The Lagging Indicator

Once the health care fight is over, the next big fight is the battle over financial regulation. As challenging and frustrating as health care has been, at least reformers have been in the game in terms of a decent bill. The odds have never been even, but a decent bill, in my view, is a possible ending. With the financial regulation fight, the odds are much tougher because the Wall Street lobby is so powerful, and the forces on the other side are still relatively weak, and the Obama proposals overall are a weaker starting place than in health care. As important as it is, though, the financial regulations fight is only a pre-cursor to the massive economic policy debates that we will be engaging in for the next four years. These fights are symbolized by a phrase that the President and his economic advisors repeat too often, a phrase that is both politically tone deaf and potentially indicative of a much deeper problem in their thinking. It's the phrase, "jobs are a lagging indicator" of our recovery. I worry less that they say it, though, and more that they might actually believe it.

That "jobs are a lagging indicator" thing is a phrase that conservative economists (which is most of them) like to use because in their neo-classical economic models about recessions and financial crises, first the bankers regain confidence and their economic health, then they start loaning to businesses again, then businesses get healthy -- and finally at the end of the happy cycle -- they start hiring workers again. Of course, as the brilliant Paul Krugman piece on the economics profession in the NYT magazine pointed out, many of the same economists said both a real estate bubble and a financial panic were actually impossible because they didn't correspond to their free-market-cures-all-problems-and-provides-perfect-equilibrium models.

If the basic ideas behind the jobs being a lagging indicator phrase sound vaguely familiar, it's because they are essentially another version of the trickle-down economics we have been hearing for years from the two Presidents Bush and President Reagan: give those rich people and corporate CEOs more money, and it will eventually trickle down to the rest. There are a great many problems with this theory, but they can be summed up rather simply with the fact: pretty much nothing ever trickles down. In all the years of the Reagan and Bush presidencies, 20 years in all, the income of middle class workers stagnated (or worse), while the income of the rich skyrocketed.

So now we see one article after another on the economy reporting some version of the news that banks have recovered, businesses are starting to do better, but workers are getting left behind. You can grab any article on the economy at random written over the last couple of months, and find the same kind of quote, such as this one from a WP article from September 1st: "The emerging economic recovery suffers from a great contradiction: Even as factories seem to be cranking out more stuff, the job market remains terrible."

Now I am not suggesting that Obama's economic philosophy is the same as the right-wing Republican trickle-down philosophy of Reagan and the Bush kin. There are lots of things to like about what he has done and proposed so far. The stimulus was classically liberal Keynesian, with hundreds of billions in job-creating public capital investments, and it is clearly helping prop up the economy right now. Even the tax cuts that were included in the stimulus bill were considerably more progressively structured than any tax cuts ever passed or proposed by Republican Presidents. Obama's budget proposal was also very progressive: the most money for poor people of any federal budget in history, even LBJ's War on Poverty budgets, for example. He has generally argued strongly for a more progressive tax system than we have seen in the Bush or Reagan years. Although we don't know what we will get in the end, his initial health care and energy proposals included solid policy ideas with lots of good progressive notions in them. And he clearly does believe in a stronger regulatory hand than Republican Presidents whose lack of support for even basic regulation is so much of the reason we are in the economic mess we are in today.

In spite of all this though, I do have a couple of deep worries about Obama's economics, and neither of them are small things, they go to the very core of whether the "lagging indicator" ever catches up to the happy days the Wall Street bankers are experiencing right now. One worry is about the President and his economic team's core belief system, and the other is his tactical mindset.

