A tale of two crises: a lesson in priorities
by digby
This article in the Atlantic tells two stories about our recent history:
The first story is called: How Washington Saved the Economy. You might begin in 2008, when the Federal Reserve went on an unprecedented spree of asset-buying to un-gunk the banks, push down interest rates, and spur investing in mortally weakened economy. This was followed, in 2009, with an equally historic stimulus package aimed at filling holes in state budgets and sending cash back to families and businesses. The government ran steep $1+ trillion deficits to keep as much money in the weak private sector as possible.
There is little question that monetary and fiscal stimulus blunted the recession — and saved the economy.
The second story is called: How Washington Permanently Scarred the Labor Market. You might begin this story in 2011, when Congress (led by Republican obstructionism) embarked on a historic quest to crush deficit spending by any means necessary. Hold the economy hostage over the debt ceiling? Check. Kill the American Jobs Act while scheduling a too-awful-to-be-a-real-law sequester? Check. Allow the too-awful-to-be-a-real-law sequester to become a real law? Checkmate.
The deficit fell fast. As unemployment ebbed, the ranks of long-term jobless calcified, creating two separate job markets. One broken market for people out of work for more than six months. And another slowly healing market for everybody else. But the combination of a thermostatic recovery and a deep aversion to stimulus crushed any hope that the long-term unemployed would get the help they needed. Long-term unemployment isn’t special just because it’s longer; it’s special because it’s self-perpetuating. Skills atrophy, networks dry up, and employers discriminate, creating a vicious cycle of joblessness that can’t be cured by normal economic growth.
There is little question that, in the last two years, Washington has essentially left the long-term unemployed to fend for themselves — and permanently scarred the labor market.
The article goes on to examine why the first crises was met with such a strong bipartisan solution while the other has just been … left to flounder. The author, Derek Thompson, suggests three explanations:
(1) It’s the basic fact that, without a financial system, there is no economy.
This explanation blames pretty much nobody in Washington.
In 2007 and 2008, the entire economy stood on the brink of collapse, and the only way to save it was by a historic all-hands-on-deck response from the Federal Reserve and Congress. In retrospect, you could say that we went too far to protect the biggest banks (some of which are even bigger, today) without ensuring similar financial protection for homeowners. And yet, while millions of underwater homeowners are an acute tragedy, you might say, they won’t guarantee a lasting national depression. Without enough gainfully employed homeowners, you won’t have a strong housing market. Without a banking system, you won’t have a housing market, period.
(2) It’s all the Republicans’ fault.
This explanation blames half of Washington.
Let’s be crystal-clear about this: There is no doubt that Republican policies are disproportionately to blame for the shift away from stimulus. That’s an easy story to tell, and I don’t think Republicans would even dispute it. After all, they’ve argued that cutting spending would help the economy. The GOP has thoroughly convinced itself that spending-side efforts to fix unemployment are unworkable.
But there’s something else, too.
In the last year, there has settled, even among the Democrats, a kind of reserved defeat that shows a stunning lack of urgency toward the crisis of long-term joblessness. From abandoning the payroll tax cut in late 2012, to quietly acceding to sequester, to going silent on unemployment, nearly all of Washington — not just the right — has essentially stopped talking about the most important economic issue of our time.
High-ranking Treasury officials officials I’ve spoken with on background couldn’t name any specific proposals they have to help the long-term unemployed. Instead, they’ve argued that general economic growth stuff, such as infrastructure spending, should be enough to put these 4 million people back to work. But the economic literature objects: Fighting vast long-term unemployment with general economic growth policies is like fighting pneumonia with Vitamin C.
So, why aren’t even Democrats scrambling to fight for the long-term unemployed?
I’m pretty sure you know the last explanation don’t you? It’s very simple: $$$$$
This explanation blames everything about Washington. Money might not buy elections. But it does buy the attention of electeds. It subtly but substantially biases them toward the issues that most concern the rich.
Read on. Thompson takes you through the entire money morass of DC, elections and the more subtle but even more powerful incentives playing out in today’s Versailles on the Potomac. It’s deeply disturbing.
This blog post by Matt Bruenig at DEMOS illustrates the dichotomy in terems of the recent high-fiving over the recovery of the stock market to pre-recession highs:
{These] stock market moves are sadly interpreted by many as an indicator that the economy is back. This interpretation is helped along by local news stations in particular, which seem to think reporting on the economy should primarily consist of relaying the Dow Jones and S&P 500 movements of the day. Needless to say, these recent stock market moves do not indicate the overall health of the economy, certainly not for those Americans who work for a living.
For starters, the index prices do not even tell us that much about how well the stock market itself is doing. The price-to-earnings ratio for the two major stock indices are still lagging behind their pre-recession levels. This suggests that stock prices would be even higher if the investors were more confident about the future profit levels of the firms represented in those indices.
More importantly, stock prices only track investor expectations of future profits. When you buy stock in a company, you buy an ownership share in the future profits of that company. If stock prices are going up, it means investors expect higher future profits. But higher future profits have no necessary relationship to gains for working people. In fact, one of the ways businesses might book higher profits, and thereby increase their stock valuation, is by reducing the amount they pay to their workers.
[…]
Of course the fixation on stocks is rather predictable. All sorts of people hold stock, but the wealthy especially. According to the 2010 Survey of Consumer Finances, while 17.9 percent of all families have stock holdings, 52.4 percent of those in the wealthiest 10 percent of families do so. Just 4.3 percent in the poorest 25 percent of families hold stock. The numbers are even more skewed when you look at the amount of stock held. In 2010, The median family held $17.8 thousand of stock, the median family in the wealthiest 10 percent held $131 thousand of stock, and the median family in the poorest 25 percent held just $1.1 thousand of stock.The joy over the return of the stock market is a thinly veiled celebration of the returning net worths of the wealthiest among us, that being who economic and financial reporting is primarily targeted at. Just remember that the next time you see the state of the stock market is used to describe the overall state of the economy.
The decoupling of the business of America from the workers of America is quite a story that took place over the course of a relatively short period of time. It just goes to show what a concerted effort by people with money and power can do. Of course, there are some examples in history that show what a concerted effort by the masses can do too. I wonder if that pendulum’s going to swing …
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