The Big Fix By DAVID LEONHARDT February 1, 2009
I. WHITHER GROWTH? The economy will recover. It won't recover anytime soon. It is likely to get significantly worse over the course of 2009, no matter what President Obama and Congress do. And resolving the financial crisis will require both aggressiveness and creativity. In fact, the main lesson from other crises of the past century is that governments tend to err on the side of too much caution - of taking the punch bowl away before the party has truly started up again. "The mistake the United States made during the Depression and the Japanese made during the '90s was too much start-stop in their policies," said Timothy Geithner, Obama's choice for Treasury secretary, when I went to visit him in his transition office a few weeks ago. Japan announced stimulus measures even as it was cutting other government spending. Franklin Roosevelt flirted with fiscal discipline midway through the New Deal, and the country slipped back into decline. Geithner arguably made a similar miscalculation himself last year as a top Federal Reserve official who was part of a team that allowed Lehman Brothers to fail. But he insisted that the Obama administration had learned history's lesson. "We're just not going to make that mistake," Geithner said. "We're not going to do that. We'll keep at it until it's done, whatever it takes." Once governments finally decide to use the enormous resources at their disposal, they have typically been able to shock an economy back to life. They can put to work the people, money and equipment sitting idle, until the private sector is willing to begin using them again. The prescription developed almost a century ago by John Maynard Keynes does appear to work. But while Washington has been preoccupied with stimulus and bailouts, another, equally important issue has received far less attention - and the resolution of it is far more uncertain. What will happen once the paddles have been applied and the economy's heart starts beating again? How should the new American economy be remade? Above all, how fast will it grow? That last question may sound abstract, even technical, compared with the current crisis. Yet the consequences of a country's growth rate are not abstract at all. Slow growth makes almost all problems worse. Fast growth helps solve them. As Paul Romer, an economist at Stanford University, has said, the choices that determine a country's growth rate "dwarf all other economic-policy concerns." Growth is the only way for a government to pay off its debts in a relatively quick and painless fashion, allowing tax revenues to increase without tax rates having to rise. That is essentially what happened in the years after World War II. When the war ended, the federal government's debt equaled 120 percent of the gross domestic product (more than twice as high as its likely level by the end of next year). The rapid economic growth of the 1950s and '60s - more than 4 percent a year, compared with 2.5 percent in this decade - quickly whittled that debt away. Over the coming 25 years, if growth could be lifted by just one-tenth of a percentage point a year, the extra tax revenue would completely pay for an $800 billion stimulus package. Yet there are real concerns that the United States' economy won't grow enough to pay off its debts easily and ensure rising living standards, as happened in the postwar decades. The fraternity of growth experts in the economics profession predicts that the economy, on its current path, will grow more slowly in the next couple of decades than over the past couple. They are concerned in part because two of the economy's most powerful recent engines have been exposed as a mirage: the explosion in consumer debt and spending, which lifted short-term growth at the expense of future growth, and the great Wall Street boom, which depended partly on activities that had very little real value. Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union's growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme. Where will new, real sources of growth come from? Wall Street is not likely to cure the nation's economic problems. Neither, obviously, is Detroit. Nor is Silicon Valley, at least not by itself. Well before the housing bubble burst, the big productivity gains brought about by the 1990s technology boom seemed to be petering out, which suggests that the Internet may not be able to fuel decades of economic growth in the way that the industrial inventions of the early 20th century did. Annual economic growth in the current decade, even excluding the dismal contributions that 2008 and 2009 will make to the average, has been the slowest of any decade since the 1930s. So for the first time in more than 70 years, the epicenter of the American economy can be placed outside of California or New York or the industrial Midwest. It can be placed in Washington. Washington won't merely be given the task of pulling the economy out of the immediate crisis. It will also have to figure out how to put the American economy on a more sustainable path - to help it achieve fast, broadly shared growth and do so without the benefit of a bubble. Obama said as much in his inauguration speech when he pledged to overhaul Washington's approach to education, health care, science and infrastructure, all in an effort to "lay a new foundation for growth." For centuries, people have worried that economic growth had limits - that the only way for one group to prosper was at the expense of another. The pessimists, from Malthus and the Luddites and on, have been proved wrong again and again. Growth is not finite. But it is also not inevitable. It requires a strategy. ... http://www.nytimes.com/2009/02/01/magazine/01Economy-t.html *********************************** * POST TO MEDIANEWS@ETSKYWARN.NET * *********************************** Medianews mailing list Medianews@etskywarn.net http://lists.etskywarn.net/mailman/listinfo/medianews
