Jeff Madrick

Roosevelt Institute Senior Fellow and Director of the Rediscovering Government Initiative
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Recent Posts by Jeff Madrick

  • It's Wages, Stupid

    Nov 17, 2011Jeff Madrick

    By focusing on supply, economists and policymakers have lost sight of the fact that driving down wages destroys demand.

    For a few decades now, American economic policy has focused on keeping inflation low, assuming that the natural rate of unemployment is fairly high. In general, that has led to stagnating wages. Family income today is at 1990s levels. Adjusted for inflation, hourly wages are at levels they last reached in the 1960s. The wage share has been falling.

    By focusing on supply, economists and policymakers have lost sight of the fact that driving down wages destroys demand.

    For a few decades now, American economic policy has focused on keeping inflation low, assuming that the natural rate of unemployment is fairly high. In general, that has led to stagnating wages. Family income today is at 1990s levels. Adjusted for inflation, hourly wages are at levels they last reached in the 1960s. The wage share has been falling.

    Some economists claim inequality is the bigger issue due to runaway income at the top. My own view is that a better way to understand America's dilemma to focus on stagnation for the broad middle and bottom. As I note in my latest piece for the New York Review of Books, the incomes at the top, which account for most of the inequality, are made in finance -- much of which is a game Wall Street plays with itself. For this brief piece, I will put that issue aside.

    It is time to talk about the importance of high wages to sustainable growth in America and Europe -- indeed, in most countries around the world. The precarious circumstances in the eurozone today are widely understood, as was the U.S. financial crisis, as a problem of fiscal and financial discipline. In fact, I'd argue they were mostly a product of economic models based on low wages that were not sustainable.

    Both Germany and China had models that depended on low wages. I'd also argue that the U.S. had a low wage policy to fight inflation, which had become public enemy number one in the minds of even the most sophisticated economists since the 1970s. These economists persistently over-estimated the so-called natural rate of unemployment, which gave the Federal Reserve justification to keep rates up to suppress inflation. In practical fact, the Fed under Alan Greenspan was mostly appeasing bond markets, which Greenspan watched very closely as the signal of inflationary expectations.

    We can now focus our attention on wage deficiency. You might be surprised to think Europe or even American financial distress is a wage problem, not a financial discipline problem. But it is time to think this through clearly. We are told too often that disciplined Germany must bail out undisciplined Greece, that America is angry at China's currency manipulation and China at America's profligate government deficits. We might almost believe this is the heart of the matter.

    But at the center of the issue are low wage shares and inequality. And one reason the world's policymakers, technocrats, and economists don't think about it clearly enough is that they focus too much on "supply" as the principal source of economic growth -- of machinery, ideas, technology, resources, and human capital quality labor. They focus far too little on "demand" as a source of economic growth.

    So here is the brief version of this case. To simplify, aggregate demand must be strong enough to utilize the full productive capacity of a nation in order to optimize growth and keep unemployment down. Demand is largely consumption, which in turn is mostly a product of salaries and wages. In other words, wages must be high enough to support demand for goods and services.

    Already we start with an over-simplification. Higher demand, for example, can itself increase productive capacity by promoting investment. On the other hand, higher wages can undermine profits and dampen growth. New School professor Lance Taylor tells us America's economy is profit-led rather than demand-led. I am a little skeptical of this argument, but Taylor readily admits conditions may change. Servaas Storm, the Dutch economist, who has models similar to Taylor's, believes that is exactly what is happening.

    If wages are too low, then, there won't be enough demand to support growth. Similarly, if inequality is too high, demand will be insufficient because high-end consumers usually save far more than the rest -- there will be a dearth of consumption. The International Labor Organization is now arguing along these lines.

    There are basically two ways to increase demand, and they are at the center of the current financial crises. One is to export much more than one imports. Germany and China are the classic examples of this. Wages are relatively low in Germany and very low on a world basis in China, however hard China is trying to raise them. Low wages and low currency values keep their exports competitive. The other model is to borrow to pay for consumption. The U.S., where wages are also low as we noted earlier, is the classic example of this.

    The main point is that neither of these economic models of growth is sustainable.  There is no longer any doubt about the American debt-led model. It collapsed dramatically in 2008 with damaging implications for the U.S. and the rest of the world.

    But many seem to believe that the export model can last forever. Indeed, Germany is cited as a model of rectitude for its moderate wages and discipline. It is now called on to bail out the profligate Greeks, and maybe the Italians, the Spaniards, and the Portuguese. There is a moralistic and sometimes I think ethnically prejudiced subtext for this simple diagnosis -- a diagnosis the media repeats carelessly.

