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Did America Learn Anything From the Last Economic Crisis?


Those who do not remember history are condemned to repeat it. Even when that history is only a decade old, evidently.

The global financial crisis, the deep recession it caused, and the weak recovery that followed have produced plenty of lessons about helping the economy escape from a period of trauma. The United States seems to be ignoring some of them in its response to the coronavirus pandemic.

Several prominent Republicans in recent days have raised alarm bells about rising public debt. They’ve also indicated their opposition to further financial help for state and local governments. Leaders of both parties in Congress have structured business bailouts as loans from the Federal Reserve rather than as direct assistance to struggling companies.

And signs of bailout fatigue are already starting to appear, particularly among Republicans — raising the risk that government help for the economy will dry up before a potential coronavirus depression is contained — which was a key reason the last economic recovery was so slow for so long.

“The pandemic response got off to a really promising start, with everyone coming together with a whatever-it-takes attitude,” said Jason Furman, who shaped economic policy in response to the global financial crisis as a staffer in the Obama White House. “But we’re slipping back into the types of gridlock, over-optimism about the economy and over-pessimism on the deficit that followed the financial crisis and unnecessarily prolonged the economic pain.”

Consider a few of the experiences from that earlier episode that might inform the pandemic response.

In the aftermath of the 2008 crisis, there were heated bipartisan warnings about excessive public debt — warnings that the United States risked hitting a tipping point of spiking interest rates and fiscal crisis if it did not curtail borrowing.

A high-profile bipartisan commission was formed to plan ways to reduce the trajectory of deficits. The Obama White House and congressional Republicans in 2011 embarked on lengthy negotiations over a “grand bargain” to reduce future entitlement spending.

Those efforts came to naught. But not only did no debt crisis occur — the opposite happened. Interest rates and inflation have stayed persistently low for the last decade, and demand for Treasury bonds has remained very high.

With the economy now in free fall, even many fiscal hawks are embracing large-scale deficit spending to help the economy emerge from the pandemic in better shape. Interest rates have fallen to record lows — 10-year Treasury bonds yielded only 0.6 percent Thursday — indicating investors are willing to lend to the U.S. government on generous terms. Economists see the last crisis as a reminder that deficit spending during a recession is desirable if it can prevent long-term economic damage.

“A key lesson from the 2008 period is that crises can have long shadows if there is damage to the economic structure,” said Karen Dynan, a Harvard economist and a former Treasury Department official. “The economic scarring if lots of businesses go bankrupt and households are wiped out financially in this episode would be a failure of policy. Based on the 2008 experience, a real concern is that we will tire of fiscal stimulus before the need for that money runs out.”

Already, there is uncertainty about the federal government’s willingness to support states financially — which has a particular parallel with the not-too-distant past.

In early 2010, the private sector in the United States turned a corner and began consistently creating jobs. But around the same time, state and local governments were facing the delayed effects of plunging tax revenue. Unlike the federal government, states generally must balance their budgets, and do not have a central bank to ensure their access to funds.

As a result, their only option was to enact huge spending cuts just as the rest of the economy was starting to turn around. State and local governments shed 570,000 jobs from 2010 to 2012, contributing to a perennially weak economic recovery. If an extra 570,000 people had been working at the end of 2012, the jobless rate would have been 7.5 percent instead of 7.9 percent. Some funds had been allocated to states in the 2009 fiscal stimulus bill, but Congress was unwilling to seriously consider the possibility of allocating more.

Republicans were dead set against the idea of bailing out states’ finances, and even many Democrats in Congress were wary, disinclined to help political rivals in state houses and governors’ mansions.

Now, states face plummeting tax revenue and new costs tied to treatment of the virus. Republicans blocked Democratic requests to add more money for states in the latest rescue legislation, and the Senate majority leader, Mitch McConnell, said on Wednesday that “there’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations” and that states should consider filing for bankruptcy if necessary.

The ground may also be shifting on programs to encourage businesses to keep making payroll.

Controversies that have emerged around programs to support small businesses suggest that the politics of industry bailouts are becoming more toxic. Outcry over some midsize companies that obtained forgivable loans through the Paycheck Protection Program suggests that public stigma and political blowback could be attached to taking advantage of the federal rescue — which could undermine the ability of the program to fulfill its goal of preventing layoffs even as Congress scales up its size.

“Identifying individual companies and trying to paint a picture of a program that’s not doing well does suggest that the kind of bailout fatigue that existed 12 years ago is lurking very close to the surface and may even be popping up above the surface,” said Michael Strain, a resident scholar at the American Enterprise Institute.

Finally, Congress has repeated another behavior from the global financial crisis: relying to an extraordinary degree on the Federal Reserve to carry out steps aimed at fixing the economy, rather than taking direct action itself.

In 2008, that meant the Bush administration relied on the Fed to rescue Bear Stearns and AIG; in 2009, it meant the Obama administration used a Fed program to support lending as a key part of its crisis response. For years thereafter, as Congress refrained from new fiscal action, the Fed enacted quantitative easing to try to keep the economy on track.

The Fed has a lot of strengths. It is run by capable technocrats, can act quickly, and has the unique capacity to create dollars out of thin air. But it also has limitations. Its tools generally work through financial markets, which means it is better at improving financial conditions generally than at helping individual industries that are experiencing problems.

And though it has wide authority to lend money to solvent borrowers, it is not legally allowed to spend money — for example, to directly pay businesses to keep their payrolls high, or to send money to individuals.

Now, the core of the Trump administration’s strategy — with bipartisan support in Congress — has been to authorize Treasury funds to be used by the Fed for new programs to lend to businesses.

“The Fed is great at stabilizing the financial system, but it’s not well designed to target specific segments of the economy,” said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University. “Giving grants is a much more effective and efficient manner of helping businesses out than the Fed giving loans.”

In that sense, Congress’s desire to avoid the sticker shock of spending huge sums directly could make its rescue efforts less effective than they otherwise might have been.

In all these areas, the great test for the government is whether it can engineer a response enabling the economy to come out of the pandemic without being much smaller — without the years of inadequate growth that followed the 2008 crisis, which kept millions of people from fulfilling their productive potential for years.

If the recent trends hold up, the post-pandemic years could be another way in which history repeats itself.

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