Tuesday, February 3, 2009

Cyclists and Structuralists

Robert Reich, who oversaw Clinton's economic upturn as Secretary of Labor, has written an article that every Senator and Congressman who are opposing the Stimulus package should read. The often repeated quote of Santayana, "Those who cannot remember the past are condemned to repeat it" certainly applies to the Republican Congressmen who voted against the Stimulus package.

Math was always my worst subject so I don't pretend to be qualified to make judgments on the economy, but, as you know, I am pragmatic and if something makes sense to me I accept it as being close to factual.

It would be nice to forget politics now that the election is over, but the hard part is just beginning and it has been proven that a loud and vocal constituency gets the attention of our representatives if done en mass. It is easy to voice our concerns now with
Internet access . Find the web site of your representative, write them an e-mail, and tell them your views. If you have a story on how the subject impacts your life be sure to include that. Pay special attention to votes coming up and write asking them to vote yea or nay on the issue. Right now the Stimulus Package is due for a vote in the Senate. Let your rep know how you want them to vote.

Please ask your friends and relatives who agree with your position to write or call their representative also. With the Internet we can multiply our numbers easily and the greater number of letters or calls a representative gets, the greater the impact. After all, we are the ones who pay attention and vote.

Following are excerpts from an editorial written by Robert Reich, Clinton's Secretary of Labor. I have omitted the first part of the Reich editorial for brevity, and have made, what I consider to be, the salient points in blue. If you don't have time to read the whole article I urge you to read those points.

And now to the editorial:

The moment the economy appears to be on the mend, conservatives such as Feldstein will want the government to cut spending. In their view, this is the only way to get the economy fully back on track. But others believe that it is precisely the track we were on that got us into this mess in the first place.

Those who support the stimulus as a desperate measure to arrest the downward plunge in the business cycle might be called cyclists. rs,Others, including me, see the stimulus as the first step toward addressing deep structural flaws in the economy. We are the structuralists. These two camps are united behind the current stimulus, but may not be for long. Cyclists blame the current crisis on a speculative bubble that threw the economy's self-regulating mechanisms out of whack. They say that we can avoid future downturns if the Fed pops bubbles earlier by raising interest rates when speculation heats up.

But structuralists see it very differently. The bursting of the housing bubble caused the current crisis, but the underlying problem began much earlier - in the late 1970s, when median U.S. incomes began to stall. Because wages got hit then by the double-whammy of global competition and new technologies, the typical American family was able to maintain its living standard only if women went into the workforce in larger numbers, and later, only if everyone worked longer hours.

When even these coping mechanisms were exhausted, families went into debt - a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take'out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.

What happened to the money? According to researchers Thomas Piketty and Emmanuel Saez, since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do - after all, being rich means that you already have most of what you need. That's why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It's not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation's income.)

Other structural problems are growing as well. One is climate change and our dependence on oil. Another is the United States' growing reliance on foreign capital, mostly from China, Japan and the Middle East. Neither is sustainable.

Meanwhile, our broken health-care system drains more of our dollars yet delivers less care. When President Clinton tried to tackle health care in 1994, it represented 14 percent of our GDP, and 38 million Americans were uninsured. Now, the nation spends 16 percent of its GDP on health, and about 44 million of us are uninsured. Most cyclists acknowledge these problems, but they tend to think of them as separate from the current crisis - issues to be tackled after the economy has recovered, and then only to the extent that we can afford to do so.

But structuralists like myself don't believe that the economy can fully recover unless these underlying problems are addressed. Without policies that put the nation on the path to higher median incomes, higher productivity, renewable energy and a more accessible and efficient health-care system, we'll face deeper and more prolonged recessions, followed by ever more anemic upturns. Bill Clinton's inability to do enough about these problems in the 1990s, followed by George W. Bush's negligent disregard of them, allowed them to grow to the point where any major triggering event can cause a vicious downward spiral.

As early as next year, the business cycle may hit bottom and begin climbing. At that point, cyclists and structuralists will want two different things - and which side the president chooses will be, as Will Marshall of the Progressive Policy Institute puts it, the "central drama" of the Obama administration. The president recently sought to placate the cyclists by promising to focus on controlling the future costs of Social Security and Medicare. Perhaps Obama has in mind a "grand bargain" that would allow him to continue his structural agenda after the business cycle turns upward in return for limiting spending for those two giant entitlement programs.

Let's hope he has something more in mind, something more fundamental: a debate about public investment and sustainable growth. For structuralists, the size of the federal debt itself is irrelevant. Debt has to be considered in proportion to the economy as a whole. According to government projections, the national debt will exceed half the nation's gross domestic product by the end of this year - not including the stimulus package. That's certainly high, but not close to a record. The debt was far more than 100 percent of GDP at the end of World War II. That mammoth debt, not incidentally, put Americans back to work, financed industrial production, underwrote a new generation of science and technology and created a wave of demand for consumer goods when the war ended. In short, it got the economy on a new and faster track, thereby allowing the United States to pay down the debt and ushering the country into a new era of widely shared prosperity.

Even a high ratio of debt to GDP isn't especially worrisome if much of that debt comes from investments that put the economy on a path toward solid growth. One recent study from Columbia Teachers College, for example, shows that cutting high school dropout rates in half would generate $45 billion in new tax revenues and savings on expenses such as welfare and incarceration.

We cannot assume, however, that gains from these sorts of public investments will grow the economy enough to reduce the relative size of future debt. We must consider the tax code's structure as well. Should marginal taxes be raised on the most affluent? That could help finance what must be done to put the economy on a sustainable growth path.

