04 April 2011

Gloom and doom from Robert Reich

I'm not necessarily agreeing with him, but there are some thought-provoking comments in this HuffPo column:
Why aren't Americans being told the truth about the economy? We're heading in the direction of a double dip -- but you'd never know it if you listened to the upbeat messages coming out of Wall Street and Washington. Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It's weaker today on average than at the lowest point of the Great Recession.

The Reuters/University of Michigan survey shows a 10 point decline in March -- the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board's index of consumer confidence, just released, shows consumer confidence at a five-month low -- and a large part is due to expectations of fewer jobs and lower wages in the months ahead. Pessimistic consumers buy less. And fewer sales spells economic trouble ahead...

Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop... There's no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year's budget...

Washington, meanwhile, doesn't want to sound the economic alarm. The White House and most Democrats want Americans to believe the economy is on an upswing. Republicans, for their part, worry that if they tell it like it is Americans will want government to do more rather than less. They'd rather not talk about jobs and wages, and put the focus instead on deficit reduction (or spread the lie that by reducing the deficit we'll get more jobs and higher wages).

I'm sorry to have to deliver the bad news, but it's better you know.

3 comments:

  1. I'm not an expert at all in economics, but it seems to me like he answers his own question.

    If I understand correctly, his point is that the economy is going to collapse again because the public's confidence is low.
    If that's the case, how is saying "the economy is going to collapse" supposed to help?..

    Anyway, the whole premise of measuring "consumer confidence" sounds preposterous to me.

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  2. He's not saying that the economy will collapse again because of a lack of consumer confidence, what he's saying is that it will collapse again because of a lack of action on part of people who know how to.

    He spells out clearly what nearly every economist on the planet knows needs to be done, and has needed to be done since the time of the original stimulus (the ones who disagree are a part of a small dying group of economists who haven't been relevant since the 80's) and that's that the government needs to spend more money.

    The stimulus is ending, the consumers will not spend, and neither will the government, so who's going to make up that difference? How will the economy function in the meantime while NOBODY is spending anything?

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  3. In October, 1929, Herbert Hoover had been in office for 7 months and had 41 more months before FDR would take responsibility for what was then occurring - the bursting of a speculative bubble. That bubble had to do with the stock market, but other than that, it was a close duplicate of one to occur 79 years later, in housing. Both bubbles had been the result of essentially Ponzi schemes spread out to millions of Americans, at the encouragement of the vast majority of politicians and economists.

    Once the crash occurred, Hoover, with his Republican mindset of "responsible economic principles," tried everything in the Republicans arsenal. The #1 mechanism was to balance the federal budget, by cutting spending. This utterly failed, and was seen to fail by FDR. FDR had those 41 months to observe what NOT to do - and trying to balance the budget was one of the things FDR avoided doing once the ball was in his court.

    Barack Obama, on the other hand, had about three months to observe what George W Bush was doing. Notice, all ye with an eye to see and an ear to hear: George W Bush pulled $700B out of thin air and threw it at, forced it on, the big banks who had created the mess and told them to not go out of business. For this, Bush was praised, because the world could not stand to have all the big dangerous hip-shooting investment banks go out of business.

    Obama, when he came into office, did the same, and the Republicans praised that the money was going where it needed to go - in their eyes. Obama, for some reason, chose to keep all but one of the regulators who had allowed the collapse, by not regulating.

    What did FDR do with his 41 months of observing from the sidelines?

    First, he CLOSED all the banks. Then he sent teams out to assess each bank's viability. Some he closed down for good. Some he allowed to re-open a week later.

    Second, he began a plan to put people to work, so that the economy could begin again. The NRA, the AAA, the WPA, the CCC - all were designed to allow people to earn a living and keep their pride - and begin to funnel money through the economy. As little as it was - and it WAS only a little - it began to work.

    By the end of his first term, the stock market had recovered something approaching 90% of its mid-1920s level. Prosperity was beginning to bloom again. "Happy days were are again" was very nearly true.

    After his reelection, FDR did a very stupid thing: He listened to the rich bankers and the other Republicans. He was, after all, one of them, in spite of his siding with the Democrats. So what did he do?

    He decided to try to balance the budget. The economy was not recovered sufficiently, and it crashed again.

    The 1930s was not one Depression. It was TWO. The first had recovered to simply recession levels, after 7 years. The second one lasted another 3 years - until the U.S. started supplying England with armaments. A year later, the U.S. was supplying itself, too.

    The arguments that World War II cured the economy is one we have been stuck with ever since, and is the reason that we spend over 60% of our federal budget on the military: Many are afraid that if we don't, we will have a return of the 1930s.

    It all started when FDR listened to the Republican economists instead of the Keynesians. The Keynesians knew that in depression, it is beholden on the government to take up the spending slack, to keep things going until the private sector had enough momentum itself.

    Yes, our economy is going to collapse, just like it did when Hoover balanced the budget, and just like when FDR tried to balance the budget. Obama will have the same luck.

    Consider that Obama is only 25 months into his term of office. That puts us only 28 months since the Lehman Brothers crash, 13 months short of when FDR stepped in and closed the banks and started the country back - by SPENDING. NOT by balancing the budget. The latter is exactly the thing NOT to do.

    IMHO.

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