republicans deserve a huge amount of blame in this picture.
But it was President Obama who decided to play deficit reduction games rather than be truthful about the state of the economy. There was no reason to expect better from the Republicans in Congress, but we had reason to hope that President Obama would act responsibly.