Not Taking The Presidential Eye Off The Economic Ball

On my way back to DC after three days in New York (including some time at this year's excellent Personal Democracy Forum which NDN helped sponsor) and I can't stop thinking about the conversations about the American economy I had while there.   David Leonhardt has a piece in today's Times which captured a lot of the sentiment I heard.  It begins:

In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.

To make the case for a big stimulus package, they released their economic forecast for the next few years. Without the stimulus, they saw the unemployment rate — then 7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent next year. With the stimulus, the advisers said, unemployment would probably peak at 8 percent late this year.

We now know that this forecast was terribly optimistic. The jobless rate has already reached 9.4 percent. On Thursday, the Labor Department will announce the latest number, for June, and forecasters are expecting it to rise further. In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.

There are two possible explanations that the administration was so wrong. And sorting through them matters a great deal, because they point in opposite policy directions.

The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference.

The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it.

To me, the evidence is fairly compelling that the second answer is the right one. The stimulus package does seem to have helped. But its impact has been minor — so far — compared with the harshness of the Great Recession.

Unfortunately, the administration’s rose-colored forecast has muddied this picture. So if at some point this year or next the White House decides that the economy needs more stimulus, skeptics will surely brandish that old forecast.

Worst of all, the economy really may need more help.

Three quick thoughts:

1) It is time for the Obama Administration to abandon the "recovery" rhetorical frame.  Going back to the economy under Bush is neither possible given what has happened in recent months, nor is it desirable - that economy produced growth but declining incomes for a typical family.  The more recent formulation of "new foundation" is clearly a better frame.   What America needs is a more modern and better economy - the very opposite of recovering what we had.

2) It is remarkable how suprised mainstream economists - including the Obama team - have been by the virulence of the Great Recession.  We will be debating this point for years but certainly one major factor is that the American middle class was already in a terribly weakened state prior to the financial crisis.  Incomes had been declining, and wages flat for most of the current decade, long before the Recession began.  So when it kicked in, and a weakened middle class then lost wealth, jobs, homes, income while retaining high levels of debt, things have gotten much much worse with the end hard to see today. 

My own view is that we really don't understand how robust growth is going to happen again in the Untied States, and certainly we don't know how we can get incomes up again given that they fell during the last period of sustained growth.  What are we doing differently now that will ensure that we don't "recover" the Bush economy - one that saw growth and income decline?

Given the state of the American consumer it is easy to see how over the next 3-5-7 years the savings rate stays very high as people replenish their lost savings and pay down high-interest debt.  This leaves little left over for consumption.  If the American people spend the next half a decade getting their own personal balance sheets in order, and buying very little to do so, we could see very slow growth here and aboard, and may be headed, incredibly, to an entire decade or more of no income growth for the typical American family. 

3) In meeting after meeting I heard that the coming commercial real estate crisis could dwarf the home mortgage crisis.  Are we really ready for this? Do our policy makers understand what is coming here? Will another round of defaults then once again cause bank failures and usher in a new round of financial crisis?  Predictions are we will begin to feell the effects of this impending new crisis this fall, while the nation may also start having to manage the prospect of several states, including California, going bankrupt or shutting down this summer.

As recent polls have shown the American people believe there is one dominant issue in American politics today - the economy.  While I am proud of the President for bravely taking on health care and climate change this summer, he also cannot lose sight of our weakened economy, weakened financial sector and weakened middle class, and to be very very sure he is keeping his eye on this very important ball.  It seems like the nation is ready for, and requires, a big conversation about our economic future, and how this new economy of the 21st century will be very different from the one just past.  I am not convinced we are adequately preparing our people for what is to come, and certainly the nostalgia tied into the concept of "recovery" is not helping us let go of an old economic and financial paradigm, and forthrightly begin the process of welcoming in the next.