Annals of the Great Recession I.

In a column in the New York Times, Neil Irwin takes up an important, under-analyzed topic.[1] He doesn’t take it very far, but it’s better than a poke in the eye with a sharp stick.

He begins by reporting on a new book on the “Great Recession” by the University of California-Berkeley economic historian Barry Eichengreen.[2] The book is 500 pages long and came out in early January 2015, so I don’t think that Irwin has fully digested what Professor Eichengreen has to say. (I sure haven’t.) All the same, he brings out several important points.

First, the Great Depression of the 1930s and—more importantly—the Second World War legitimized Keynesian counter-cyclical spending to moderate the economy. Thus, when the American economy began to plummet in early 2008, both Republican President George W. Bush and the Democrat-led Congress agreed on a $150 billion to cover the credit markets (the TARP). Within a year, however, Republicans had turned against big deficits. When the newly-elected President Barack Obama called for a $787 billion stimulus bill, scarcely any Republicans could be found to vote for it. For the next several years the Republicans kept up their assault on deficit spending. By 2011 Democrats also were running away from deficits.

Second, in the absence of spending action by Congress, responsibility for countering the recession fell to the Federal Reserve Bank (the Fed). Here again, Eichengreen finds too little effort made too late. The Fed’s stimulation mostly came a day late and a dollar short. “Quantitative Easing” through bond-buying pumped money into the economy. It just never pumped in enough money until the ambitious program that began in September 2012 (and which has now come to an end).

The result of these lamed policies came in an excessively-long recession that has just ground the spirit out of many Americans. Irwin is good on pointing out the events. He’s less good at explaining them. Why did Republicans turn against Keynesianism?[3] Why did Democrats, of all people, turn against the legacy of Franklin D. Roosevelt?

What is missing in Irwin’s explanation is any analysis of the rise of the “Tea Party.”[4] Not everyone responded well to the stimulus bill. A Seattle-area blogger named Keli Carender organized a protest against the bill in February 2009, then talked it up on-line. Soon, protests took place in other cities. Then Rick Santelli’s on-air rant against bail-outs went viral. Then Fox News pushed the cause. April 15, 2009 provided a forum for lots of protest rallies. ObamaCare added fuel to the fire.

This “Tea Party” movement was largely made up of previously apolitical ordinary citizens who had been energized by their economic concerns. Underneath this concern is a feeling that they have “lost” their country to “elites.” At the same time, many Tea Party people had “social conservative” views on gay marriage, the Second Amendment, hostility to the expansion of government authority by the courts). Illegal immigration formed another concern. Finally, some of the Tea Party supporters were just nuts: “birthers” and “Obama = Hitler” types. The specific targets of the “Tea Party” were the rapidly expanding federal deficit, the growth of “big government,” and taxes. The agenda of the movement appeared to be unrealistic and impossible to achieve: lower taxes combined with a balanced budget.

The “Tea Party” pressured Republicans. The Democratic abdication is harder to figure. Nobel Prize economist Paul Krugman argued that the Obama Administration’s stimulus program was half the size it needed to be, was spread over two years instead of front-loaded into one year, and contained a lot of tax cuts that were a waste. However, Irwin (and apparently Eichengreen) still trot out the tired excuse that the administration under-estimated the scope of the problem. More importantly, perhaps, President Obama felt no commitment to stimulus. Bob Woodward has quoted him as saying “Look, I get the Keynesian argument, but the American people just aren’t there.” But why didn’t he use the “bully pulpit” to get them there? And why didn’t Democratic leaders tell him—as Al Gore once told Bill Clinton, to “get with the program”? There is a lot of blood on the floor from this unnecessary disaster and a lot of blame to go around.

[1] Neil Irwin, “The Depression’s Unheeded Lessons,” NYT, 11 January 2015.

[2] Barry Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Mis-Uses of History (New York: Oxford University Press, 2015).

[3] Richard Nixon once remarked that “We are all Keynesians now.” Republicans may yet come to rue the day they tossed over the ideas of Nixon for those of Ronald Reagan. Nixon also had proposed national health care, only to have it sunk by the petty personal jealousy of Teddy Kennedy.

[4] “The Rise of the Tea Party,” The Week, 19 February 2010, p. 13.

 

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2 thoughts on “Annals of the Great Recession I.

  1. As I understand it, quite a bit of the stimulus money went for simply cronyism. I think that that definitely hurt the public’s view of the current administration. Also, I definitely agree with you on the Tea Party gaining followers through a “the country isn’t listening to its people anymore” tactic. Heck, when you have Nancy Pelosi saying that they have to pass the healthcare bill in order to know what’s in it, it’s hard not to feel that way. Indeed, much of politics feels as if it has been lost to nepotism and big money–if you don’t have the cash (or the backers who have cash), then you can forget about getting a seat in the House or the Senate. As I understand it, part of why Keynesianism had great support around WWII was because it made many of the nation’s people feel like the federal government was doing something to help the common man. It wasn’t just sitting around waiting for the business cycle to keep cycling. They tried to prime the pump again with the recent recession, but when you don’t feel like it goes to the people and instead to buddies to whom some politicians owe favors, well, Keynesian tactics lose some of their appeal. Nevertheless, Keynes was still a genius. Then again, what do I know? My degrees are in English. Anyway, good and interesting post.

  2. My own view–no more of an economist than you–is that Krugman was right. The Administration just didn’t care to fight for a real stimulus bill that would have dragged the country out of the recession much sooner and more completely than has been the case with the Mini-Me Stimulus. The Republican-enforced “sequester” has just made matters worse. The President goes along with this. All of the job-creation measures that he has proposed are revenue-neutral, while a bigger deficit was what was needed. As for “cronyism,” well it doesn’t matter to me so long as the money gets spent. Then, money-in-politics? “We all want justice, but you’ve got to have the money to buy it.”–Alan Price.

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