Blame Larry Summers
Barack Obama’s chief economic advisor, Lawrence Summers, is determined to sabotage a second round of stimulus. And, he’s getting plenty of help, too. Congressional Democrats are dragging their feet because they’re worried about the political backlash and midterm elections, the GOP deficit hawks are looking for a way they can derail the Obama agenda and reestablish their bone fides as fiscal conservatives, and the bailout-traumatized American people are simply opposed to anything that generates more red ink. Even Obama has joined the fray and started badmouthing stimulus stressing the importance of living within our means and trimming the deficits. So it looks like a done-deal; no more stimulus. There’s only one problem, without another blast of stimulus the economy is headed for the skids.
Summers knows this because he is an extremely bright and competent economist. With Summers, the issue is loyalty, not intelligence. To prove this point, consider Summers comments in a Washington Post editorial (September of 2008) where he explains what needs to be done to put the economy back on track:
"Indeed, in the current circumstances the case for fiscal stimulus — policy actions that increase short-term deficits — is stronger than ever before in my professional lifetime. Unemployment is almost certain to increase — probably to the highest levels in a generation. Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system. Global experience with economic downturns caused by financial distress suggests that while they are of uncertain depth, they are almost always of long duration.
“The economic point here can be made straightforwardly: The more people who are unemployed, the more desirable it is that government takes steps to put them back to work by investing in infrastructure or energy or simply by providing tax cuts that allow families to avoid cutting back on their spending.” ("A Bailout Is Just a Start", Lawrence Summers, Washington Post)
To repeat: "Monetary policy has little scope to stimulate the economy given how low interest rates already are and the problems in the financial system."
Bingo. Zero-percent rates don’t give any traction in a liquidity trap. That’s why economists push for fiscal stimulus; jobs programs, state aid, and extended unemployment benefits. That’s the only way to narrow the output gap and rev up economic activity. Summers doesn’t even challenge the idea; in fact, he makes the case for fiscal stimulus. Of course, that was then, and now is now. Here’s another clip of Summers stirring up the masses at the Brookings Institute with his thundering Fidel Castro impersonation:
"Between 2000 and 2007 – a period of solid aggregate economic growth – the typical working-age household saw their income decline by nearly $2000. The decline in middle-class incomes even as the incomes of the top 1% skyrocketed has a number of causes, but one of them is surely rising asset prices and the fact that financial sector profits exploded to the point to where they represented 40% of all corporate profits in 2006.
Confidence today will be enhanced if we put measures in place that assure that the coming expansion will be more sustainable and fair in the distribution of benefits than its predecessor."
Larry Summers carrying-on about "distribution of benefits"? Huh? So how does the Redistributionist-in-Chief feel about stimulus now? Here’s a clip from Thursday’s Wall Street Journal:
"The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said.
“Mr. Obama is keen to avoid any measures suggestive of a second, big-ticket stimulus. With about half of the February stimulus spending spoken for, the measure has created about 640,000 jobs, fewer than the number of jobs lost in January alone.
"There is no discussion of a package like a second stimulus, but we are working closely with Congress and consulting with outside experts to determine the right policies and the right steps," said White House deputy press secretary Jennifer Psaki. ("Weighing Jobs and Deficits", Elizabeth Williamson, Wall Street Journal)
Apparently, Summers has had time to rethink his populism and do a 180. Team Obama plans to create jobs by initiating tax credits and lending to small businesses. Sound familiar? In other words, the only way that millions of dejected workers will get any relief is if private industry can be enriched in the process. That’s why "there is no discussion of a second stimulus." Because Summers is an industry rep who primary task is to ensure the smooth transfer of public wealth to corporate plutocrats. He even opposed the extension of unemployment benefits believing that greater hardship would push wages down even further.
Indeed, from Summer’s point of view, the America Rescue and Recovery Act has worked out just dandy. The unions are getting walloped, 8 million people are out of work, the labor market is in the worst shape it’s been since the Great Depression, and the blood-flow of stimulus is about to get choked-off sometime in the next two quarters. Hey, it’s morning in America!
But, as we noted earlier, Summers is a good economist, so maybe there is an economic reason for his opposition to more stimulus. Could it have to do with the output gap? Since Lehman Bros collapsed, the output gap (which is the difference between an economy’s actual output and its potential output) has been at record lows. That means that there is not sufficient demand to take up the slack in the economy. The only way to resolve that problem (when the Fed is in a liquidity trap and consumers are slashing spending) is to get money into the hands of people who will spend it. That means more government spending, thus, more stimulus. But how much more?
