Cloudy With No Chance of Normal
A full recovery is nowhere in sight. So beware economists who use a false dawn to push awful policies.
LARRY SUMMERS MAY BE OUT of the White House, but he is still a remarkable bellwether of establishment economic thinking. As the Treasury secretary under President Clinton, he was a stalwart of fiscal discipline and financial deregulation; as the director of President Obama’s National Economic Council through 2010, he was a brake on big stimulus proposals. Now, in these days of worldwide fiscal austerity, he has reinvented himself, in lectures, on television, and in the press, as a pro-growth moderate. In an essay published in the Financial Times last March, for example, he warned against the dangers of “premature” efforts to rein in the U.S. deficit with harsh spending cuts and tax increases:
Even if the economy creates 300,000 jobs a month and grows at 4 percent, it would take several years to restore normal conditions. So a lurch back this year towards the kind of policies that are appropriate in normal times would be quite premature.” [Emphasis added.]
Of course, it’s true—with unemployment still at nearly 8 percent, a “lurch” toward austerity now would be disastrous. And for opponents of austerity, obliged by a budget-obsessed political climate to fight their battles one day at a time, Summers’s call for patience makes him a valuable ally. But the more important point lies not in the argument he makes about our current moment, but in what he concedes, without any reflection, is the correct policy for returning to “normal” conditions.
Notice his repetition of the word normal. This signifies a belief that Summers shares with many economists: that the market system trends naturally toward an end state of full production and high employment. The economy can be displaced from this “normal” condition by a shock or a crisis, but when the shock passes, “recovery” begins—and once “recovery” is under way, progress toward “full recovery” is inexorable. This belief runs so deep among economists as to be practically primal; it is also built into official U.S. government forecasts, coloring the worldview of legislators and presidents.
From this belief it follows that, as soon as the country enters a recovery, the job of economic policy is to manage a “soft landing.” By this, economists mean that we must start to concern ourselves with the problems that come with too much employment: price inflation, higher interest rates, aggressive unions, big wage increases, and the “crowding out” of private investment by public borrowing. For Summers, these worries are second nature; they are what policy should address once a good recovery gets going. Austerity’s time will come—we’re just not there yet.
But could his premise be wrong? What if what Summers takes to be “normal” is not normal at all, but a condition so remote as to be unattainable? Rather than “abnormal,” is the present, miserable state of the economy exactly what we should expect from now on? And if so, what do we do?
Four years ago, the government chose to base its policy on projections that showed us reaching just over 5 percent unemployment by 2013. We will not meet this goal. The unemployment rate has remained stuck at levels that would have provoked outright political panic at any time between 1950 and 2000. And even worse, the employment-to-population ratio—a measure of the percentage of American adults who have a job—has sunk by nearly 5 percentage points since the start of the crisis in 2007. The small drop in joblessness owes a lot to people who have simply given up hope and dropped out of the labor market.
Four years ago, I argued that there would be no “return to normal,” because the scale of the housing bust, powered by the corruption and dysfunction of the banks, blocked any return to the credit-led growth on which the United States had relied since the 1970s. Here’s where I differ with Summers: for him and his allies, the economic model they created in the 1980s and ’90s by loosening up constraints on the banks is a means to realize the permanent potential of American growth. In my contrary view, financial deregulation created an unstable system that was doomed to spin out of control and now cannot recover.
Since 2009, it has become clear that falling house prices, underwater mortgages, and financial fraud are not the only obstacles to a return to “normal.”
First, we have an energy problem that is not going away. Energy prices are now twice as high as they were in the 1990s, and they are also more volatile, thanks to the rise of unregulated investments in commodities—a market that has seen a huge influx of capital since the mortgage crash sent speculators looking for new places to put their money. The result is pressure on consumer budgets and uncertainty for businesses. For an oil-importing country, speculation-dominated energy prices are a choke chain on growth: whenever there is a small pickup in growth, the ensuing rise in fuel prices drains away any potential broad increase in purchasing power. (For this reason, and with all due respect to Paul Krugman, a larger stimulus package would not by itself have brought us back to full employment.)
Second, we are still caught up in the undertow of the digital revolution. Technological change has two phases: first creation, then destruction. The big boom in information technologies ended back in 2000. But the technologies themselves—digital computing and communications—are still conquering new territories, industries, and markets. And they are savagely laborsaving, which is precisely the nature of their appeal. The result is that many workers, older ones especially, are no longer needed and never will be again. In many ways, the computer is doing to the office worker what the tractor, a century ago, did to the horse and the mule.
Third, the American mortgage debacle helped precipitate the eurozone crisis when European investors, faced with big losses on toxic U.S. assets, moved to protect themselves by selling weak sovereign bonds—and fleeing for safe vehicles like U.S. Treasuries. This threw the Continental economy into a downward spiral, which no one can now control. And so a major market for U.S. exports remains stagnant.
The euro debacle did, however, help save the dollar, and this means that the U.S. could get away with much more domestic spending, and bigger deficits, without a risk of inflation. Right now we could be investing heavily in education, health care, energy conservation, and climate-change prevention—measures that would create jobs and fend off disaster. But that is an advantage our leaders seem determined not to use.
Rather than learning the sad lessons of European mismanagement, our policy makers seem bent on replicating its dreadful results, in which spending cuts drive the economy down and keep the deficit high. Consider, for example, the idiotic arrangement that gave us the “fiscal cliff”: to avoid falling off this metaphorical precipice—which is entirely an artifact of politics—we have been told we will have to cut Social Security, Medicare, and Medicaid. The debate about these cuts now centers on two depressing poles: “do it now” and “do it later.” Here the moderate, even liberal position exemplified by Summers is: pain must come, but please, not quite yet. The eventual compromise—you can see it on the horizon—will most likely be cuts to the safety net phased in over time, mainly hurting today’s workers when they retire.
But is pain of this type necessary at all? Social Security, Medicare, and Medicaid are insurance programs. They take the burden of caring for an existing subset of elderly and low-income people and spread it over the whole working population. The transfer is not from the future to the present, or even from one generation to the next; it takes place in the present moment, from people who would otherwise have more for themselves, to people who would otherwise have less.
These programs are not private businesses or funds, and they do not need to earn a profit or be balanced against the revenue stream of the payroll tax. The idea that they are bankrupt or might go bankrupt is false. And the idea that they represent a threat to the financial stability of the United States government is also false—a point that anyone with a newspaper can see by looking at the low long-term interest rate: on any given day, this is the rate at which people with real money are willing to lend to the country for 20 or 30 years, knowing exactly what they know about Social Security, Medicare, and Medicaid.
So do we wish, as a community, to keep supporting those who have earned, by dint of paying into the system for years, the right to be supported when they are no longer able to support themselves? Or do we curtail that right, on the ground that the supposed financial conditions of some distant “normality” will require such a measure?
In answering this question, we must recognize that this “normality” on the supposed horizon is not normal at all. It is an economists’ illusion, fostered by our exceptional run of happy history over three-quarters of a century, since the Great Depression—coupled with sloppy habits of economic thought.
True, buying time by delaying uncomfortable decisions is not altogether a bad thing. But to do so by conceding that we’ll inevitably need cuts to the social safety net is pernicious. It is a way of squelching criticism, of forcing consensus—and both of these acts are dangerous when the key premise of the argument may be wrong. This will lead, sooner or later, to the destruction of institutions that we need more than ever, to protect the elderly, the poor, the sick, and the vulnerable—especially if, in fact, we do face a long period of slow economic growth.