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    The export model, however, is not sustainable because Germany and China are increasingly dependent on borrowing nations (or relatively high-wage but less export-competitive nations) to buy all those goods. If Germany suddenly left the eurozone, for example, a new deutsch mark would likely rise sharply in value and put its exports at a disadvantage. Then what? One wonders how carefully some of the anti-bailout German economists have thought this through.

    In fact, Germany and China are as dependent on those who buy their goods as those who now over-borrowed may be dependent on Germany and China to bail them out. As suppliers of careless debt, their institutions also bear heavy responsibility for their debtors. Thus, both Germany and China have moral obligations to support a bailout.

    I'd like to say that we should not ascribe blame. But some shifting of blame back to Germany and China is necessary if only to balance responsibility for corrective action now. The euro is priced too low for Germany, giving it a great advantage, and China manipulates its currency downward.

    The world requires rebalancing. The answer is to raise wages and wage share and reduce inequality. America would then need to borrow less, and China and Germany would need to export less. Current account balances -- big surpluses for Germany and China and big deficits for the U.S. and much of the rest of the eurozone -- would move closer to balance.

    One way to start would be immediate coordinated fiscal stimulus. If all provide stimulus, the leak from deficit nations due to the high propensity to import would be mitigated. Similarly, looser monetary policies in the rich nations are required, even as America addresses its so-called zero bound problem. Germany should lead a stimulative fiscal charge in Europe.

    Nations, however, are generally doing just the opposite. Germany is mildly stimulative, but austerity economics is tragically in vogue in countries like France. Those within the eurozone, because they cannot cut the value of their currencies, see lower wages as the only recourse to make their exports competitive and generate growth. On the contrary, it will of course bring on slow growth or recession. This has become a vicious circle.

    While I don't advocate ending the euro, the single currency makes it difficult for those within the eurozone to adjust currencies. But ideally, China's currency should rise, which has of course been widely discussed in the U.S. and Congress. (Keep in mind, this may provide more advantage to China's even lower-wage rivals, like India, Bangladesh, and Indonesia, than the U.S. and some economists currently consider.) There should be continuing pressure to make this happen.

    China needs a strong domestic market to make growth sustainable, but it is not clear that Germany fully understands that it does as well. The European Central Bank has also been especially destructive. Its obsession with low inflation has damaged Europe for a couple of decades. Now, its narrow view that it should not be a lender of last resort could do the euro in.  One wonders whether these technocrats are any better than first year doctorate students who believe all the rudimentary theory they are taught.

    Aggressive short-term, medium-term, and long-term strategies are also needed to raise wages in the U.S. On an after-tax basis, policies are a little easier to coordinate. In the U.S., where the top one percent of earners make almost 20 percent of the income, higher taxes should be levied on the wealthy and then distributed as transfers to the rest -- or used to reduce deficits to keep the deficit hawks quiet.

    But the more significant task for the U.S., and the more difficult one, would be to fix the broken jobs machine in America and generally raise wages before taxes. Job growth was very slow before the Great Recession, as was wage growth. Such policies could include direct hiring by the federal government, persistent large infrastructure and energy investment programs, a living wage policy, and a higher minimum wage.

    In sum, there seems to be a deep and potentially tragic misunderstanding of the sources of today's problems. Internationally, as I note, we should stress how important it is that wages rise in China. Germany must also learn as a nation that its low-wage, export oriented policies are beggar-thy-neighbor policies that cannot last forever, and that it played a part in the financial distress in peripheral eurozone nations.

    And the U.S. should get over its own obsession with low inflation, born with the general acceptance of a natural rate of unemployment in the 1970s that no one could forecast but many pretended they could. Keeping wage growth suppressed was a direct outcome of this inflation focus. Compounding the problem is cultural acceptance of low wages and the powerful and widespread influence of Wall Street, which rewards CEOs with stock options that are only valuable with high short-term profits, encouraging them to lay off workers and keep labor costs down.

    I plan to write a longer and more nuanced take on this argument, but in light of widespread misinterpretations and possibly calamitous developments in Europe, I thought it important to make this point clear: "It's wages, stupid."

    Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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  • Super Committee Cuts to Social Security Divert from Real Issues

    Nov 1, 2011Jeff Madrick

    What would cutting a mostly solvent program doling out already meager benefits get us? Very little.

