Annals of the Great Recession XI.

I saw the Iraq War as an obvious act of stupidity from even before we attacked in Spring 2003. So, in 2008, I voted for the candidate who had opposed it, Barack Obama. I voted for him in spite of his obvious weaknesses: he was as green as grass in politics, he had never run anything, he didn’t know anyone much in Washington, and he had some dopey ideas. My assessment of President Obama’s failings is amply borne out by Ron Suskind’s scathing account of how the President and his advisers made economic policy in the first two years after he reached the White House.[1]

Undoubtedly, Obama inherited an economic disaster from the George W. Bush Administration. However, his background and range of contacts left him ill-positioned to deal with the immense problems on his plate. First, the president believed in the power of rhetoric; he almost seems to have believed that talk and action were identical. Supporters have argued that he’s the first president in a while to speak in full sentences and paragraphs, and that doesn’t mesh well with sound-bites. In reality, the trouble was that much of his discourse seemed to have been picked up in Chicago rec-league basketball. He disses people who disagree with him.[2]

Second, the president turned out to be a poor judge of people and had few close advisers to keep him from going into the ditch at the first opportunity. Rahm Emanuel, who served as his first chief of staff (and who recently squeaked through to re-elections as mayor of Chicago), and Lawrence Summers, who headed his National Economic Council (before going off to become President of Harvard until he vexed the faculty, were imperious), abrasive men who rubbed people the wrong way as a first order of business in any meeting. Tim Geithner, his first Secretary of the Treasury, was consistently suspected of mouthing the Wall Street view.

Third, unlike his immediate predecessor, President Obama could not pull the trigger on any issue. Instead of deciding, he sought consensus. Endless debates went on, but the President refused to choose one option and then to say “it’s my way or the highway.” Who ever crossed Richard Nixon without landing on the sidewalk with his suit in tatters? It’s a short list.

Many of his own subordinates saw through him from the start. Famously, Lawrence Summers, the head of Obama’s National Economic Council, told another official: “We’re home alone. There’s no adult in charge. Clinton would never have made these mistakes.” Geithner has been accused of out-right insubordination, but stayed at Treasury as long as he chose.

The “friendly opposition” within the Democratic Party would argue that, after the rough ride of his first two years, Obama began to understand how things should operate. He got rid of his early hires and started to make decisions. So they say. With a year and change to run on his second term, it isn’t clear that much has changed.

Still, what was the bigger disaster for America: Obama’s mismanagement of the economy or the Iraq War? Somebody in Washington needed to get drilled for the Iraq War, not just the men and women who fought there. John McCain and Hillary Clinton had to pay a price at the voting booth. What are we supposed to do? Let bygones be bygones after each new train-wreck engineered by the usual suspects who populate American politics?

Finally, has Obama learned anything? The answer to that question goes to the credibility of the Iran deal.

[1] Ron Suskind, Confidence Men: Wall Street, Washington, and the Education of a President (New York: HarperCollins, 2011).

[2] See: Stuff my president says.”

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Does Paul Krugman eat lunch alone?

Paul Krugman[1] (1953- ) is one of the smartest guys alive. He got a BA in Economics from Yale (1974) and a Ph.D. from M.I.T. (1977). He taught at M.I.T. from 1979 to 2000, then moved to Princeton. He has won both the American Economic Association’s John Bates Clark Medal (1991) and the Nobel Prize in Economics (2008). He is a prolific author and a columnist for the New York Times.

Krugman presents himself as a scald to “politicians and pundits who solemnly repeat the conventional wisdom that sounds tough-minded and realistic.” He argues that “some of those seemingly tough-minded positions are actually ways to dodge the truly hard issues.” He cites “Bowles-Simpsonism”[2] as an example of this problem. Elite discourse is diverted from the immediate problem of high unemployment by obsessing over how to pay for Social Security and Medicare/Medicaid in the distant future.

