U.S. Economy - The Government Has Made Things Worse

Larry Summers seems to be saying:

• Obama is a central planner: his team is trying to guide the U.S. economy to grow the "right" industries, and shrink the "wrong" ones.
• The economy is going to get worse. How does he know? Maybe he knows of plans to unveil yet more policies that further destroy work incentives, in addition to those unveiled already: like means-tested mortgage modification, mean-tested student loan modification, unemployment insurance extensions, state income tax hikes, and marginal federal tax rate on the "rich".

There has been so much talk of "fiscal stimulus" and ways the government can help, but I think ultimately the debate about public policy and the 2008-9 economy will be whether the government made things worse, or was just impotent.

There are few economists now saying that government caused the housing bubble (quite an exaggeration, I think), but I seem to be the only one saying that, even with a housing crash, the depth of this recession would have been significantly less if the government hadn't done its damage too.

Comments

[CautiousInv...:]

I found the interview with Summers to be both interesting and revealing. As I noted elsewhere today, he realizes there will be an economic paradigm shift and believes we will emerge from the current recession and gravitate towards the picture described below which is at odds with the new normal described by many others.

"This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-orie... “more bio- and software- and civil-engineering-orie... and less financial-engineering-... and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift."

This would be the optimum outcome to expect in recovering from the current recession but there is little to suggest that it's either attainable or achievable. To move in this direction would require that all economic policy be driven by this vision...........inclu... the stimulus package. Rather than being driven by this vision of the future, the stimulus package is a hodge podge of earmarks and pet projects that comprise anything but a coherent policy response designed designed around specific goals.

The inability to impose a unified and disiplined vision of the future is also found when the FT asked him what his primary job was. He followed with this: "“My role is to make sure the president gets access to the best economic thinking he can on everything that touches the economy” he says loyally. “That means making sure that no arguments go unscrutinised ... and it means helping everyone on the president’s economic team make the best case for whatever policies they prefer.”

The last words summarize it best: make the best case for whatever policies they prefer. I should think he would be giving advice on what economic ends they should strive for and argue for the policies essential to achieving those ends. Instead, it's all ass backwards with him helping those in power justifying what they want do with clever economic argument. With this mindset, we should expect very little from the stimulus package or from future initiatives as the process is being driven by personal preferences with staff providing supporting reasoning and arguments.

Jul 12 01:28 PM

[steve graves:]

I think you're right, the government in hyper-Keynesian mode bailing out Wall Street and everyone else (except of course the actual taxpayers who perhaps need it most) is not the wisest path to take.

Your tacit suggestion that there is somehow a far easier way out of this crisis, however, seems a bit suspect. After all, this crisis is decades in the making - debt of all denominations steadily rising, a pair of bubbles artificially inflating what would otherwise have been a stagnating GDP, the cancerous growth of finance over manufacturing, etc. - which would seem to imply that the solution to this crisis, no matter which path we choose (Keynesian, supply-side, etc.), cannot possibly be swift or easy.

While I find two trillion dollar deficits sickening, I'm not convinced that in the long run (say twenty years) their impact is going to be that much different from a more hands-off approach that would let the chips fall where they may. Liberal economists argue that the second approach would result in even larger decreases in tax revenues, ultimately creating deficits every bit as high as the Keynesian approach. As in, we're damned if we do, damned if we don't. And while I disagree with them I have yet to read an analysis that necessarily disproves them.

I guess my point is, I'd like to see the evidence that supports your conclusion that "the depth of this recession would have been significantly less if the government hadn't done its damage too." You hang that statement out there as if it proves itself simply because you believe it. I'm personally inclined to believe you're correct, but it might be more interesting if you actually offered facts to support your hypothesis rather than mere ideological posturing.

Jul 12 02:42 PM

[steve graves:]

Correction:
Should be, every bit as high as a more hands-off approach

Jul 12 02:44 PM

[John Bowman:]

Revised Summers Statement:

"This new American economy, Summers notes, will be “more dollars exported” and “less consumption-oriented due to less disposable income”, “more costly environmental boondoggles” and “fewer energy-independent measures", “more bio- and software- and civil-engineering favors to campaign contributors"... and "more socialistic endeavours which result in reducing financial risks", and, finally, “more income redistribution which burdens the middle-class and upper-class” and “less oriented to income growth that is disproportionate towards a very small share of the population with the end result of making everyone poorer”.

Jul 12 02:59 PM

[Dave Wrixon:]

Why the surprise? That is what you elect them to do, isn't it?

Jul 12 05:34 PM

[ed233:]

The problem with the Obama administration is that they are basically attempting to make good all of the economic wrongs that have occurred in the past on the assumption that if something hadn't been done by the government then the consequences would be far worse than could have been imagined. Of course, a pro-active approach of throwing money at every conceivable problem brings with it unpredictable results. The consequences of huge deficits have dire consequences. What if the financial consequences do not substantially get better? There are no guarantees. What if the government owned auto industry reveals little or no fruit? From what I am reading there does not seem to be a chance in hell for any of these industries to be a source of increrased employment looking out into the foreseeable future. If past conduct is any indication then there is a greater chance for failure down the road because both of those sectors have suffered financial disasters when government financial assistence was provided in the past. The government's use of taxpayer money could have been better invested by directly paying workers to re-train themselves for areas of the economy where there is a genuine need for skilled workers. Secondly, paying employers to train workers in economic sectors that have a future potential like advanced farming, technology, mining, tourism, service industries and infrastructure. Also paying students to stay in university and college for further scholastic achievements would have also been a positive effect. This type of approach would have been cheaper and the unemployment figures would have been held in check by now. LOL Looking after your money.