    What would cutting a mostly solvent program doling out already meager benefits get us? Very little.

    The Congressional Super Committee to cut the budget deficit, due to report soon, has let it be known that it will cut Social Security benefits. Let me be short and sour about this. It is a public relations stunt. They basically say so. All this is about is showing the world America is serious about cutting its long-term deficit. The nation has the guts to do what it takes. It is no bleeding heart country. It is willing to beat up on the elderly.

    Other allegedly serious Democratic economists from fancy institutions have made the same argument. The reason is simple. You seemingly can make modest adjustments to Social Security to dent or even eliminate the projected longer-run shortfall. You can't do that with Medicare.

    In exchange for these Social Security cuts, the Democrats expect the Republicans to consider tax increases. They are probably going to be rolled again by the intransigent Republicans, who believe avoiding all taxes on the rich is the sure path to infinite reelectability.

    So let's be clear. The Social Security Administration projects that benefits will rise by one percent of GDP from five percent to six percent over the next 20 years or so and then stabilize or even fall a bit due to the rising elderly population. One percent. That's what all this is about.

    This increase can be covered completely by raising payroll taxes by 6.2 to 7.2 percent for workers and employers. All of it can be covered by eliminating the cap on Social Security taxes, now about $109,000 a year. Even though it's not practical, raising the cap to the point where it covers 90 percent of wages earned -- the original level -- would go a long way to paying for benefits.

    But let me remind us all: There is plenty of room to raise other taxes. America is almost the lowest taxed rich nation in the world. But it doesn't have the highest standard of living for its average citizens -- not compared to free education in Europe, much cheaper or free health care, and so on.

    Let me also remind us that Social Security is not very generous. The average payment is $14,000 a year. It is getting less generous. It used to replace 55 percent of retirement income, but benefits were reduced in the 1980s. It now covers on average 41 percent of retirement income. In 2031, it will cover 32 percent of retirement income.

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    We have already reduced the program's generosity. Yet Social Security provides nearly all income for one quarter of the elderly and more than half the income for more than half of the elderly.

    The Super Committee will say it simply wants to make the inflation calculation more accurate. It will reduce benefits. But government research suggests elderly costs rise faster in price than the traditional measures of inflation.

    The Super Committee is likely to do some real axing, if it gets its way, on Medicare. But it, too, is not a generous program. The typical beneficiary earns $23,000 a year, yet co-pays and deductibles are high. One analysis by the CBO showed that the typical employer plan provides 88 percent of beneficiary's needs. According to an analysis by the Congressional Research Service, Medicare provides only 76 percent.

    One last important point. Big cuts in Medicare and Medicaid will mean that health care expenditures will go up because Americans will get their insurance in the private market or on the public dole somehow. It will not cut overall medical costs, which are ridiculously high in America, as we know. Paul ryan's absurd Medicare plan, according to the CBO, would raise American spending dramatically overall. In sum, cutting Medicare sharply will either mean more health care expenditures for the nation as a whole or a large chunk of the elderly going without adequate coverage altogether.

    What will drive future budget deficits is Medicare and Medicaid, not Social Security, and for the umpteenth time, the reason is that overall health costs are expected to rise quickly. This means we have to reform our uniquely inefficient healthcare system. Congress is, as usual, diverting us from the real issues. No wonder Americans like Occupy Wall Street.

    A final word on taxes. The top 1 percent pay federal income taxes at a rate of 23 percent. If we raised it to their rate only ten years ago, we'd collect about $100 billion a year. If we reversed the Bush tax cuts on those who make $250,000 a year, we'd raise about $830 billion over ten years. If we reversed all the tax cuts, including on the middle class, which I'd favor, we'd raise about $3.5 trillion over ten years.

    We have plenty of taxing capacity to take care of our needs. We simply refuse to act as a modern nation, driven by myths that we can somehow return to the simplicity of colonial America. But even colonial America was more complex than what today's Republicans imagine it was.

    Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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  • We Can't Wait, But Obama May Have Waited Too Long

    Oct 26, 2011Jeff Madrick

    His new slogan and new strategy are right on target. But they may be too little too late.

    “We can’t wait,” says President Obama. He is now out pushing some modest programs to help underwater homeowners and the unemployed. We can’t wait for Congress, which won’t pass his jobs bill, he tells Americans.

    His new slogan and new strategy are right on target. But they may be too little too late.

    “We can’t wait,” says President Obama. He is now out pushing some modest programs to help underwater homeowners and the unemployed. We can’t wait for Congress, which won’t pass his jobs bill, he tells Americans.

