ANALYSIS/OPINION:
Newly triumphant congressional Republicans are determined to put America’s recent bailout and stimulus programs on the hot seat. Investigations of the Troubled Asset Relief Program, the Obama stimulus bill, the auto rescue, “quantitative easing” I and II and such could teach valuable lessons about economic crisis management, government’s proper economic role, and the perils of moral hazard.
Or, as seems much likelier, these hearings and probes could propagate dangerous myths that could bring another crackup.
Not that the right has a monopoly on major misconceptions surrounding the inevitably intertwined subjects of crisis and recovery. Thanks to President Obama, America has just spent two years paying the price of mainstream liberal myths about the economy’s recent woes.
Chiefly, the administration and its supporters have portrayed the near-collapse of 2007-08 as a fundamentally financial event rooted in abuses by the virtually unregulated investment and mortgage-lending sectors. Needlessly prolonging the resulting slump have been a selfish refusal to lend by bailed out financiers, anemic demand produced by persistently high unemployment, and the recently traumatized public’s lingering spending phobia.
This narrative explains why, despite mild rebukes of bubble-era shopaholism and lip service to goals such as boosting savings and exports, the president keeps avoiding the economy’s massive structural defects. Thus, too, the driving assumptions of Mr. Obama’s recovery strategy — that some financial re-regulation and a few trillion dollars’ worth of supposedly temporary stimulus and bailouts for big chunks of the economy will suffice to repair the nation’s crisis-torn economic confidence and build bridges to normality. It’s no coincidence, of course, that this approach demands a gargantuan role for government.
Newly triumphant Republicans and conservatives, however, appear seduced by equally dangerous, blinkered and convenient myths that define the economy’s structural challenges out of existence. The main reason: They depict the previous decade’s economy as “fundamentally sound” except for (a) that darned subprime mortgage sector (needlessly and fatally inflated by Washington) and (b) some unnecessary George W. Bush administration deficit-spending overkill.
Not surprisingly, these views powerfully encourage characterizations of the bailouts as completely unnecessary at best and at worst a lefty mechanism to exploit a golden opportunity (as famously suggested by former Obama aide Rahm Emanuel) to realize long-standing big-government dreams.
What the right doesn’t seem to get is that the American economy that cratered starting in mid-2007 was gravely ill and has since avoided catastrophe precisely because of the admittedly flawed Obama (and Bush) emergency programs.
After all, the 2001-07 economic landscape featured government stimulus that set the previous peacetime record — mainly, interest rates kept at multidecade lows even following a brief, mild recession, and a record swing in the federal budget balance from surplus to deficit. But did economic performance set records? Not even close.
During the 2001-07 recovery, inflation-adjusted growth totaled 16.59 percent — versus the 40.06 percent real growth registered during the only somewhat longer 1990s recovery. Total non-farm employment edged up by just 2.76 percent from 2001-07, compared with 22.37 percent growth during the 1990s expansion.
Worse, it’s critical to recognize that even this dreary performance depended on investments created, credit amassed, homes built and bought, and goods and services consumed without any basis in economic fundamentals. That’s why we call it a bubble. Indeed, that’s why Federal Reserve Chairman Ben S. Bernanke rushed emergency credit measures into place in summer 2007, well before the watershed Lehman Brothers collapse. Clearly, the nation’s engines of real wealth creation were seriously malfunctioning.
Republicans and conservatives rightly complain that bubble-fueled growth has largely been replaced by equally perilous bailout-fueled growth. But do they seriously believe another meltdown can be avoided if current bailouts are slashed or eliminated? Just what do they suppose can replace them?
Let’s all hope they don’t really consider tax and regulatory cuts as cure-alls. Low levels of both already have been tried — during Mr. Bush’s presidency, for example. Not only miserable growth and employment levels resulted; so did a disastrously deformed economy.
Of course, dramatic tax and regulatory change is essential, along with the fastest possible return to genuine, private-sector-led growth. But true economic health will require both parties finally to start thinking about a vital goal that neither of their current philosophies can achieve — reorienting the economy around genuinely productive activity, like generating real-world goods and services instead of easy money, financial quackery and sloppily spent public subsidies. In other words, they need to start talking about a sound economic structure for the nation.
This means somehow ensuring that new resources — whether created mainly by more tax and spending cuts or more government stimulus — are spent productively. Above all, in this era of globalization, it means somehow ensuring that productive investments are made in the United States to employ Americans gainfully and to foster a continuing stream of know-how to ensure future prosperity. The kind of international leakage America has witnessed recently — for example, with the last decade’s trade deficits offsetting twice the stimulative effects of its budget deficits and this decade’s deficits more than offsetting the effects of Mr. Obama’s stimulus program — is no longer affordable.
So let’s hope congressional Republicans use bailout investigations wisely — to start formulating better, structure-focused recovery strategies. For the nation easily could be headed for an ever more vicious circle of mass joblessness, worsening state and local finances, major public payroll and service cutbacks, and resurgent foreclosures. If Republicans instead simply retreat into familiar tax- and spending-cutting nostrums, be very, very afraid.
• Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website, www.AmericanEconomicAlert.org.
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