The Broken Economy

...We should be clear about the source of the current deficits...

...There is simply no evidence that markets lack confidence in U.S...

...What is it about this recession that makes economic recovery more difficult...

...making government buildings more energy efficient...

...The economy has 7.7 million fewer jobs than it did when the recession started...

...And when housing prices finally stalled, the whole Ponzi scheme collapsed and the recession, the most severe since the 1930s, began...

...If this were a normal recovery, interest rates would fall, the stock market would rebound, and businesses would start hiring again...

...Treasury debt continues to be robust, in fact, yields are low and declining...

...This suggests a prolonged slump...

...Construction boomed, even while manufacturing floundered...

...More than half of the long-term unemployed reported that they had borrowed money from family or friends, 45 percent have increased credit card debt, and 70 percent have used money saved for retirement...

...John Schmitt and Tessa Conroy of the Center for Economic Policy Research have pointed out that even if the economy creates jobs at a pace equal to the fastest four years of the early 2000s, we will not return to the December 2007 level of employment until April 2021...

...workers in competition with workers around the world, and economic deregulation and the privatization of government services...

...The head of Obama's Council of Economic Advisers, Christina Romer, initially wanted a stimulus of $1.2 trillion, convinced that anything less would be inadequate in the light of escalating unemployment...

...deficit through austerity, he risks prolonging the unemployment crisis—and making the debt problems worse...

...In short, there is no reason to believe that the United States faces any loss of confidence based on its debt levels...

...Obama and his advisers did push through a $787 billion stimulus program...

...But now there's a disconnect: credit isn't perfect, but neither is it frozen...

...The bubbles of the late eighties and nineties were replicated in the 2000s in the housing and commercial real estate markets...

...ARTICLES The Broken Economy MARK LEVINSON Two and a half years after the recession started, Wall Street executives are once again collecting billions in bonuses, businesses are flush with cash, but most of America is still hurting...

...Businesses have plenty of cash but are not hiring...

...Our deficits are also not caused by the economic recovery policies pursued by Obama...

...The lesson of the post World War II period is that we can't reduce the debt or the deficit if our economy isn't growing...

...From 1948 to 1982, average compensation in the financial sector ranged from 99 percent to 108 percent of the average for all domestic private industries...

...But if what he is "doing" about the economy leads, at worst, to a double dip recession and, at best, to slow growth, prolonged unemployment, greater inequality, and increasing insecurity, it will be a very hard sell in 2012...

...GDP was declining at an annual rate of 6.4 percent...

...The unprecedented gap between pay and productivity growth was the result of a dramatic shift of bargaining power away from workers toward employers...

...The president's political aides and Summers believed that was too big to be enacted and feared its impact on the deficit...

...A recent portrait of the president in Vanity Fair concludes that Obama believes that if he looks after the "doing" of the presidency, the "selling" of the presidency will look after itself...

...Conventional monetary policy is less helpful because people with balance sheets underwater are not interested in borrowing at any interest rate.* Since the government cannot tell the private sector not to repair its balance sheets, the only thing it can do to keep the economy going is to borrow and spend in the private sector, thus putting money back into the economy's income stream...

...If Obama continues to try to reduce the *The Federal Reserve, however, could be doing more to promote employment...

...Almost half of all unemployed workers (6.6 million) have been unemployed for over six months...

...The public-investment-led recovery that Obama described before he became president, combined with aid to states and localities and an ambitious public program to employ a million workers in the home-care, child-care, and preschool industries, is a great place to start...

...It is no time to be cutting deficits...

...Wall Street was in shambles...

...But Congress paved the way for sustained economic growth—it passed the GI Bill, the federal highway program, low cost mortgages— and in doing so it reduced the deficit...

...In each case, housing tanked, then bounced back when interest rates were allowed to fall again...

...Richard Koo (the chief economist at Nomura Research Institute in Tokyo), who popularized the notion of a balance-sheet recession, has argued that when a debt-financed bubble bursts, asset prices collapse while liabilities remain, leaving millions of household and business balance sheets underwater...

...Moreover, the stimulus must be maintained until private sector deleveraging is over...

...It's Jobs Or . . . President Obama is now in the untenable situation of claiming that jobs are his number one priority while having no program to increase jobs...

...they are the wheels...

...The growth that has occurred is largely the result of replenishing inventories, and this has run its course...

...In fact, according to the Center on Budget and Policy Priorities, the tax cuts enacted under George W. Bush, the wars in Afghanistan and Iraq, and the economic downturn together explain virtually the entire deficit over the next ten years...

...When home prices threatened to discourage new purchases, banks and brokers, encouraged by the Fed, offered new subprime mortgage deals...

...Mark Levinson is chief economist for the Service Employees International Unon and book review editor of Dissent...