Jul 12 05:36 PM

[Dave Wrixon:]

Pointless discussing it unless you come up with a credible way of measuring progress, which we currently ain't got!


On Jul 12 01:28 PM CautiousInvestor wrote:


> Unlike many other economists, Summers does not believe
> that lower growth is the inevitable price of this economic paradigm
> shift."
>
> This would be the optimum outcome to expect in recovering from the
> current recession but there is little to suggest that it's either
> attainable or achievable. To move in this direction would require
> that all economic policy be driven by this vision...........inclu...
> the stimulus package. Rather than being driven by this vision of
> the future, the stimulus package is a hodge podge of earmarks and
> pet projects that comprise anything but a coherent policy response
> designed designed around specific goals.

Jul 12 05:38 PM

[LilBob:]

Things must be getting better. The conservatives are starting to blame Obama in the past tense.

How conveniently Republicans forget that it was eight years under the rule of Prime Minister Cheney that got us into this mess.

Jul 12 08:14 PM

[chargers_ru...:]

Its easy to sit and criticize the president. Its easy to offer nothing but discouraging words and blame.
The problem began long ago under a republican administration that
took the USA off the gold standard at a place called Bretton woods.
The problem was compunded further by captains of industry who fort the sake of "Profits today!" and "Damn tomorrow"! decided to take American industrial strength overseas.These people are traitors to the USA and theiir memories should be joined with Benedict Arnold and Tokyo Rose.
Please spare the readers the critiques of a president who is doing a good job and trying to keep families together.
Pro business politicians have utterly destroyed this country. Do not be so mean spirited as to deny the unemployed weekly extensions.Please do not claim that people have no incentive to work . That is utter hogwash.The USA as we all know it will change forever torn assunder thru petty bickering and internal strife - unless the public wakes up and demands excellence from its leadership at all levels!

Jul 12 10:59 PM

[Moon Kil Woong:]

Pragmatic Summers is not, nor is he a populist. He can clothe his wolfish self however he wants but he is still the guy who wants to kill Glass Stegal and find ways to enrich the banking sector (or at least prevent them from losing money) at the cost to the taxpayer and to those holding US$. Don't buy his eco-friendly I love the middle class propaganda. The guy wants more money to financials, more money spend, more bailouts, and more stimulus. And you can forget about any new regulation as well. If that's not the status quo I don't know what is.

Jul 13 01:24 AM

[Mistrofan:]

Hear! Hear! To me looks more then a status quo. Just looks plain worse and we are heading at full speed towards the worst bubble the human kind ever seen.


On Jul 13 01:24 AM Moon Kil Woong wrote:

> Pragmatic Summers is not, nor is he a populist. He can clothe his
> wolfish self however he wants but he is still the guy who wants to
> kill Glass Stegal and find ways to enrich the banking sector (or
> at least prevent them from losing money) at the cost to the taxpayer
> and to those holding US$. Don't buy his eco-friendly I love the middle
> class propaganda. The guy wants more money to financials, more money
> spend, more bailouts, and more stimulus. And you can forget about
> any new regulation as well. If that's not the status quo I don't
> know what is.

Jul 13 01:28 AM

[WorseThanYo...:]

Want a economic recovery? - bring manufacturing back. Cancel all those trade agreements that were advantageous to other countries at our expense. Pull back hard on regulation, taxation, etc. that drove jobs overseas.

Then return the 90% of the stimulus that hasn't been wasted yet and downsize the federal government for a year or two - put in a skeleton crew to run the country. Above all, put Congress on an allowance and stop them from "SPEND, SPEND, SPEND!"...

Jul 13 09:17 AM

[Danny Newton:]

We will never tire of stimulating our economy. It is the new legalized dope. The habit on the federal level dates back to at least the beginning of the Interstate System. The Commerce Department dispatched smart people with pencils in their pockets to declare that the Interstate would be great for the economy overall if you just ignored the pain of the restructuring the hospitality and roadside service industries that were stranded on low volume roads once the Interstate was built. They also had to ignore the deterioration of the core of large and small cities.

On the state and local level, stimulating the economy can be traced back to totally crazy subsidies (bribes) to railroads to make sure hat they went through your town instead of some other town. Many state constitutions were altered, like in Texas and Tennessee, to prevent abuses after local governments went bankrupt trying to throw subsidies at the problem of economic stimulation or economic development. The rest of history is basiclly pirating industries from one part of the country to another or even one part of a state to another one.

Jul 13 10:26 AM

[darrenlobo:]

"We will spend and spend, and tax and tax, and elect and elect."
--Harry Hopkins

As long as the govt can buy elections like this there will be stimulus ad nauseum, economy be damned.

Jul 13 07:39 PM