His latest target is efforts to “divert our national discourse about inequality into a discussion of alleged problems with education.”[3] Krugman argues that “soaring inequality isn’t about education; it’s about power.” The conventional wisdom holds that rapid technological change has divided the labor force into those who have adapted (and reaped the rewards) and those who have not (and have suffered the losses). (See: Inequality )

The evidence doesn’t support the contention that “educational failings are at the root of still-weak job creation, stagnating wages, and rising inequality.” First, there’s no sign of high demand for skilled-workers, so the “skills gap” argument doesn’t hold water. Second, the inflation-adjusted incomes of highly-educated people have stayed flat for almost twenty years, so the differentiated income argument doesn’t hold water either.

Krugman sees something different happening. Corporate profits are up without the rate of return on investment having risen. He sees this as a sign of monopoly power. Companies are just squeezing consumers, rather than letting competition drive down prices. Furthermore, incomes are rising sharply for people with “strategic positions” in corporations and Wall Street.

He recommends redistribution through higher taxes on corporations and the rich, spending on programs to help working families, raising the minimum wage, and support for organizing labor to bargain effectively with employers.

There’s a lot to like in Krugman’s arguments. His assault on the inadequate Obama stimulus bill certainly proved correct. However, for someone with such extraordinary intellectual fire-power at his disposal, it’s odd that he doesn’t have more effect. Writing for the NYT is preaching to the converted. It is, perhaps, revealing that he called the British Labour Party leader Gordon Brown “more impressive than any US politician.” Brown is a brilliant man with sadly deficient political skills. The far less capable Tony Blair maneuvered Brown into delaying his claims to the prime ministership for years; then Brown put his foot in his mouth once he had the job. Krugman has explained his own absence from government by saying that he’s “temperamentally unsuited for that kind of role. You have to be very good at people skills, biting your tongue when people say silly things.”

It’s hard to persuade people if they turn down the volume when you start to talk.

[1] Curiously, Krugman’s middle name is Robin. His first wife’s name was Robin Bergman. His second wife’s name is Robin Weiss. This starts to sound a little like Lyndon Johnson.

[2] Krugman does not exactly attack the Commission’s Report itself, so much as a movement that makes use of the report. Erskine Bowles punched back effectively in a letter to the WSJ, 11 February 2015.

[3] Paul Krugman, “Knowledge Isn’t Power,” NYT, 23 February 2015.

Inequality 2.

Americans history since 1967 has been complex and troubled. However, the economic fortunes of virtually all Americans have steadily improved.[1] In 1967, 40 percent of households earned less than $35,000; 53 percent earned between $35,000 and $100,000; and 7 percent earned more than $100,000 a year. In 2013, 34 percent of households earned less than $35,000 a year; 43 percent earned between $35,000 and $100,000; and 22 percent earned more than $100,000.

The share of households earning more than $100,000 increased from 7 percent to 22 percent. This 15 percent moved up from the middle class. If nothing changed for the lowest share of households, then the middle class would have fallen to 38 percent. Instead, the share earning less than $35,000 decreased from 40 percent to 34 percent. This 6 percent moved up into the middle class. This pretty much matches up with the 43 percent still earning between $35,000 and $100,000 a year. For all three classes, then, the years from 1967 to 2014 have seen a total of 21 percent of Americans moving from the lower class into the middle class or from the middle class into the upper class. This means that 79 percent of Americans remained in their original class. That doesn’t mean that many of them felt frustrated or deceived.

However, the over-all rise of American household fortunes masks other important trends. First of all, the general process of advance went into reverse after 2000. In 2000, 31 percent of households earned less than $35,000 a year; 45 percent earned between $35,000 and $100,000; and 25 percent earned more than $100,000. Then, between 2000 and 2013, 3 percent of households fell out of the middle class into the lower class, and 3 percent fell out of the upper class into the middle class. So, the American story up to 2000 was even more emphatically one of success. It was followed by a period of retreat. How much of the retreat—and the resulting sense of crisis–arises from the pain of the Great Recession and how much from long term trends like globalization? People were clearly falling backward between 2000 and the onset of the financial crisis in 2008. This decline resulted from foreign competition and new technology.

Some of the people who “fell” from the ranks of the middle and upper classes probably were marginal new arrivals. Any economic down-turn would shove them off the ledge. They were the victims of President Obama’s rejection of an adequate stimulus bill back in 2008-2009 and of Republican-enforced austerity policies after 2010.