...workers: 25.8 million workers are either unemployed or underemployed (this includes those who want to work but have given up looking and thus are not counted in official unemployment figures and the underemployed, those who are working part time but want full-time jobs...

...The problem is that households are saving and thus not contributing to aggregate demand, and businesses are not spending because of that lack of demand in the economy...

...Homeowners used their newfound home equity to purchase cars and second homes...

...Although the stimulus clearly saved jobs (2.7 million according to economists Mark Zandi and Alan Blinder) and succeeded in averting a catastrophic second Great Depression, it was not enough to generate a recovery...

...A multitude of factors contributed to stagnant wages and growing inequality: the steep drop in unionization rates, the failure to raise the real value of the minimum wage, macroeconomic policy that has keep the unemployment rate too high for most of the last thirty years, unfettered globalization, the off-shoring that increasingly puts U.S...

...And even if we make the more optimistic assumption that jobs grow at the rate of the fastest four years of the 1990s recovery, we would not return to pre-recession levels until September 2014...

...For a quarter-century almost all the benefits of economic growth went to the very wealthy...

...And while the administration talks about the need for jobs, and rightly complains that Congress would not pass even the limited proposals it has put forward, these actions strengthened the hand of Senate Republicans and conservative Democrats, who refuse to appropriate another dime for jobs measures that are not "paid for" by tax increases or other spending cuts (which of course undercuts any stimulus effect...

...Are we entering a new era of unprecedented high joblessness...

...In fact, the United States ranks twenty-sixth among thirty wealthy nations in social spending...

...This is precisely where the administration made a fatal mistake...

...Fewer Americans had health insurance, and only one in five workers enjoyed guaranteed pension benefits...

...And the issue that is killing the Democrats is high unemployment...

...It didn't happen...

...The administration also misunderstands the nature of this recession, which is different than most post-Second World War recessions, and it gets the banks' reluctance to lend money wrong, too...

...The market for U.S...

...The stock market boom and bust of the late eighties was followed by the dot-com boom and bust of the late nineties, which created a "wealth effect" that buoyed consumption and investment...

...There is a growing body of evidence on the deleterious effects of long-term unemployment—what John Irons has called "economic scarring...

...When the administration was formulating its stimulus plan, Summers said it must be "timely, targeted, and temporary...

...Even mainstream economists like Alan Blinder and Robert Shiller are calling for a government jobs program...

...We have been in this situation before...

...Why hasn't the administration been able to do more...

...The only thing more disturbing than the size of the economic hole we are in is the shocking, and inexcusable, lack of response from the federal government...

...In other words, fiscal stimulus becomes indispensable in a balance-sheet recession...

...During the campaign, Obama promised to create the largest public works program since the inception of the interstate highway system...

...Unemployment at this level, for this length of time, will substantially harm many individuals and families...

...Meanwhile, Wall Street saw its opportunities and took them...

...or installing fuel-efficient heating or cooling systems...

...But the three recessions since 1990 haven't been deliberately engineered by the Fed...

...By the late 1990s, Treasury Secretary Lawrence Summers was simply repeating conventional wisdom when he said, "Financial markets don't just oil the wheels of economic growth...

...But these policy commitments rest on a misunderstanding of the limits of deficits and how to reduce them...

...Obama's Response to the Economic Collapse When Barack Obama took office the economy was losing 750,000 jobs a month, and the unemployment rate was 7.6 percent and heading toward double digits...

...When the banks and brokers became worried about risk from these mortgages, they invented elaborate financial instruments to cushion and spread the risk...

...It could take many years before the economy starts to grow again...

...Recent surveys confirm that unemployment is hard on families...

...His plan was to repair roads and bridges, schools, sewer systems, mass transit, electrical grids and dams...

...Most distressing, unemployment is at 9.5 percent, a rate historically associated with a severe recession, and it now appears likely that it will rise into next year...

...The United States has carried a considerably larger debt burden in the past and had no difficulty finding willing lenders at the time...

...political parties pursued policies that led to a low-wage, high-spending economy...

...The longer-term debt problem is entirely a consequence of health care costs, projected to grow at a much faster rate than the economy...

...This Recession Was Different Before the growth of asset bubbles, recessions were caused by high interest rates imposed by the Fed to control inflation...

...It cut taxes, provided extra funds for unemployment insurance, gave significant aid to state governments, and funded public infrastructure projects...

...Bankers' pay rose just as dramatically...

...Paul Volcker summed up the situation: "The fate of the world economy is now totally dependent on the growth of the U.S...

...Origins of the Bubble Economy Our story begins in the Reagan years, when finance was accorded a special place in the American economy...

...In the second half of 2010, federal stimulus spending will decline, the inventory correction that has boosted manufacturing will have run its course, the housing market appears to be turning down again, and problems in Europe are leading to a global economic slowdown...

...For thirty years both major U.S...

