Jamie Galbraith inquires why I have space in my Project Syndicate column to quote somebody who got it so very wrong in the spring of 2009--Robert Lucas--but not anybody who got it right.
Jamie Galbraith, March 2009:
No Return to Normal: Did the president and his team correctly diagnose the problem? Did they act with sufficient imagination and force? And did they prevail against the political obstacles?… [D]id they get the scale right? Was the plan big enough?… [T]he recovery bill pours a bit less than 2 percent of GDP into new spending per year, plus some tax cuts, for two years, into a GDP gap estimated to average 6 percent for three years…. The CBO estimates that because of the multiplier effect, two dollars of new public spending produces about three dollars of new output…. And with this help, the recession becomes fairly mild….
Why did the CBO reach this conclusion? On depth, CBO’s model is based on the postwar experience, and such models cannot predict outcomes more serious than anything already seen. If we are facing a downturn worse than 1982, our computers won’t tell us; we will be surprised. And if the slump is destined to drag on, the computers won’t tell us that either….
[I]f we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression…. If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work?… [E]conomist Marshall Auerback….
[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock….
Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed…. In 1937, Roosevelt tried to balance the budget, the economy relapsed again, and in 1938 the New Deal was relaunched. This again brought unemployment down to about 10 percent, still before the war….
A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around….
The first thing we need, in the wake of the recovery bill, is more recovery bills. The next efforts should be larger…. To the extent possible, all the resources being released from the private residential and commercial construction industries should be absorbed into public building projects…. [C]omprehensive foreclosure relief…. [W]e should offset the violent drop in the wealth of the elderly population as a whole…. That means that the entitlement reformers have it backward: instead of cutting Social Security benefits, we should increase them, especially for those at the bottom of the benefit scale…. Third, we will soon need a jobs program to put the unemployed to work quickly…. Finally, a payroll tax holiday would help restore the purchasing power of working families…. As these measures take effect, the government must take control of insolvent banks, however large, and get on with the business of reorganizing, re-regulating, decapitating, and recapitalizing them…. Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management….
The chorus of deficit hawks and entitlement reformers are certain to regard this program with horror. What about the deficit?… First, the deficit and the public debt of the U.S. government can, should, must, and will increase in this crisis…. The choice is between an active program, running up debt while creating jobs and rebuilding America, or a passive program, running up debt because revenues collapse…. Second, so long as the economy is placed on a path to recovery, even a massive increase in public debt poses no risk that the U.S. government will find itself in the sort of situation known to Argentines and Indonesians…. Third, in the debt deflation, liquidity trap, and global crisis we are in, there is no risk of even a massive program generating inflation or higher long-term interest rates…