Here’s economist Robert Skidelsky with an answer:
"But how large must such a stimulus be? The United States Congressional Budget Office (CBO) estimates that American output will be roughly 7% below its potential in the next two years, making this the worst recession since World War II. American unemployment is projected to peak at 9.4% towards the end of 2009 or the beginning of 2010, and is expected to remain above 7% at least until the end of 2011.
“The US government has pledged $787 billion in economic stimulus, or about 7% of GDP. Superficially this looks about right to close the output gap – if it is spent this year . But it is in fact a three year-program. Some $584 billion is allocated for 2009-2010, leaving perhaps $300 billion of extra money for this year. Even so, it is not clear how much of that will be spent.
“ ….A double round of stimulus packages is needed to counteract the real prospect of a double-dip recession.
“The time to start worrying about inflation is when the recovery is entrenched. To pay back the debt without strain, we need a booming economy. Talk of government spending cuts is premature. ‘A boom not a slump is the right time for austerity at the Treasury’ said Keynes. He was right." ("Is Stimulus Still Necessary?" Robert Skidelsky. Project Syndicate)
Surely, Summers made the same calculations as Skidelsky, but decided to go with a smaller stimulus package for political reasons. Fair enough. He was probably afraid that a larger bill wouldn’t get through congress. That’s reasonable, but it doesn’t change the fact that more stimulus is needed now. The White House should be preparing itself for a major public relations campaign. But there’s no PR campaign on the drawing board at all; just more blabber about cutting deficits and reducing long-term government spending. (nb…an attack on Social Security) So as soon as this stimulus-injection wears off, the economy will slip into a coma once again. Here’s Paul Krugman breaking it all down:
"Second estimate of third-quarter GDP out; growth rate marked down to 2.8%.
This is really quite grim. At this growth rate it’s far from clear that we’re doing anything to reduce the output gap — the gap between what the economy could produce and what it’s actually producing. Correspondingly, there’s no reason now for even a bit of optimism on unemployment.
When the 3.5% advance number came out, I took to warning people that even if the economy continued to grow at that rate, we wouldn’t see anything like full employment until late in Sarah Palin’s second term. Given the latest number, the date at which we can expect to see a return to full employment is … never.
And that’s if growth continues at this rate. The odds are good that growth will slow down next year: the stimulus has already had its peak effect on growth and will turn into a net drag in the second half, the inventory bounce — which was a major factor in 3rd quarter growth, such as it was — will fade out. Basically, we may be in a technical recovery, but we’re not recovering. (Paul Krugman, "Gee, that’s De Pressing" The Conscience of a Liberal, New York Times)
There’s no recovery. Figure it out. Bank profits went up last quarter, but lending went down significantly. Now, that’s a neat trick. How did they manage that?
They did it with the money they’re getting from the Fed. Bernanke has provided broken banks and other financial institutions with trillions of dollars that are being diverted into high-risk assets, carry trades (with the zero-rate dollar as the funding currency) and speculative derivatives bets. The same bubble that just blew up a year ago has been reflated thanks to Bernanke’s largesse and gigantic re-leveraging. Main Street is in a Depression, but Wall Street is doing just fine.
Even so, there is no sign of inflation anywhere and the government is able to borrow capital at record low costs. Last week 3-month Treasuries went negative while the 2-year T-bill has fallen off a cliff. Why? Because Bernanke ended the guarantee on money markets so investors are fleeing to safety again. Ordinary retail investors who can’t do bigtime cross-border currency transactions or High Frequency Trading, need a place to hide. Hence, USTs. They’re forking over their money to Uncle Sam for under 1 percent interest. It’s highway robbery. At the same time, consumer credit is shrinking, bank lending is down, and 1 out of 4 homeowners is upside-down. Money is not moving and the economy is on a ventilator. We need more stimulus.
But there won’t be another round of stimulus because Summers and his sniveling companion Geithner won’t allow it. They have other plans. Oh yeah, Wall Street and the banking Goliaths will still get as much monetary stimulus as they need (under the phony moniker of "quantitative easing", liquidity swaps, or excess reserves) But as for the working slob — zilch.
Summers’ assignment is to bring the broader economy to its knees; to crush big labor by keeping unemployment high, to force state and local and governments to privatize more public assets and services, and to generate as much human misery as possible. In short, Summers is laying the groundwork for structural adjustment within the US, a policy which reflects his ongoing commitment to multinational corporations and neoliberalism. It’s the shock doctrine redux. These people are monsters.
MIKE WHITNEY lives in Washington state. He can be reached at email@example.com