A return to people-centered investment can motivate the flow of private capital
As I go back and look over what was being written about the economy, and the federal budget, the lost Clinton surpluses, falling wages, and the property bubble, throughout George W. Bush’s second term in office, it is clear the signs were there throughout that a major financial collapse was coming. Many observers, some more astute than others, predicted a correction was in the offing, without having to depend on very complex analysis.
In fact, simple arithmetic sufficed: there was not enough private wealth being generated in the Bush economy to sustain generalized economic growth. Millions of people were not earning enough to pay back what they owed. The mortgage industry was too reliant on refinancing to make existing loans payable—too often, the logic was: take out a second loan to pay your first. Cost of living was soaring while wages were falling, and Bush’s budgets were essentially pretending the two most expensive wars in US history were not real spending.
Now, in 2011, with the benefit of hindsight, we have learned that economic growth was substantially slower, at least in 2008, than we had previously thought. Some defend the Bush administration, saying the numbers could not be known adequately then, that the measures were flawed, or that we have expanded economic transparency generally since then, and so now know more than we could have then.
ON DECEMBER 16th, 2008, President-Elect Barack Obama met in Chicago with key members of his economic team to discuss their response to the deteriorating economic situation. Just two weeks earlier, the Bureau of Labour Statistics reported that 533,000 jobs had been lost in November, after a decline of 302,000 in October. According to the latest output figures, the economy had contracted by 0.5% in the third quarter, and much worse was expected of the fourth. …
President Obama was inaugurated on January 20th, and a stimulus bill was introduced in the House of Representatives on January 26th. A stimulus package worth $819 billion passed in the House just two days later.
Two days after that, Americans received grim news about the economy: in the fourth quarter of 2008, GDP contracted at a 3.8% annual pace—the worst quarterly performance since the deep recession of 1982.
What we now know, however, is that those reports—which were the mathematical foundation for the American Recovery and Reinvestment Act, and the Obama administration’s belief that unemployment could be kept to 8%—were radical understatements of the economic chaos that was unfolding.
In fact, as The Economist report continues:
Output in the third and fourth quarters fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time. Employment was also falling much faster than estimated. Some 820,000 jobs were lost in January, rather than the 598,000 then reported. In the three months prior to the passage of stimulus, the economy cut loose 2.2m workers, not 1.8m. In January, total employment was already 1m workers below the level shown in the official data.
When Pres. Obama was implementing the stimulus, the official numbers from Pres. George W. Bush’s administration showed negative growth in the third and fourth quarters of 2008 to be 0.5% and 3.8%, respectively. In fact, the reality, never shown to Obama or any top policy-makers in Washington until two years after the Recovery Act became law, was negative growth of 3.7% and 8.9% in the last two quarters of 2008.
Both of those figures were worse than anything seen in nearly 20 years. The fourth quarter decline of 8.9% was the worst since the double-digit single-quarter decline of 1957. And there were very good reasons to worry that GDP was being artificially inflated by anomalous activity: the Pentagon’s record spending, for instance, counts as GDP, but was far beyond any historically normal level, and with two concurrent wars, would eventually have to decline. (The recession of 1945, many believe, is attributable in part to the war-spending bubble deflating as the war came to an end.)
The question, then, would have to be: what was really going on in the private-sector economy, if government policies were propping up GDP? Where was household wealth going to come from to fund the record—and rapidly expanding—debt Americans had taken on? How could people get this wealth, if it was not available through wages and other costs of living, aside from credit repayment, were rapidly escalating?
For trained observers watching financial markets, and who had some understanding of the “extreme investing” that was going on, and becoming mainstream, through complex mortgage-backed securities and credit-default swaps, it was clear huge swaths of the financial sector were essentially underfunded and could collapse. The property bubble, however, was visible, and was well understood—and discussed—by prominent voices as early as 2005.
The Economist magazine ran a cover story in June 2005, exploring what would happen “after the fall”, projecting a global collapse in real estate markets, severe economic fallout in Europe and the US especially, the contraction of private wealth generation for most people in those markets, and resulting budgetary shortfalls that could cripple governments and their ability to respond.
Part of the problem is the idea of GDP itself: it is a flawed measure of economic health and wellbeing, because sometimes expansion is illusory or somehow counterproductive, and contraction can be a healthy correction, resetting apparent values to where they actually lie. That something was wrong with GDP measures across the developed world was evident throughout Bush’s second term; what was not evident was how to get out of the mess without inviting economic collapse.
Is that, however, a defense of the policies enacted from 2005 to 2009? In early 2008, when George W. Bush introduced his federal budget proposal for Fiscal Year 2009, his last official budget, there was widespread concern the policies he proposed were reflective of and would invite more sustained economic malaise. He had built into the federal budget record deficits, but had not yet begun counting the wars in Iraq and Afghanistan as budget items—the fear was this would give a distorted impression of the nation’s fiscal health, and might conceal from key decision makers worrying revenue shortfalls that could hamper overall growth.
