An earthquake registering 9.1 on the political Richter scale
rattled the White House today. It was the latest
unemployment rate, and combined with this week's bad news elsewhere in the
global economy -- from the stock
market to housing
markets, from Greece's
downgrade to food
price inflation predictions -- it may not have leveled the president's
reelection prospects, but it certainly has begun to level the political
playing field in the United States.
That's too bad because the people most likely to gain from
economic shocks that batter the president are actually the people least likely
to be able to help the United States deal with the consequences of those shocks. On the
other hand, people whose economic advice I have always been somewhat wary of
because they are often a bit too ideological for my taste -- Paul Krugman and
Robert Reich -- have published pieces this week that have me thinking they get it
in a way that neither President Obama nor his arithmetically challenged
Republican opponents do.
Reich's
piece, published in the Financial Times, and Krugman's,
appearing in his usual column at the New York Times, coolly and accurately
assess the problem the United States is facing right now. Both are worth a
careful read.
Essentially, the point of both is that the U.S. is having
the wrong debate about the wrong problem right now. First, the battle over
raising the debt ceiling a complete fraud that will be resolved shortly because
no politician in his right mind … nor even all the rest of them … would ever
want to be accused of lighting the fuse that led to blowing up the United
States' credit rating. Next, however, and more importantly, as Krugman argues
especially effectively, the most critical issue is not the deficit at all. It
is jobs and related issues associated with restoring growth to the U.S. and
hope to average Americans.
Nonetheless, as Krugman writes, "somehow an overwhelming
consensus emerged among policy makers and pundits that nothing more should be
done to create jobs, that, on the contrary, there should be a turn toward
fiscal austerity.… Somehow it became conventional wisdom that the deficit, not
unemployment, was Public Enemy No. 1."
Krugman makes the analogy with a similar misread of the
United States' core challenges that led to a mistake that prolonged the Great
Depression. Here, I think he may even ben inadvertently understating the
threat. The "mistake of 1937" to which he referred undercut the recovery from
the depression. This mistake might well deepen the current crisis and leave the
U.S. more exposed to shocks from elsewhere in the world. In other words, its
net negative impact might be considerably worse. For example, he doesn't even
really deal with how higher unemployment and sluggish growth might impact housing
markets that currently have an astonishing 28
percent of U.S. homes underwater in terms of their mortgages with the
number potentially rising past a third next year.
Homes are not just where Americans live. It's where they
keep their savings -- not in their mattresses (although who could blame them, given
what these numbers suggest about the health of U.S. banks?), but in the value
of their properties. While one out of 11 Americans is unemployed, and maybe
twice that is unemployed or underemployed, the remaining 80 percent are
seeing the most important asset they have crushed. We can debate Medicare all
we want. More damage will be done to more retired Americans by the flattening
of the U.S. home market than by anything even Paul Ryan could cook up.
And don't expect a rebound to fix things. With Americans aging,
boomers rocked by the devaluation of their principal assets are going to sell
and move into something smaller, often renting. There is no guarantee that U.S.
housing prices will rebound anytime soon … if they ever do.
Reich, in his brief but thoughtful list of possible ways to
deal with the United States' situation, includes a provocative idea: change
bankruptcy laws so that first homes are protected, thus giving homeowners more
leverage against lenders. But the bigger issue is that both Reich and Krugman
understand what the president and the Republicans seem not to: that the core
challenge for the U.S. is restoring growth and creating jobs, and that old
formulas aren't going to work as U.S. and the global economy have changed
dramatically over the past decade.
We need to be fiscally responsible (as I noted yesterday).
But of the three ways to fix the deficit, cutting spending may be not only the
least useful approach, it may be counterproductive to the extent it undercuts
growth. Increasing revenue, done properly, should not impeded growth (fairer
tax laws would actually attract new investment and eliminate unnecessary drag),
and it also would provide the funds for the infrastructure, research and
development, education, and other spending that are pre-requisites to the third
and most important approach to fiscal rebalancing: generating sustainable
growth.
That needs to be project one in the United States. And it only
provides slim solace to think that the political class that is ignoring this
most critical issue will almost certainly turn to it one way or another -- either
by waking up and thinking about creating new jobs for all Americans or by
continuing to sleep walk until they are forced to think about how to create new
jobs for themselves.
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