Will the recession just go on and on and on? In the absence of far more vigorous government action, it certainly looks that way.
At a recent conference sponsored by several think tanks, Paul Krugman declared that the recession could literally continue indefinitely because the economy is stuck in a cycle of depressed wages, reduced consumer purchasing power, damaged banks, and business hesitancy to invest -- and no strategy on the political horizon is about to alter this dynamic.
It's not surprising to hear that from Krugman. The startling thing was that his two co-panelists, former Reagan chief economist Martin Feldstein and the chief economist of Goldman Sachs, Jan Hatzius, agreed that massive stimulus spending was the necessary cure.
In similar circumstances in the middle and late 1930, GDP growth turned positive, but unemployment remained stuck in double digits. It took the accident of World War II for government to spend and invest at a level that finally brought back full production and full employment. Annual deficits were as high as 28 percent of GDP, more than triple the current level. Once prosperity returned, however, the debt level came steadily down.
But Republicans have made it impossible for the government to increase spending to create jobs and investment, and deficit hawks of both parties would rather have government tighten belts.
If fiscal policy is inoperative, that leaves monetary policy. The Federal Reserve has abandoned its inflation phobia and is turning to the printing presses (the trendy euphemism for printing money is "Quantitative Easing.")
But most economists think that the Fed is about out of tricks. Very low interest rates have already triggered a risky speculative boom in commodity prices and a flight from the dollar. Zero interest rates don't stimulate the economy when banks invest the proceeds in Treasury bills because they are too traumatized to lend to business.
Faced with a Japan scenario of endless stagnation triggered by a wounded financial system, you might think this country would be having a serious, adult debate about what it will take to rekindle growth. A useful debate, for example, can be had about the relative benefits of tax cuts versus public investment (according to the bipartisan Congressional Budget Office, public investment wins, hands down.)
But instead, the microphones have been hogged by people who think that the road to prosperity is paved with austerity.
Deficit hawks dominate President Obama's fiscal commission, which is due to report by December 1. Even though Social Security will be in surplus for the next 27 years, austerity mongers want to slash benefits, on the theory that some kind of human sacrifice will restore business confidence.
And just in case the official fiscal commission is insufficiently hawkish, a privately funded commission will shortly issue its own austerity blueprint. The Pew-Peterson Commission on Budget Reform wants to reduce the public debt as a recovery strategy. But if we pull back on public spending while the economy is still deeply depressed, that only reduces economic output. Debt would actually loom larger because GDP would be smaller.
Happily, three of the think tanks that sponsored the conference that brought together Krugman and Feldstein have now unveiled a website, providing the evidence for a national strategy of growth rather than austerity. (Full disclosure: one of the sponsors is Demos, where I am a senior fellow. A second is the Economic Policy Institute, where I serve on the board.)
OurFiscalSecurity, as a counterweight to the power of the deficit hawks, is sorely needed. Pete Peterson is spending a billion dollars of his own money to promote the austerity view. EPI, Demos, and their third partner, the Century Foundation, don't have anything like those resources, but they have logic on their side.
If we want to get out of this recession, we need to put Americans back to work. There is no shortage of work to be done, building 21st century infrastructure which also makes the US economy more competitive. And if you don't like the idea of government taking the lead, consider that most of the funds that build modern water and sewer systems, high-speed rail, universal broadband, cycle right back into private business investment and private payroll jobs.
Nor does it make any sense to demonize Social Security. Incomes of the elderly have been hard hit by the financial collapse, the related bust of housing values, and the steady erosion of private pension plans. For a large majority of the elderly, Security is more than half their income. Cut Social Security and you further whack purchasing power. Social Security benefits have already been cut by the 1983 reforms that slowed indexation and raised the retirement age. In a deep recession, we should be debating how to expand Social Security, not how to cut it back.
In a fair debate, growth beats austerity. But the necessary recipe to get us back to prosperity will be doubly on the defensive after November. From one side, an enlarged Republican caucus in Congress will be going after public investments. From the other side, the bipartisan caucus of austerity-mongers will be promoting belt-tightening.
Sooner or later, the citizenry will come to its senses. And in the meantime, all we can do is rely on the power of argument, evidence and leadership.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His new book is A Presidency in Peril.