Average median household income has fallen by 9 percent. Among households headed by people 65 or older, median income has risen by 14 percent since 2000. Partly, the rise in income for older households results from people who continue to work after age 65. Partly, it results from increasingly generous benefits (Social Security, Medicare) provided to older people.

One of the key factors here appears to be education. Even as late as 1992, almost half of middle class families were headed by someone with a high school education or less; slightly more than half by someone with at least some college. Today, 37 percent of middle class families are headed by someone with a high school education or less; 63 percent with at least some college. The middle class has declined most markedly in places that have shifted from industry toward technology and services. New England and New Jersey offer good examples.

How should we deal with globalization, the increased value of education, and the weighting of social policy toward older Americans at the expense of younger Americans?

[1] Dionne Searcey and Robert Gebeloff, “More Fall Out As the Middle Class Shrinks Further,” NYT, 26 January 2015.

 

The economic mess

Every–bored-to-tears–schoolboy knows who propounded the idea of a “social contract”: Thomas Hobbes and John Locke.  The idea of a social contract on the distribution of income has formed one of the pillars of “neo-capitalism” since 1945.  However, that basic idea has witnessed several successive versions.  From 1945 to the Reagan Administration in the 1980s, the US combined high tax rates on the wealthy with the channeling of the gains in productivity to employees.  Eventually, business people pushed back against what they saw an an unfair deal.  A new social contract emerged in which much higher incomes for the wealthy were accepted so long as the real incomes for the middle class continued to rise.  (All this is just my opinion.  In all likelihood, many of my historian friends would rain-down good-humored abuse on this interpretation.)  The financial crisis and the “Great Recession” then ruptured this second version of the social contract.

In 2007-2008 we had the financial crisis and the “Great Recession.”  In 2009 we started back up the road to prosperity.  American Gross Domestic Product (GDP, OK, cue Mort Sahl here) is up 6.7% over 2007.  Per-capita disposable income rose 4.2% between June 2009 and June 2014.  Well, some of us started back toward prosperity, but not all of us did.  In June 2009 the median family income was $55,589; in June 2014 it was $53,891 (in inflation-adjusted dollars).  That’s a 3.1% decline.

How can that be?  Well, the stock market is doing very well.  If you’re the kind of person who puts their  savings  into Vanguard accounts, then your the kind of person who probably has profited from the recovery.  (On the other hand, you’re also the kind of person who took a bath in the recession.  Not that the people at the New York Times give a rip about your experience.)  If you’re the kind of person who depends on wages or salary and your home is your chief investment, there is good reason to feel like the “recovery” is a joke.  (Like a bucket of water propped on top of a partly-open door.  “Hey, can you come in here for a minute?”)  Worse still, the 1999 peak in real household income was a little higher than the 2007 (pre-recession) peak in income.  Five years into the “recovery” and we aren’t even back to the 2007 level and the 2007 level wasn’t as high as the 1999 level.  In sum, we’ve actually had fifteen years of things not working right, rather than five or seven years of things not working right.  There’s probably something in the Bible about this.

One great challenge of the day is to figure out a new version of the social contract.  There has to be a way of achieving broadly-shared economic growth.  There isn’t much political consensus about what to do.  George W. Bush and Barack Obama, Republicans and Democrats all had or have high disapproval levels in public opinion polls.  A big chunk of voters seem to have swung from supporting Obama and the Democrats in 2008 to supporting the Tea Party faction of Republicans in 2010.  The 2014 mid-terms loom next month with no certain outcome.

Saying that there is no political consensus on action isn’t quite the same as saying that professional economists couldn’t come up with some solutions.  It’s just that neither the right or the left seems much interested in listening to what they have to say.  The flight from Keynesian solutions to the recession actually was widely shared.  It is inexplicable in rational terms, especially by Democrats who were going to be left holding the bag in future elections.  Yet it happened.  Probably the same goes for constructive policies aimed at building a better American future.

Paul Krugman, “How to Get it Wrong,” NYT, 15 September 2014.

Neil Irwin, “A Crisis of Faith in the Global Elite,” NYT, September 2014.

Neil Irwin, “Why the Middle Class Isn’t Buying the Talk About a Strong Recovery,” NYT, 22 August 2014.