    He is right. But where was Obama two and a half years ago when he took office? We couldn’t wait then, either. Where was he after the 2010 mid-term loss? We could not wait then, either. As I wrote in November 2010, Obama will be running for reelection with an unemployment rate no lower than 8.5 percent, maybe 8.2 percent. It will probably be higher than 8.5 percent, as it turns out. No incumbent won before with an unemployment rate above 7.2 percent. The exception is Reagan, under whom unemployment, after soaring, had fallen by three full percentage points.

    Soon enough, the media got on the message about the dangerously high unemployment rate. But the Obama team countered that all they needed was economic momentum in their favor. If rates are falling, it doesn’t matter how high the absolute level is. After all, that is what election models like Ray Fair’s of Yale implied. But these high rates were unprecedented.

    No worry, we will get our financial house in order, the administration said. We’ll get that irksome government spending down. That’s what the surveys say the people want. Spending on social programs is the issue. (Of course what created the deficits had nothing to do with Social Security or Medicare. It was almost all the recession, Bush tax cuts, and the wars. Medicare part D was a smaller contributor, but not basic Medicare.)

    All I can say is holy cow. By now, maybe few remember that one of the president’s first priorities on taking office in early 2009 was “fiscal responsibility.” He started out wanting to cut government, just like Clinton pronounced the end of the age of big government. Yes, he wanted a health care package and eventually came up with a brave, if inadequate, stimulus plan. But a few days before he was inaugurated, he announced that he would call a White House Fiscal Responsibility Summit for February 2009. He had indeed inherited a trillion dollar deficit that perhaps he thought he could pin on George Bush to score political points. At the summit, notes Tom Edsall in a fine new book, The Age of Austerity, he promised “to cut the deficit we inherited by half by the end of the first term in office.”

    In fact, we already had a jobs crisis in early 2009. Even before the recession of late 2007 to mid-2009, far fewer jobs had been created under George Bush during recovery and expansion than in any comparable post-World War II period. GDP growth was slow, but job growth almost invisible. In January, before the summit, the unemployment rate was 7.8 percent, up from 5 percent 12 months earlier. It was on its way to 10.1 percent in October.

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    Obama had signed into law the $800 billion stimulus plan. His economists seriously overestimated its benefits, expecting unemployment to top out at the then seemingly high rate of 8 percent. It is important to get one thing correct: Christina Romer and Jared Bernstein weren’t wrong about the value of Keynesian stimulus. (By all accounts, Romer wanted more.) But they were wrong about how big a hole America had fallen into already.

    Despite the disappointing economic performance, Obama proposed a commission early the next year to balance the budget. It was to be headed by a conservative Democrat, Erskine Bowles, and a very conservative Republican, Alan Simpson.

    We are all not Keynesians now. Throughout his first and second years in office, Obama promoted fiscal responsibility. Apparently his economic team agreed. He bought into austerity economics instead of trumpeting the success of the stimulus. My gut feeling by now is that he really believes in austerity and “fiscal responsibility,” much like Jimmy Carter did. And when the Democrats lost badly in the November 2010 elections, he still didn’t get it. He welcomed the proposals of his budget balancing commission, and by then there were quite a few others singing the benefits of spending cuts and budget balancing. All the proposals called for more spending cuts than tax increases.

    Only when the unemployment rate rose back to 9 percent or so and stayed there throughout the spring and fall of 2011 did the president decide to change his tune. He discovered we had a jobs crisis. He discovered that’s what the American people were really upset about. He did the unthinkable and proposed a jobs program that in fact was half good. He changed the tone of his rhetoric. Clearly, he was now at last running for office again. This seems to be what focuses his mind.

    The Republicans shrugged him off. Why not? It worked every other time. But he demanded that they pass the jobs bill “now.” The shift seemed a little cynical, but it was an improvement. He is no longer waiting for the Republicans. He is doing what he can by executive orders. This is the right plan. But he has so turned off the American people with his obliviousness to their plight that they will be hard to bring back to his side.

    And he doesn’t stick up for himself even now. His budget plan would actually stabilize American debt at about 70 percent of GDP by 2017 or so, a territory even most cautious economists believe is sustainable. Has Obama told anyone that? Ask anyone in the press whether they know that.

    This is why Occupy Wall Street has been so successful. No one in Washington heard Americans' distress. Democracy was not working. Obama, who promised change, surrounded himself with old-time Washington pros who had tin ears and small-time ambitions -- and economists who had no sense of the depth of the crisis.

