Many who have been vociferous in criticizing income and wealth inequality such as Paul Krugman have not pointed to the increase income inequality as the cause of the depression. Those on the left who might be the natural proponents of a more progressive tax system have not connected the dots. They have a different theory as to the cause of the depression. They are adherents to the regulatory fallacy, the belief that the depression was caused by insufficient regulation.
To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis? If they answer yes, they are adherents to the regulatory fallacy
In Paul Krugman’s 2012 book “End this Depression Now!” he comes heartbreakingly close to connecting the dots between the reduction in the progressivity of the tax system and the cycle of overinvestment that caused the depression. He states that the book is much less concerned with the cause of the depression than what should be done to end it.
Those on the right have their own version of the regulatory fallacy. They blame FNMA and the Community Reinvestment Act. According to their theory, regulation such as the CRA resulted in a vast increase in subprime mortgage lending that caused the financial crisis. Possibly …"
http://seekingalpha.com/article/1543642
"Data" pretty much always refers to a set of data. Virtually never do we speak of a datum.
How sad that Obama had 2 fine economists in his employ offering sound advice: Jared Bernstein and Christy Romer (not sure about Larry Sommers). Yet time and again it was Geithner who had Obama's ear. No wonder the other 3 were gone after 2 years whereas Geithner stayed the entire first term. I put the blame for the disastrous 2010 mid-terms squarely on Obama's and Geithner's shoulders.
2
It will happen again as crises are mechanisms to restore equilibrium between real values and prices. In today’s numbers the real global production of goods and services is one fifth of the claims on its value. This mirage is fostered by the illusion of financial assets created in the credit process. CDS and and similar financial instruments continue to be created around debt in emerging markets and even here around debt like that of student loans. Many of those debts won’t be paid and will see the ensuing devaluation like in 2008-2009. That’s why crises are initially manifested in the financial sphere. But in reality correspond to the inability of people to pay for their own needs (houses, student loans, non financial corporate loans, etc). Thus the defaults ...
3
That last point is really crucial, that government mainly focused on rescuing the banks rather than indebted homeowners and the unemployed. The Fed did its job, but not Congress.
The BEA publishes data indicating how much each component of GDP (e.g., consumption, business investment, government, and net exports) contributes to real GDP growth.
That data tells us that from 2010-2014, government spending subtracted about 0.4% from GDP growth each quarter. So instead of the average 2.2% GDP growth during those years, it would have been 2.6% if the government had only been a neutral contributor (i.e., 0 rather than minus 0.4%).
As Dr. Krugman argues, that contribution should have been strongly positive.
Even Trump understands this; in the past three quarters, government spending has added an average of nearly 0.4% to the real GDP growth rate. So that 4.2% growth in the latest quarter would have been 3.8% with neutral government policy, 3.4% with policy comparable to what we had 2010-2014.
From 2010-2014, spending as % GDP fell, and we didn't regain the late 2007 level of non-farm jobs until May 2014.
Reagan understood this as well, making sure spending rose as % GDP until employment returned to its pre-crisis level after the rough 1981-1982 recession. In fact, Reagan is the recent President to outspend Obama as % GDP.
Here is the FRED chart:
https://fred.stlouisfed.org/series/A822RY2Q224SBEA
2
Too much of the stimulus was tax breaks. This lacks a multiplier effect and doesn't not give the bang for the buck that hiring to build infrastructure does. Obama smartly doled out those cuts so they were spread out to the point where a lot people didn't realize they had gotten a tax break. There was even a political movement based on the idiocy that Obama had raised taxes ! A movement summed up by the old lady screaming "keep your government hands of my medicare".
4
What you are preaching has a dramatic proof in history. The Great Depression was ended finally by the government's over the top spending during World War II. Why don't wealthy people like that explanation which is so obvious. It's not just the Reaganite belief that the government is the problem and not the solution. No, it's because human beings not only like and want to be rich, they also want to be richer than everybody else. The wealthy people like Geithner would just as well have the recession go on, reducing the average earnings and wealth while theirs are swelled by the financial recovery and the advancing stock markets. From this history, it clear what the policy initiative should be when the next recession comes around. The Dems and Repubs should bipartisan agree on a large increase in defense spending until the recession is aborted.
