A reliance on supply-side theory, in both the White House and the media, keeps us from addressing our real economic problems.
Peter Baker has a 6,500-word piece in the upcoming Sunday New York Times Magazine, The White House Looks For Work, about Obama's economic team and the quest to create jobs. He says:
I went to see Geithner one evening in late December in his high-ceilinged office at the end of the third floor in the Treasury Building...All the second-guessing, he said, missed the point. “Everybody now has these cool ideas -- why didn’t we do it in this way, why didn’t we do it bigger, why didn’t we have a different mix,” he said, thinking about the stimulus. “All of that is marginal.” What was important, he said, were speed and force. As for nationalizing or liquidating the banks, he said, “They both would have been catastrophic.”
Marcy Wheeler points out that the words "foreclosure", "housing" or "HAMP" don't come up in the piece at all. How telling is that? We just had a housing bubble collapse, and the signature post-collapse stories are about the fraudulent ways the securities were made in the first place, the obvious flaws in the servicing models, and the record numbers of foreclosures during the entirety of Obama's first term in office.
There are obvious problems of spillovers: cascading housing price depreciation, lack of mobility, abandoned properties and the effects on neighborhoods, etc. There's also the greater issue that households are in a balance sheet recession, where they are saddled with worthless housing debt that will keep the housing market depressed. As foreclosure spins out of control, housing values plummet further, putting households further underwater, decreasing consumer spending, etc.
Atif Mian and Amir Sufi have recently written an economic letter for the Federal Reserve Bank of San Francisco, Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery:. They find:
Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector. This view is supported by survey evidence that the main worry of businesses is sales, not financing. The October 2010 National Federation of Independent Business survey (Dunkelberg and Wade 2010) shows that almost no small businesses viewed credit availability as their primary problem. In fact, the NFIB has reported that weak sales were the top problem facing small businesses throughout the recession. Weak consumer demand also helps explain the enormous cash balances currently held by U.S. corporations (see Lahart 2010). These results have important policy implications. If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth.
The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.
I'm going to write more about this later, but it's amazing how our opinion leaders are locked into the "supply-side" logic, even when dealing with our current recession. The article spends a lot of time on the Chamber of Commerce, Obama dealing with business leaders, and how to get business confidence back. It doesn't mention that the number one self-reported problem facing small businesses, by a mile, is poor sales. The article is really stuck on the idea that the problem must be the deficit, or the "populist" tone Obama has taken with Wall Street, or the financial reform bill, not depressed consumer spending.
Embedded in that assumption is the notion that the only thing that would hold back a full employment economy is government action. Deregulate enough, and supply will create its own demand. It's too bad that doesn't describe our situation.
Mike Konczal is a Fellow at the Roosevelt Institute.