Interestingly, the longest recession since the Great Depression—it lasted 18 months, from Q1 2008 through Q2 2009—with such deep declines in GDP was over by the third quarter of 2009, Pres. Obama’s second full quarter in office. The GDP growth rates for that period were:
- Q1 2008: -1.8%
- Q2 2008: 1.3%
- Q3 2008: -3.7%
- Q4 2008: -8.9%
- Q1 2009: -6.7%
- Q2 2009: -0.7%
- Q3 2009: 1.6%
- Q4 2009: 3.8%
It is evident that the Recovery Act worked, as far as such a thing was possible. Economic growth continued steadily throughout 2010, and is weaker now that the stimulus spending is beginning to wind down. There are mounting concerns that massive federal budget cuts will have a depressive effect on the economy, literally withdrawing hundreds of billions of dollars a year in economic output from the domestic economy.
For some, this is healthy and corrective. But to the average American household, it feels very much like a period of prolonged economic malaise. We can blame financial analysts, rating agencies and policy-makers, for creating the economic framework that ignored long-running pathologies and exacerbated the crisis, by using unfunded derivatives, rampant credit expansion, tricky accounting and record Defense spending, to conceal the clues, but it is more important to learn the lessons, to avoid doing the kind of things that impose crisis on ordinary working families and small businesses.
At present, the government has issued so many historic tax cuts, from 2001 right through 2011, that revenues are at historic lows, just 14% of GDP. Budgetary requirements, by contrast, are upwards of 22% of GDP. That is the cause of the record deficits, and much of it is about correcting course from a time of underfunded hyper-exploitation, in which the underpinnings of sustainable economic growth were eroded by flawed theories, flawed reporting of data, unsustainable borrowing and unwarranted gambles.
Total federal government revenue for 2010 was just $2.092 trillion, while GDP for 2010 was $14.66 trillion, so revenues amount to only 14.27% of GDP. With spending at $3.397 trillion, or 23.17% of GDP, there is a resulting stimulus shortfall to the wider economy. The deficits from the Bush years, which helped to conceal the gravity of the mounting economic crisis, have been passed to the Obama years. And now, with BEA revising its reporting for all GDP figures since 2006, in July 2011, it is clear the 2009 stimulus was less than was needed, not more.
The question is: if we were able to see the oncoming economic collapse years before it happened, but we are still living with the legacy of the policies that created it, how can we get back to the healthy growth of late 2009, early 2010, and avoid slipping into another recession? American businesses are sitting on record amounts of cash, and banks enjoy record low interest rates, to stimulate lending, yet neither are putting money into the economy.
A specific kind of policy course correction, then, is needed to motivate significant private investment in new industry, new technologies, and new jobs. It has to be the kind of policy that will not cost taxpayers a lot of money, that gets money from industry profits moving through the consumer economy, and which either before or after achieving that, results in the net creation of millions of new jobs.
There are few ways to achieve this, but there is real promise in the energy sector. Because energy is tied into all other economic activity, which means that virtuous adjustments to how we find energy, how we harvest it, and how we get it to consumers, will ultimately push a cascade of positive impacts through the economy.
According to the Carbon War Room:
Investing $1.3 trillion each year in green sectors would deliver long-term stability in the global economy, a new UN report has suggested. Spending about 2 percent of global GDP in 10 key areas would kick-start a global low carbon, resource efficient green economy.
Since the oil crises of the 1970s, billions of dollars have been pumped into technology development in the areas of energy efficiency, low carbon energy, efficient transportation, bio-fuels, and other areas. This investment has led to hundreds of breakthroughs that are today cost effective. Yet, full commercial utilization of these innovations and their financial rewards still elude us.
What is needed to deploy those breakthrough innovations is for private capital to come off the sidelines and motivate collateral investment in an overhaul of our outmoded energy sector. Clean, renewable energy sources will replace dirty, finite combustible fuels; the question is whether it happens sooner, bringing the economic benefits to more people at a lower overall investment cost, or later, putting off the moment of maximum opportunity.
In many ways, the legacy of the Bush years will be one of putting off the moment of maximum generalized economic opportunity. Much was done to slow the development of rivals to the fossil fuels sector, and unprecedented amounts of money were spent to protect, obtain and propagate the use of fossil fuels. Even the catastrophic deepwater BP oil well failure of 2010, with net cost impact estimates running as high as $100 billion, was the result of a culture of lax regulation and virtually non-existent safety and emergency planning, instituted by the Bush-era Interior Department.
That the signs of impending economic calamity were visible for at least four to five years before the financial collapse of 2008 is an indication of how urgently policy makers need to learn the lesson that all citizens are stakeholders in the outcome of our broader economic policy and that the work of government is to protect stakeholder interest, not shareholder interest. A confusion of the two may be the leading philosophical driver of the 2008 collapse, as shareholder interest was thought to be inherently virtuous for wider economic prosperity. But in the hyperactive financial markets of 2001-2008, shareholder interest was too often served by practices that ran contrary to the wider interests of sustainable economic growth and generalized prosperity.
If we are to emerge from the Great Recession and its aftermath stronger and more resilient than we were when it set in, then we need to favor government policies that actively consider the stakeholder interests of citizens and incentivize private investment to work for the wider economy. The capture-and-hold profit-making of the Bush years was in many ways illusory and corrosive to long-term economic health; we need real investment, with resilient, optimizing impacts on the consumer economy, so that more people are earning, more people are spending, and more people are building assets and buying power to keep us secure against another collapse.
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