On the economic belief side, I worry that he doesn't fundamentally get that the neo-classical theories that have dominated the economics profession over the last couple of decades are just flat out wrong, and that our economy, despite the recent uptick in some statistics because of the stimulus and the trillions of dollars the Fed injected into the system over the last year, is on some level truly broken. Neo-classical economics assures that once we stabilize the banking system, more credit will go to businesses to invest, and they will all eventually start hiring people. The problem is that this economy is still fundamentally weakened, that the cracks and bruises it suffered in its sudden fall last year made it vulnerable to other problems that will sap its strength. If the neo-classical economists are wrong again- just like they were about the housing bubble, just like they were about deregulating finance and the financial crisis in general- and the economy stays soft, will the jobs ever start getting ginned up again, especially after all that stimulus money runs out in the middle of 2011? (What a delightful time for the economy to turn south for an incumbent President gearing up for his re-election campaign.)

The other thing I worry about with President Obama is on the tactical level. I give him huge credit (in fact of all the things I like about him, what I like best is this) for his willingness to swing for the fences, to try to do big things, transformational things: health care reform, climate change, financial reform, immigration reform. His ambition and desire for big change is his best quality. But when it comes to how you get things passed, his instinct seems to be to follow Rahm Emanuel's more conservative lead and stay carefully within the cautious conventional wisdom lines: rather than being as gutsy on his tactics as he was on his big change agenda, he seems to be pulling back. In order to break through the power of DC special interests, I think Obama is going to have to take them on directly, pick fights with them, and beat them decisively. Because not only is the economic system broken, the political system is broken as well. He needs to think big about programs that create jobs directly, and think bigger than he's done so far about taking on Wall Street.

In the 1930s, FDR figured out that the economic theories that he studied in college were no longer working, and needed to be directly challenged. He put money directly into jobs and income for the poor and working class people rather than doing bank bailouts and tax cuts for the wealthy. He took the fight to the big special interests, the "economic royalists", with pride and with gusto. And the American people supported him. Now is the time for President Obama to take FDR's example, and to fully embrace bottom-up policies rather than the trickle-down variety.

Comments

[peetey]

I think the next big fight will be over Immigration reform. As far as lagging indicators are concerned I believe Obama is a Leading indicator of change in America. I believe he is the first of many presidents that will break the mold. A mexican intellectual in the 20's wrote a book called "La Raza Cosmica" which is about a race of people in America that will represent all of the races. I believe that Obama is one of this cosmic race and he is a leading indicator. This is the stuff that scares the dickens out of Birthers and Tea Baggers, America is changing and Obama is leading the change.

[scottmcdowell]

Well, the problem is not that there was a lack in regulation, but the disconnected way financial institutions are regulated. For example the SEC and CFTC should probably under the same roof, but such a merger would just as much bureaucratic opposition as it would from a Wall Street lobby.

I believe in theory that markets can be self correcting and sustainable, but when you add derivative trading and the systemic risk of "too big to fail" banks, the self correcting aspects of a market are all but diminished.

As for the trickle down, I think if we would have went with Paulson's initial proposal of capital injections this would be true, but with the regulated investments that Fed has made, with the assumption that we will get the money back with interest, I'm not so sure. It does take some time for market changes to reach main street, and furthermore employment.

I'm not sure that the system is broken, but it certainly needs some changes. Better forms of oversight. It's a time for big ideas from legislators, we'll have to wait and see if they have the wherewithal to make them.

[Indianrock]

Yes, we can't allow a "recovery" to be defined as something with high unemployment. It reminds me of saying inflation is low if you take out the volatile elements such as food and energy ( who needs those anyway ! ). Wait, those make up a large percentage of most people's budget.

I like what someone said about "laying off your customers." Well I don't actually blame businesses since they just have to compete with what other companies are doing to cut costs. Although large companies, in particular, do collude with each other at times, generally they have to go with the flow -- a few move factories offshore, others soon follow suit or go out of business. So, like it or not, that leaves the government to do something about it.

[Matt Osborne - Huffpost Blogger]

I'll only take issue with one thing: the next TWO battles are financial reform and Waxman-Markey cap & trade legislation. I actually feel more confident in the latter than the former because there is as yet NO civil society organization promoting financial reform.