Krugman on The Economic Narrative

Paul Krugman tackles the problem of the economic narrative today:

The way the right wants to tell the story — and, I’m afraid, the way it will play in November — is that the Obama team went all out for Keynesian policies, and they failed. So back to supply-side economics!

The point, of course, is that that is not at all what happened. A straight Keynesian analysis implied the need for a much bigger program, more oriented toward spending, than the administration proposed. And people like me said that at the time — we’re not talking about hindsight.

You can argue that nothing bigger and better was politically feasible; we’ll never know about that. But what we do know is that (1) senior administration officials, even in internal arguments, claimed that half-measures were the right thing to do, based on … well, invented doctrines that certainly weren’t basic Keynesian. And (2), the administration has never said that it had to make do with an underpowered plan; on the contrary, to this day it maintains that what it did was just right. And this just feeds the false narrative.

As Ronald Brownstein noted in the National Journal back in April, the Republicans' narrative about Obama's economic agenda has been straightforward and unrelenting. Brownstein writes "in their telling, Obama is transforming the United States into a sclerotic European social-welfare state; forcing the strained middle class to fund both a "crony capitalism" of bailouts for the powerful (the charge McConnell leveled against the financial bill) and handouts for the poor (through health care reform); and impeding recovery by smothering the economy beneath stultifying federal spending, taxes, and regulation."

The GOP's distorting narrative has been so successful that there are even those on the left who believe that the Troubled Asset Relief Program was some sort of optional exercise, a safety net for Wall Street. There are certainly valid criticisms to be made of the TARP, which is a George Bush/Hank Paulson policy to begin with, but the necessity of preventing a collapse of the banks should be quite clear to everyone. The TARP provided the necessary liquidity to keep the credit markets afloat when the danger was very really of a wider systemic collapse. In December 2009, the Oversight Panel headed by Elizabeth Warren concluded:

There is broad consensus that the TARP was an important part of a broader government strategy that stabilized the U.S. financial system by renewing the flow of credit and averting a more acute crisis. Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence.

More recently, I covered the Blinder Zandi Report which detailed what would have happened had we not acted. The report, authored by Mark Zandi, Moody's chief economist and a former adviser to both the McCain and Obama campaigns, and Alan Blinder, a Princeton economist who has served as vice chairman of the Federal Reserve's Board of Governors, offers the first comprehensive estimate of our full response to the crisis: Absent the TARP and the fiscal stimulus, "GDP in 2010 would be about 6 ½ percent lower, payroll employment would be less by some 8 ½ million jobs, and the nation would now be experiencing deflation." The TARP worked; the fiscal stimulus worked but should have been $1.3 trillion in size with fewer tax cuts and more actual investment spending.

I'm not sure if the Obama Administration is salvageable to be quite honest. The President and his team may win re-election or they may not depending on the caliber of the GOP opposition and how unemployment tracks between now and 2012. There's not much we can do about the former but there is still much that the Administration can do about the latter.

The GOP has since 1960 demonstrated a tendency to nominate a conservative as their standard bearer after an electoral loss. Thus a Nixon loss in 1960 begot Goldwater in 1964, a Ford loss in 1976 lead to Reagan in 1980, and Dole loss in 1996 brought Bush in 2000. I'm pretty confident that whoever the GOP nominee is 2012, it is going to be someone to the right of John McCain. Still that leaves a lot of ground to cover and dozens of shades of insanity with which to contend. There is a big difference between Mitch Daniels and Sarah Palin, between John Thune and Rick Santorum, between Tim Pawlenty and Mike Huckabee, between Mitt Romney and Newt Gingrich. And while Mitch Daniels may be the sanest of the bunch, he's still quite to the right of John McCain.

Nonetheless, as of now and noting that in politics 26 months is an eternity, I think Mitch Daniels represents probably the toughest challenge for Obama among the potential 2012 Republican nominees. But I don't think that Mitch Daniels can win the GOP nomination as things stand now.

The other moving part on Obama's re-election prospects are how the Administration handles the economy and in particular the vexing issue of unemployment. In this regard, I would like to see the following personnel changes in the Administration: Laura Tyson replacing Lawrence Summers as Director of the White House National Economic Council, Austan Goolsbee taking over for the departing Christina Romer as chair of the White House Council of Economic Advisers, Jon Corzine taking over as Secretary of the Treasury for the hapless Timothy Geithner and John Podesta returning to White House as Chief of Staff. I'd also find a role for Joseph Stiglitz, Simon Johnson and Dean Baker. It should go without saying that Elizabeth Warren needs to be named as the head of new Bureau of Consumer Financial Protection. 

I'll nip in the bud the push back on Corzine as Treasury Secretary: if you want to reign in Wall Street, you'll need someone who knows the major players intimately and who can make some of the more obtuse, like say Dan Loeb and Jamie Dimon, understand that it is in Wall Street's best interest to return to the pre-Reagan regulatory environment. That's going to be a hard sell because these titans of capital now seen themselves as political gatekeepers to a degree that we have not seen since the days of J.P. Morgan a full century ago.




Tags: Obama Administration, Political Narratives, US Economy (all tags)



It's a lost cause

Krugman is literally the only liberal of any prominence who understands the importance of building an economic narrative and is out there fighting to create one.  He is all alone.  Meanwhile you have scads of conservative writers at the national and local levels pushing their version of the narrative, and GOP politicians repeating their focus-grouped talking points about why Republican policies will fix everything.  They've literally created an alternate universe for themselves, one where FDR made the Depression worse, one where government has never created a single job in recorded history.  And we sit around and mock them for it but we're basically not even fielding a team to fight back.

