‘Keynesian Moment’ Needed to Fight ‘Great Recession’

Posted November 13, 2008 at 1:52pm

Updated: Nov. 14, 11 a.m.

No one’s yet named the economic crisis we’re in. It’s developed beyond the financial markets, so the “Panic of ’08” won’t do. Optimistically, I suggest the “Great Recession.”

[IMGCAP(1)]That’s optimistic because, while this recession is likely to be the longest, deepest and most global since the Great Depression, we can and should escape having to use the “D” word.

How long? How deep? And what should we be doing about it?

An emerging consensus among conservative and liberal economists seems to indicate that we’ll experience negative growth — 2 percent to 4 percent—through 2009 and into 2010.

And unemployment will rise past 10 percent.

They suggest it will match or exceed the highest unemployment rate since World War II (10.8 percent in December 1982). In 1932, during the Depression, it rose to 25 percent.

As to what to do, former Clinton White House domestic policy adviser William Galston, now at the Brookings Institution, observed that “this is a classic Keynesian moment,” and he pointed to a remarkable exchange that took place on PBS’ “Newshour with Jim Lehrer” on Monday.

Liberal economist Alan Blinder of Princeton, an adviser to both Bill Clinton and President-elect Barack Obama, and conservative Martin Feldstein of Harvard, an adviser to former President Ronald Reagan and Sen. John McCain (R-Ariz.), agreed: There’s got to be a lot of government spending.

“You need to boost spending in the economy,” Blinder said. “It almost doesn’t matter what kind of spending, but we’d like it to not to be wasteful spending, something that’s valuable in its own right.”

He added that the government also needed to support “people that are going to be losing their jobs, their homes, their health care benefits and other things that go with job displacement, because there’s going to be a lot of it.”

And Feldstein responded: “Well, I think Alan Blinder was right on. I think the plan has to be big, it has to be quick and it has to be focused on creating employment.”

Feldstein recommended against tax rebates for individuals, which was tried earlier this year and led to no lasting employment gains.

“I think the key thing is stuff like equipment. There’s a lot of equipment in public institutions, both federal and state, that could be renewed and replaced,” he said, including military equipment.

Blinder said he’d be skeptical about massive infrastructure spending because it could not be spent quickly.

“But the economy has turned so dark it’s so clear now that this is going to be a long and deep recession, that there’s actually enough time to get infrastructure spending — I mean serious infrastructure spending, not pork — into this program.”

Actually, Congressional and state transportation experts say the states have been forced to halt $80 billion worth of highway, water, sewer and school construction projects because of recession-induced budget restraints.

These could be relaunched quickly with federal money, be under way within three months and begin to re-employ laid-off construction workers.

There’s now a lot of chatter — and a Time magazine cover — likening Obama to Franklin D. Roosevelt in 1932 and his program to the New Deal.

And Obama is duplicating FDR’s example in having nothing to do with deciding economic policy until he takes office.

Feldstein thinks that’s a mistake. “I think [Obama] should say, ‘Look, I’m not only president-elect. I’m also a Senator and I can introduce legislation. I can work with the [economic] team that I’m bringing together … and come up with a really substantial plan.”

Feldstein — this is the conservative, mind you — said that the extra spending plan ought to be $300 billion for 2009 and $500 billion over the next two years, above and beyond the $700 billion already committed to the rescue of financial institutions.

It’s worth noting, as Feldstein and other conservatives do, that the United States did not emerge from the Great Depression until World War II, the hugest Keynesian project of all time.

And why? Even liberals such as Princeton economist Paul Krugman admitted in his New York Times column that Roosevelt’s spending programs were combined with tax increases — the first stimulative, the latter, depressive.

Amity Shlaes, author of “The Forgotten Man: A New History of the Great Depression,” makes the same point and urges Obama — instead of giving in to the temptation to reverse Reagan-Bush tax policy — to drop plans to raise capital gains and other taxes on the rich.

I’d say he should do so until the recession is over. Then, the United States has to start returning to fiscal responsibility or else over-borrowing will undermine the country’s credit-worthiness or wildly printing money will debauch the currency.

At a conference put on by the New America Foundation on Monday, Brian Riedl of the conservative Heritage Foundation pointed out that, even at $5.4 trillion, the federal debt is just 38 percent of gross domestic product, below post-war levels.

But if trillion-dollar annual deficits continue and baby boom retirement promises are not shaved back, the debt could hit “100, 200 or 300 percent.”

Another participant, Maya MacGuineas of the Committee for a Responsible Federal Budget, warned that “the next bubble could be federal debt. The U.S. government could be the next subprime borrower.”

So, as Feldstein said, “what we need now is to have a major spending program which takes the place of the arms build-up that happened as we went into World War II.”

But Congress also ought to be putting in place mechanisms — such as the entitlement commission recommended by Reps. Frank Wolf (R-Va.) and Jim Cooper (D-Tenn.) to contain out-of-control spending in the longer run.

And, a bailout for GM? Like AIG, the auto industry probably is too big to fail — it would send an additional 3 million workers onto unemployment lines — but the domestic industry needs to be restructured.

Washington Post columnist Steven Pearlstein has come up with the idea of a “pre-arranged bankruptcy.”

That would involve promises of federal aid along with a federal takeover of the companies’ pension obligations, renegotiation of union and dealer contracts. Creditors would take a loss, stockholders would be wiped out, and management would be replaced.

It’s an emergency we face, no question. But soon-to-be White House Chief of Staff Rahm Emanuel had it right when he said, “No crisis should be allowed to go to waste.” Let’s hope he and his boss manage this one well — better, in fact, than FDR.