Republicans refused to acknowledge that their policies in the 30's (let charity take care of the poor, let banks collapse, impose tariffs) were disastrous and that FDR's approach was much more effective. We're still enjoying the benefits of the many work projects done then such as the TVA, Grand Coulee, Hoover Dam, and National Parks. If it doesn't directly benefit the 1% they don't care. Isn't this how old European royalty behaved? That didn't work out too well.
5
Great opinion piece! Is Krugman possibly Truman's one -armed economist? Surprise-the banks and the head honchos received the mother lode while the rest of the economy -well you know the song: They got the gold mine, I got the shaft! Does anyone think I'll feel better about our failure to truly respond well to the crisis after I read Adam Tooze's tome? Doubtful.
Why do Republicans keep getting elected?
9
@Kathryn: Perhaps because Republicans are so very good at shifting the blame for the inevitable consequences of Republican policies - to Democrats. Look at the number of people who blamed the Obama administration for its response to Hurricane Katrina, and the glazed look in their eyes if one points out that Hurricane Katrina occurred during the Bush Administration.
The real problem was, and is, that none of the bankers whose actions made the Great Recession inevitable suffered any consequences for their actions. The folks they wrote liars' loan mortgages for got their houses repossessed, the pension funds that purchased derivatives based on those mortgages lost money. Wall Street and the bankers, cashed their enormous bonus checks while condemning others for being foolish enough to buy what Wall Street was selling.
6
There are lots of things that weren't done when they were needed and well-after...
As people were laid off, eventually, training programs were offered without regard for whether or not there were matching jobs locally for them. The banks weren't lending. Something should have been done get people from job deserts to where they were needed.
Homeowners were left holding the bag and homes were left empty until prices began to rise again. Then, long-term unemployment was ended and withing about six months, we began to see a steep rise in homelessness. By September 2014, it was declared a crisis. Meanwhile, there was no investment in affordable housing and now we have housing crises all over the place, with California being one of the epicenters. In spite of the state approving a couple of billion for affordable housing, NIMBYism is winning out and not a red cent of it has been spent yet.
Student debt is eating up a huge chunk of young people's earnings and that is causing some societal changes. According to Pew, as of 2016, 64 million people lived in multigenerational living arrangements. That's 20% of the population. "The share of the population living in this type of household – defined as including two or more adult generations, or including grandparents and grandchildren younger than 25 – declined from 21% in 1950 to a low of 12% in 1980."
What Trump is doing will only worsen inequality.
Notes on ‘Capitalism, Socialism, and Unfreedom’
https://wp.me/p2KJ3H-345
6
Additionally, and ironically, the GOP's defifcit ballooning tax cuts look as if they will turn out to be deflationary. Evidence is mounting that companies in heavily competitive industries like retail and autos, are using at least part of their 14 percentage point windfall to cut goods prices.
This will keep the yield curve from "normalizing" and banks from improving their NIMs.
1
Obviously you weren’t in charge just other practitioners of the dismal science.
We abandoned our brief flight of hope when Obama choose to be advised by Geithner and Duncan, among others. If Paul Krugman is unable to get very important people to listen to reason, who could? Not I. All I have is one tiny little snowflake vote. One at a time that isn't much. If Americans don't rise up to the ballot en masse, our experiment in democracy will soon be over.
6
@mary bardmess If you look at the loss of functionality in bipartisanship governing over the past four decades and the evolution of the 24/7 campaign/election industry - in both politics and political media (those evil symbionts), it would be extremely difficult to argue that our so called "experiment in democracy" - has long been over. Trump is the most extreme symptom of the death of a competent representative democracy, yet.
This is an excellent analysis as far as it goes, but why leave out the failure to bail out under-water homeowners?
15