This White House has pursued some okay policies (yes, yes, the stimulus was too small, but at least we had a stimulus) but they seem to do little or nothing to explain or defend their policies.  Instead of explaining in easy-to-understand terms why this is the best policy in the short and long terms, they constantly seem apologetic about the fact that we're spending all this money and they're more interested in emphasizing that we'll turn to deficit reduction any day now than in explaining why we're doing what we're doing.

But it's about a lot more than just the President as Explainer-in-Chief.  It's about the complete failure of the liberal message machine to get the word out and make arguments that persuade swing voters.  Other than Krugman, our prominent liberal voices are people like Maureen Dowd and Frank Rich who, at best, waste their column space serving up red meat.  Rachel Maddow, who I'm confident understands every detail of the economic arguments, seems more interested in scoring cheap points against Republican hypocrisy (look! that guy voted against the stimulus and now he's at a ribbon-cutting!) than in making the affirmative case for liberal policies.  The argument for Keynesian stimulus isn't that complicated, I'm sure there's a way to encapsulate it in 10 words or less, and yet we're surrendering the debate to idiotic arguments like "the government should tighten its belt in a crisis just like a family would."  At most we're responding by doing what Charles does in this post - "look, this wonky report proves we'd be even worse off with no stimulus." 

I think the liberal worldview has a defect in that we tend to think everything we believe is so blindingly obvious, we shouldn't even have to explain it.  Conservatives make bad arguments and we think it's good enough just to mock them, without realizing that people are being taken in and we need to make the opposing case.  John Boehner is going around the country saying the current state of the economy proves that stimulus is bad policy, and we're all just like hey, fellow liberals, come gawk at this guy's economic illiteracy.  But meanwhile no one is actually explaining why stimulus is important and why it works.  We built a lot of liberal infrastructure in that 1994-2006 period, but the message machine is still in its infancy from where I sit.

by Steve M 2010-09-01 11:23PM | 2 recs
RE: It's a lost cause

You talk about the lack of a liberal message machine, I would argue that this administration has been responsible for stifling it. Look at the conservatives, they have Freedom Works and multiple other groups working independently and in concert to deliver different versions of the same message. What have we? Nothing. And you know why because this administration took OFA, DNC and combined them and told all the big donors that everyone they donate to has to be approved by the DNC/WH. So for the longest time progressive groups could not get their message out without the approval of the WH (remember Rahm yelling "F-ing retarded" because some liberals had the sheer gall to target Blue Dogs on their resistance on the healthcare reform?).

Also in an administration that is perpetually in an identity crisis who exactly is the message manager? Joe Biden is no Dick Cheney, he has limited say in the WH and he is less of an attack dog. So what we have is bipartisanship taken to extremes to the detriment of this administration, and now the Democratic party is paying the price.

by tarheel74 2010-09-01 11:53PM | 1 recs
I disagree with your prescription

At this point, there is not much Pres. Obama, or his economic team can do to hasten the end of the current business cycle ~ they can make things worse, but not much better.  The time for that has past !

Looking forward, the big issue that needs to be tackled is the slow trickle of manufactring jobs.  There is, I believe, a very misplaced and pervasive sense of complacency caused by a fundamental lack of understanding on the importance of manufactring jobs.  Every politician states that they understand the importance of manuf. jobs, while also buying into the contradicting notion that manuf. jobs are not really all that important, as long as we retain a monopoly on the creative design cycle.  I do not mean to make fun of politicians who do not understand how dangerous it is to believe in these two positions ~ I did so myself till about 10 years back. 

The President's economic team is dominated by individuals who believe that the proper direction of capital to the right enterprise(s) is a worthy excersise.  There is nothing wrong with this belief ~ this is the goal of the financial markets.  However, it is wrong to be dominated by this belief alone, to the extent where you do not have the time to accomodate other thoughts.  Thus, to a wall street expert, supporting manufactring simply means shuffling some money around to the right producer (e.g. GM) in exchange for future or current profits; or shuffling a management team around.  If you are dominated by "proper direction of capital" thoughts, then you tend to forget that sustainable (i.e., real) GDP growth only occurs when you create, produce and sell things of increased value; and that manufactring innovation is a critical (and forgotten) step in this regard.

And so, the change I would like to see is a whole sale replacement of the President's economic team with a group that includes several individuals with actual manufactring experience.  Further limiting the options, I would like to see an individual who understands the link between "ownership" of the critical manufactring steps, "innovation" and ultimate value growth.  For instance, I would go out and draft Intel's CEO.  Replacing one set of wall street experts for a "better" set of wall street experts is not the solution.

by Ravi Verma 2010-09-02 12:37PM | 1 recs
That said,

I should hasten to add that I remain a big fan of your diaries =)

by Ravi Verma 2010-09-02 12:37PM | 0 recs
RE: I disagree with your prescription

The other name for Treasury now being bantered about is Michael Bloomberg.

by Charles Lemos 2010-09-02 05:39PM | 0 recs
RE: I disagree with your prescription

I don't see that happening, but I can envision a Bloomberg run for President and I don't mind saying so, that as person who stands up for his beliefs, he will get my vote.

by tarheel74 2010-09-02 09:31PM | 1 recs
RE: I disagree with your prescription

Yes, I suppose Jon Corzine would be a better choice.  As tarheel says below, I too would vote for Bloomberg for President (and send money), but I dont want to see him as Treas Secy.

by Ravi Verma 2010-09-03 12:33PM | 0 recs


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