...In the typical family, parents were working longer hours, yet their real wages were either stagnant or declining...

...economy, which is dependent on the stock market, whose growth is dependent upon about 50 stocks, half of which have never reported any earnings...

...The unemployment rate understates the scope of the problem for U.S...

...The result was an economy driven by asset bubbles fueled by cheap debt...

...How did we get to a point where a 9.5 percent unemployment rate doesn't evoke urgent legislative and executive action from a Democratic president and Congress...

...State and local governments were falling short of revenues because of the recession at just the moment when demand for public services were rising...

...The Economic Policy Institute estimates that roughly a third of the work force and more than 40 percent of minority workers will be unemployed or underemployed at some point during the year...

...This is what came to be known as "asset-price Keynesian...

...Other countries that currently carry much higher debt burdens are still able to borrow at relatively low cost in financial markets...

...As private credit conditions improved, they believed the private sector would pick up the responsibility for growth...

...During the postwar boom, we ran annual deficits around 2 percent of GDP but the economy grew at a much faster rate, so that by the 1970s the debt-to-GDP ratio was below 30 percent...

...Job displacement also leads to a 15 percent to 20 percent increase in death rates over the ensuing years...

...Under George W. Bush, it reached 41 percent...

...It is no mystery what a jobs program might look like...

...In this type of recession, the economy will not achieve self-sustaining growth until the balance sheets are repaired...

...They are certainly not caused by so-called "out of control" social spending...

...As Michael Lind pointed out, "He was wrong...

...In many areas—early childhood education, active labor market policy, unemployment insurance, and pension systems—we are well behind other wealthy nations...

...economy is slowing, as the fiscal stimulus dissipates and spending contractions at the state and local level undermine injections from the federal government...

...government-issued debt...

...If this was insufficient, they hoped the Federal Reserve would flood the banks with liquidity and that this would encourage bankers to lend more...

...In these areas, as well as in basic infrastructure, such as high-speed rail and telecommunications, we should be talking about increasing expenditures, not cutting...

...And as sales rose, the price of homes rose...

...In 1986, that figure reached 19 percent...

...Policies promoting the free movement of capital across borders, the deregulation of finance, and the repeal of regulations separating commercial and investment banking were the order of the day...

...After a growth spurt at the end of last year, the U.S...

...building energy efficient appliances...

...After the Second World War our debt-to-GDP-ratio was about 120 percent, a greater burden than now...

...From the beginning, the administration seemed to accept the argument that the fiscal stimulus that passed Congress was the limit, on the grounds of fiscal sustainability and the need to retain the confidence of the markets...

...The point is that there is no crisis of entitlement spending—though we do need to control health care costs...

...It seemed that an economic reversal comparable to the Roosevelt revolution of the 1930s was at hand...

...Short of a public-investment-led recovery, nothing else will fuel growth...

...That is a far more attractive path to recovery than an austerity policy...

...In fact, we needed to add around 3.2 million jobs simply to keep pace with population growth...

...The job shortage is now a staggering 10.9 million...

...From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits...

...With the rates plummeting, home sales rose...

...In order to regain their financial health, households and businesses in the private sector are forced to repair their balance sheets by increasing savings or paying down debt, thus reducing aggregate demand...

...they happened when credit or stock market bubbles burst...

...Deficit Thinking The administration's embrace of austerity was first expressed in the president's State of the Union address, where he announced a freeze on domestic spending after this fiscal year, as well as in his decision to set up a fiscal commission headed by two well-known deficit hawks, Erskine Bowles and Alan Simpson...

...He also wanted to create public jobs in areas such as expanding broadband access...

...Mortgage foreclosures were surging at the rate of 250,000 a month...

...The warning signs are clear for all to see: the economy is slowing, state and local governments have already cut 316,000 jobs in the last two years, and if we don't deliver federal aid to states and localities, the national economy stands to lose up to 900,000 public and private sector jobs...

...Poverty was increasing and inequality was growing...

...and creating alternative fuels, windmills, and solar panels...

...A few examples: • The average mature worker who loses a stable job will see his or her earnings fall by 20 percent over fifteen to twenty years...

...Polls show continuing erosion in the public's confidence in Obama and the Democrats...

...The expansion of public domestic demand that America needs must be prompt, productive, and prolonged...

...After 1983 it shot upward reaching 181 percent in 2007...

...The rush of foreign dollars into the United States (a result of the trade deficit) helped the Federal Reserve keep interest rates near zero...

...Four in ten people surveyed said that they went without medical care for themselves or family members...

...Why has the Obama administration's economic recovery plan fallen so short...

...The Fed could purchase more long-term government debt (to keep long-term interest rates low), it could purchase state and local debt (to help states and local governments fund local projects), and it could state its willingness to purchase bonds of a public authority set up to fund badly needed infrastructure projects...

...With growing wealth came political power...