    We can’t wait. Darned right. But Obama did wait. Too long?

    Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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  • Occupy Wall Street: Not Anarchy, But Beautiful Sincerity

    Oct 4, 2011Jeff Madrick

    The media may mock the Wall Street protesters, but their commitment and their cause are no joke.

    The media may mock the Wall Street protesters, but their commitment and their cause are no joke.

    The contrast between the press accounts of Occupy Wall Street and the reality is stark. That is what I noticed first when I was invited there to speak on Sunday and joined Joe Stiglitz in a teach-in. At first it indeed looks like anarchy. People are sleeping there overnight. You think you may never find an organizer, but my wife and I were guided by the young man who invited me. Soon you find that amid the seeming confusion there is organization. It is, I must say, organization of a most beautiful kind.

    There are “facilitators,” who somehow round up the people, pick a spot and, oops, spontaneously, the teach-in begins. These facilitators organize who will speak at the general assembly, which addresses the entire crowd. And they create the now-famous echo, which overcomes the seemingly major obstacle that the police have not allowed the protesters and their guests any microphones or other amplification.

    The echo chamber is extraordinary. You must speak in half sentences, which the group then repeats. In the general assembly, each phrase is repeated twice, once by those nearest the speaker, then again for those behind the front group. This has produced surprising benefits: People are engaged, they pay attention, and they force the speakers to talk briefly and get to the points. Ah, the benefits of no technology.

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    The other characteristic of the crowd is how friendly and courteous it is. The young people (though they were not all young) that Joe Stiglitz and I spoke to, perhaps a hundred or more, were very attentive, very much wanting to absorb what information and opinions we had to offer. We talked about income distribution, predatory lending, and ways to get out of the mess. They were eager and they were grateful. Finally, they asked good questions. They were also, after all, talking to a Nobel laureate standing on the wet grounds of Zuccotti Park.

    Later, as dark descended, I spoke to the general assembly. It seemed like perhaps 500 people. I spoke briefly, telling them about how much money the top 1 percent make, about how steep the Great Recession is, about the lack of prosecutions, about the inadequacy of reregulation, and about how we need a serious conversation about what Wall Street is for.

    As I left, I heard one sincere "thank you" after another.

    Many criticize the protesters for not having formal objectives or an agenda. That is just fine for now. But many of the protesters are concerned about specific issues. They may well develop agendas over time, and people like Joe and myself may help them get better informed and focus their views.

    What is most aggravating is how the press has mischaracterized this group and treated it as an event with no meaning and the participants as clowns. Even the progressive press often has a tone of condescension. Many of these people are educated, but all of them are frustrated and angry. Is there some reason they should not be? Try to get a good job if you are in your twenties today. Try to make sense of why Washington has not been harder on Wall Street. Try to understand why the unemployment rate is still 9 percent and may rise in 2012, not fall. Dressing up as zombies to mock Wall Streeters -- is that so wrong for capturing attention, letting off steam, and fighting wealth not with violence, but with humor?

    Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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  • What's Missing from Germany's Euro Plan? Compassion.

    Sep 26, 2011Jeff Madrick

    The serious, disciplined Germans who want to punish the rest of Europe should remember how America lent them a helping hand after World War II.

    There is a general idea around that the euro is bound to fail because you can’t get 17 countries to agree on a single fiscally oriented rescue policy. Christine Lagarde, the new IMF director and the most refreshing economic voice in Europe, has said so. Countless commentators have said so. It is now widely accepted that the end of the euro is inevitable because of this.

    The serious, disciplined Germans who want to punish the rest of Europe should remember how America lent them a helping hand after World War II.

    There is a general idea around that the euro is bound to fail because you can’t get 17 countries to agree on a single fiscally oriented rescue policy. Christine Lagarde, the new IMF director and the most refreshing economic voice in Europe, has said so. Countless commentators have said so. It is now widely accepted that the end of the euro is inevitable because of this.

    There is little doubt that even to expand the EU bailout fund is a laborious and unwieldy process. But other measures can be taken, including pressure on the European Central Bank to expand credit and buy the debt of the nations on the brink as well as extra-mural efforts to borrow against the rescue fund.

    In fact, to save the European Monetary Union requires only one nation’s assent, not 17. Yes, Finland and the Netherlands are resisting helping Greece and others. But in truth, Europe will do whatever Germany wants it to do. Germany has the trade surplus, the assets, and the confidence; Finland and the Netherlands, though financially strong, will not likely buck the Germans if the Germans mean it.

