Chuck Marohn has a very thoughtful reply to my post about short and long term problems. I don't buy the Weimar analogy, but I've been thinking a lot about the issues, and I'm coming to agree with Chuck's main point that a recession may just be the best place for us to be at this time.
First of all, I want to say that unemployment sucks. I've been unemployed a few times, and it can be depressing. If you're unemployed for too long, you can get frustrated and angry. And that assumes that the safety net is working; otherwise you could wind up homeless or worse. High unemployment also brings down real wages, because there's always someone who'll work for cheaper.
Underemployment also sucks. I have friends and relatives who are temping, or working part-time, or at jobs that don't pay a living wage. I know a lot of people who don't have good health coverage and have to put off important procedures, and don't have a 401(k) and may never retire. There are too many people struggling.
And yet... In a fascinating interview, Mark Blyth makes a strong case against reducing unemployment as a short-term priority, mainly because he doesn't think it's feasible. He argues that with all the debt in the private sector, any stimulus would immediately be spent paying off debt. Eliminating the debt, then, should be done first. Blyth is not opposed to the kinds of mass debt forgivenness that David Graeber describes, but he doesn't think that's feasible. He suggests that the best solution is to simply wait until all the bad debts have been cleared. This would likely lead to a Japan-style "lost decade," but Blyth argues that "That decade of ‘helpless stagnation’ is actually okay."
This private debt burden is another constraint on our economic prosperity, operating in a remarkably similar way to the constraints on the flow of oil that I described earlier. But suppose we could overcome them both?
There's another reason we may not be ready for a recovery. Remember back in the housing boom, when "homebuilders" and other developers were merrily sprinkling car-dependent subdivisions, big-box stores and office parks across greenfield forests and farmland because "that's what people want"? Remember when your friends and cousins were buying SUVs and moving to Charlotte and Scottsdale "because it's cheaper"? Remember when governments were building roads, schools and sewers in the suburbs and exurbs at a fantastic rate because "that's where the growth is?" Remember when they were financing it based on phantom "future growth" - the Ponzi scheme described by Chuck?
Well, many people still want the suburban lifestyle, and from a developer's point of view it's still relatively easy to build. Zoning codes around the country still prohibit multifamily, mixed-use development and require large lots and too much parking. For large swaths of the country, big roads, sprawly development, crappy sidewalks, slow buses, cheap car loans, subsidized automakers, and low gas taxes still make driving the most convenient choice when establishing transportation habits.
When the government does try stimulus, what does it build? Roads and bridges. When Americans feel that things are looking up, what do they buy? SUVs and McMansions. If we have a recovery, that's what we're going to get. Roads and bridges, SUVs and McMansions, tar sands and electric cars. Parking required at the apartment building, parking at the train station, parking at the office park.
So Krugman is right that liquidity traps exist and we're in one. But maybe Chuck is right, and so is Blyth and maybe even Kunstler. Maybe we need to just stay in the recession until we've gotten our incentives in order. When the zoning codes are fixed so that we can build sane, mixed use multifamily housing downtown without huge parking garages or lots, when the government only builds roads that it expects to be able to maintain for hundreds of years, when the government is ready to stop subsidizing driving in all its myriad ways, then we should write off the loans, stimulate the economy and start putting people back to work.
If we do, in the meantime we're going to need a hell of a big safety net.
Well, if you've been following the political debates, you'll note that there's no way we're moving towards smart growth regulation.
ReplyDeleteRecession = Remove regulations, they're killing the economy!
So I'd argue that the longer the economy sucks, the louder the call for removal of regulations will be.
Here's a real world example.
http://fresnobeehive.com/news/2011/09/sanger_opens_door_for_new_home.html
Desperate to get the economy moving again, Sanger is cutting fees on developers, which are already pretty low. Times were good when we were destroying forests and farms to build homes. Some will argue that to get the economy going again, we need to do that, logic be damned.
No, the decade of "helpless stagnation" is actually not okay. Japan's unemployment is low by international standards, but very high by its local historical standards. And the country had zero GDP per capita growth in the 1990s.
ReplyDeleteThe problem with what Blyth and others are saying is that they take examples of partial Keynesianism, see that it doesn't lead to full recovery, and conclude full recovery is impossible. Since proper countercyclical fiscal policy is politically hard - it requires austerity in times of growth when the government gets windfall revenue and splurging in times of recession when everyone worries about growing deficits - there aren't many examples of full Keynesianism, so people who don't know where to look think it's economically impossible. But those examples do exist, and full recovery is possible: Sweden recovered from the Great Depression in 1934, South Korea recovered from the Great Recession by 2010, China engaged in so much stimulus its problem right now is an overheating rather than depressed economy.
The reason somehow decided to invent the story that Warren Buffet had recommended a book about the Weimar Republic is because creating inflation is a pretty straight forward way to eliminate the debt overhang. Not hyperinflation, but moderate levels of inflation.
ReplyDeleteWhile inflation would help those in debt, including the federal government, it would not benefit lenders. So the new narrative from those interest is that any effort to stimulate the economy will lead to Weimar-style inflation and collapse.
Of course, inflation also costs all of us who are on fixed incomes or who have a lot of money in savings accounts. But for anyone who has a home mortgage, a credit card bill or student loans, inflation will allow them to repay those loans with devalued dollars.
In short, inflation is the answer. With that solution even being suggested in places like the New York Times, wealthy lenders are rolling out this ideological narrative about the dangers of Weimar to build opposition.
no way we're moving towards smart growth regulation. Recession = Remove regulations, they're killing the economy!
ReplyDeleteThen how about moving away from anti-smart growth regulation? There are plenty of regulations-- setbacks, parking minimums and use restrictions-- which prevent smart growth.
As for Sanger, seems the problem there is that they're effectively subsidizing the developments at the expense of other taxpayers. Who's paying for the infrastructure?