But I don't think that our new president should wade into this debate right away. He has his hands full. He needs to implement the stimulus package and reverse the downturn. Bill Clinton had to choose sides almost right away - and had little choice but to cave in to the cyclists and forfeit most of his long-term economic agenda. The severity of the current crisis gives Obama more time.

But he will need to open the larger debate sooner rather than later. This downturn is revealing the U.S. economy's underlying flaws. Once the business cycle turns up, the public and its representatives may be less inclined to tackle the things that truly drag us down. Clinton was, after all, reelected in 1996 on the wave of a cyclical upturn in the economy. But the structural problems that he failed to address - widening inequality, sagging median incomes, a broken health-care system, crumbling infrastructure and global warming - are that much larger now, making the current crisis all the worse.



Betty said...

Good blog, good editorial. You're right, we do have to let our elected officials know what we want them to do. Part of our problem has been apathy, but now, we need to get involved.

20th Century Woman said...

This is very interesting, and I'd like the source if possible. I want to print it out for closer study, and also to read the full text. Thanks.

Looking to the Stars said...

I agree with Betty and a big thumbs up for you Darlene. We as americans have to keep an eye on our elected officials to (1) voice our cares to them and (2) let them know we are watching them and if they don't do right for us then vote them out.

Darlene said...

Betty, If it's truly a government of the people, for the people, etc. then it's a responsibility that we shirk at our peril.

20th Century Woman - here is the URL to the article. Sorry I can't make a link on this page. If you have any trouble let me know your e-mail address and I will send it to you.

Looking to the Stars - Thanks for visiting my blog. You are on my blog list now.

Tabor said...

This was most educational and helped put much in perspective for me. I have not digested it all, but thanks for posting! (For some reason on my blog you cannot pop to the top on the blogroll with new entries?)

Darlene said...

Tabor, I wish I could solve all of the problems with my blog. I had my guru here yesterday helping me with video problems and he caused more problems than he solved. I am at my wits end.

Rinkly Rimes said...

I didn't have time to read it all but the same things are dominating OUR TV too. In fact we heard that very gentleman yesterday! Yes, where IS the money? Was it ever there at all? I keep saying we should view Global Warming as another World War! After all, that's what got us over 'the last one'.

Robert V. Sobczak said...

I'm just hoping there are enough think tanks of experts with enough street smarts that we get it right ... but maybe that assumption has bee our problem all along. You are right that it requires civic engagement.

Nancy said...

Well done, Darlene.

You certainly do have a good grasp on things.

Keep up the great information...

Sylvia K said...

Great post, Darlene and you are so right about keeping an eye on our elected officials, because right now they seem to be playing some of the same old games and that just isn't going to get it done. They need to know we care and that we are watching them. Thanks as always! And I have the same problem Tabor has, that's why I'm sometimes late getting to your blog. Aren't all these little glitches annoying?

Anonymous said...

Any pilot knows what a PIO is--a pilot induced oscillation. It is similar to the effect you would get if you held one end of a slinky and moved your hand to make it "bounce". If you time your hand movements properly, you can make the bounce (oscillation) grow larger and larger--OR--by moving your hand out of cycle with the oscillation, you can damp it out--stop the bounce. The airplane and the slinky will stop oscillating, on its own, if the pilot (or you) just stops moving the controls (or your hand).

As we have observed, the economy has, for decades, been in oscillation. Because it is so difficult to time the "inputs" properly (impossible through a democratic government), we would be better off doing nothing and letting the economy level out on its own. This is the most difficult thing to do; but, it is the surest.

In the long run, we should have as our goal a level economy--not the growing economy that most people and the politicians seem to pursue. There is an optimum level for the economy--passed some time ago--that could assure a decent standard of living for a reasonable level of population (which also passed optimum some time ago).

No way would I encourage anyone to vote for any bailout bill, nor did I support passage of the "original one" (that one worked swell, didn't it?!!!!)
Cop Car

Darlene said...

Car - Thank you for a different take on the situation. You are probably right in letting things sort themselves out by leaving it alone in normal times, but we are way beyond normal and drastic measures are called for.

I think that we can only learn from history and the closest parallel we have to this situation is the excess of the 1920's and the mistakes made then that led to the Great Depression. We are in unchartered waters to a degree, but we can modify what worked then and use it now.

Having lived through the Depression I can tell you that you don't want to go there and that is exactly what will happen if we do nothing.

Anonymous said...

Darlene--The whole point in a pilot induced oscillation is that it is an abnormal situation--one that can lead to fatal results! Only if someone has a plan that gives guaranteed good results...and is able to execute the plan with perfect timing...can I agree that it is a good thing to do. There is no agreement that the bailout is a guaranteed good thing. We need to learn when the best thing to do is nothing!
P.S. I have observed, in life, that things done in haste lead us to repent/regret at leisure. I am hugely disappointed that Obama is echoing Bush's "hurry, hurry".

Darlene said...

Cop Car, Yes, haste makes waste but when we are hemorrhaging thousands of jobs daily we cannot afford to have the Senate tinker with it until it will be so weak it will do no good. There is no perfect timing on this one and, no it isn't what you or I would want, but most responsible economists agree this is the best we can do now.

As to your other point that the bailout did no good. Of course not because there were no strings attached to the banks getting all that money. Next time if they want our money it will have to be on our terms; they will have to put that money into the economy by lending instead of using it for mergers and partying. The way it was done before was a joke; just hand them money as a gift to do with as they wished. No wonder it didn't work.

I listen to the experts because I lay no claim to having a clue about the economy. History is the best teacher on this one.

Thanks for your input.