    The Germans seem convinced they have made their economy stronger than all others due to their manufacturing, innovation, and self-discipline. Preaching with a kind of moral authority, they want others, namely Greece, to take their medicine. In a huff, prestigious Germans are leaving international institutions because the miscreants of the rest of Europe are trying to get away with their profligacy.

    Germany did not succeed economically alone, however. It did so in good part because a single currency, the euro, underpriced its exports to most of the other EMU nations. Let it be said loud and clear that without substantial demand from others, the export models of the world, like Germany's and China's today and Japan’s before them, would not work. The U.S. has long enabled the growth of Japan and China because of its high level of consumption, based self-destructively on rising consumer debt. The same is partly true for Germany as well, but most of their trade is with the EU. And China, recognizing this, has gone to some lengths to pump up its domestic market.

    Now, Germany is a remarkable economy nonetheless, as was the Japan of Toyota and Sony and as China is today. It is a champion of manufacturing focus, from which America could learn a lot. But while the world cannot believe what the Tea Party is doing to America, it had better pay attention to what a certain kind of German economist (not all by any means) is doing to the world. These educated and seemingly somber men argue that fiscal probity is almost everything, that the ECB better not buy sovereign debt of other nations, and that Germany had better not put more money into a rescue fund to help Greece restructure and ward off similar failures in Italy and perhaps Spain (whose government was not profligate). They apparently will not back a Eurobond, which is badly needed -- a bond guaranteed by all members of the EU. They are so far opposing expansion of the rescue fund. And they will not insist their private sector share some losses.

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    There is little empirical evidence to back Germany's intransigence, despite the erudition of some of the nation’s chief intransigents. Walter Bagehot, an early editor of The Economist, the American historian Charles Kindlberger, and the far-seeing economist Hyman Minsky are agreed that there is no easy way out in a fiscal crisis. But there is a general rule: act early and act big. If not, odds are the crisis will deepen, spread, and become harder to manage.

    Germany is incapable of learning this lesson. They are in the “don’t throw good money after bad” school of thought. It is a gut feeling, not a theory based on thought, history, or statistical evidence. And it usually goes hand in hand with austerity economics.

    Many forgive Germany their current narrowness and seeming self-concern because of the punishing early history with runaway inflation. I would urge them to remember a different lesson. After World War II, when the Germans were down and out, due clearly to their own doing, many Americans did not want to support them. But the American government wisely launched the Marshall Plan and opened its border to European imports. Those were gestures -- not perfect but generous by current European standards -- that led to 25 years of prosperity.

    Germans should recall that part of their history and not demand that a people like Greece’s abide cruel austerity, even if it had to do with irresponsible government policies, to satisfy a policy based on a gut feeling rather than serious thinking.

    Tim Geithner is now preaching such a lesson to Europe: act big and act fast. He is proud of TARP and the expansive Federal Reserve policy that more than reinforced it. He is proud of the Obama stimulus of early 2009. To an extent -- but only to an extent -- he should be. Compared to what the Europeans are doing today, he should be.

    Of course, America still has a long way to go. TARP did not force private bondholders to share losses. It did not force banks to reorganize. It did not force them to restructure household debt the way Geithner would like Europe to restructure Greece. In sum, it did not force banks to lend. America needs stimulus and it needs mortgage debt restructuring. Nevertheless, America did much better than Europe is now doing in its hour of crisis, despite political bumps in the preceding 100 years. Establishing the Federal Reserve was no easy matter, requiring the 1907 financial crisis to give it momentum — the one that J.P. Morgan basically managed privately. Its ability to create fiat money was challenged in the Supreme Court in the 1970s.

    The point is this: Europe has it in its grasp to solve the problem. Plow money into a restructured Greek economy and then try to get these economies to grow. This means foreswearing austerity -- look how poorly Greece, Portugal, and England are now doing with their austerity budgets (though Geithner praised England's).

    What's needed instead is serious stimulus in Germany and elsewhere to generate growth. But we are fighting economic ignorance in the guise of educated, articulate, ever-so-serious men in nice suits. This happened before in the 1930s. These are really tough guys with strong gut feelings that the weak or disadvantaged just better get a grip. And maybe there is a bit of prejudice towards those in their southern rim -- or if not prejudice, a rather remarkable lack of compassion. To them, we can only say: Remember America in its finer moments after World War II… please.

    Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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