“If the economy were a coal mine,’ wrote the editorialist of The New York Times on Sunday, “the job market would be a 800-pound canary, warning of a recovery that is running out of steam.” Added Fareed Zararia in this morning’s Washington Post, “The American economy is sputtering and we are running out of options.”
It’s official now: Houston, we have a problem.
For much of this year, there has been a relaxing in Washington. Yes, the economy was weaker than in, say, 2005 or 1998. But financial crisis had entered the mopping up stage. Indeed, banks were paying back TARP money at a profit to the government. No one was talking about major institutions failing. Recovery had begun in May 2009 and was continuing. That cautious optimism is gone.
Friday’s job numbers could not have been a surprise, unless you were determined to ignore the clear implications of Washington’s policies over the last year and a half.
Generally I don’t refer to my past columns. But what I am about to say about the implications of current policies will sound opportunistically after-the-fact. So I want to recall at some length a warning I published early in 2009.
Writing of the Federal Reserve and Treasury responses to the financial crisis:
“Unlike U.S. policy in the ’30s, the 2008 Treasury and the Federal Reserve attacked the problem at its source. The Fed added more than $1.1 trillion in new facilities to its balance sheet…. To supplement these efforts and to augment bank reserves directly through preferred stock purchases, the Treasury received authority to commit up to $1.5 trillion—about a quarter of which had been deployed when the new administration took office….”
What were the implications of these actions?
“In 2007, a dollar of M1—base money plus demand deposits—supported 10 dollars of gross domestic product, up from $6.30 of GDP in 1993. Allowing for 3 percent growth from mid-2008, a healthy GDP in 2009 would total about $14.8 trillion. If you put the new money in the Fed balance sheet and the Treasury’s emergency spending on top of the midyear total, M1 would need to support only $5.30 of GDP to achieve that 2009 target. This is the lowest ratio of GDP to M1 the United States has seen since the early 1970s. New perceptions of risk certainly mean that fewer dollars will be lent on each dollar of M1 for the foreseeable future. But even accounting for that change, it is very likely that enough has been added to the base to restore economic activity.”
Key was Milton Friedman’s rule of thumb for monetary policy, that movements in money supply take six to nine months to be reflected in economic activity. So:
“Following Milton Friedman’s rule, the severe downturn of the last three months of 2008 almost certainly originated in the monetary events of January through May when, among other things, the structured finance markets went dead and Bear Stearns folded. By the same rule, following the massive actions the Treasury and Fed took between September and December last year, the economy should rebound between May and September this year.”
And, of course, the recovery began on Friedman’s schedule. But what could go wrong? It was as evident then as, after the fact, it is now:
“In contrast to what the Obama administration is arguing, having done enough, the government could now do too much. The administration could repeat the Hoover-Roosevelt mistakes. Working with Congress, it could mandate trade protection, increase tax rates, divert resources from productive private investment to uneconomical government-sponsored activities, intrude in the management of major industries, or prosecute business people to make populist political points. The stimulus package takes major steps in several of these directions.
“Magnitude matters. Small mistakes may not derail a recovery powered by such massive monetary movements as are already in place, while doing too much of what was done in the ’30s could prove fatal.
“The irony here is that, if it keeps such errors to a minimum, the Obama administration is well positioned to take the bows for the Bush administration’s response to the crisis. All it needs is a few months of restraint—and an understanding of Milton Friedman.”
But the administration did not exercise restraint. So now it must pay the piper for its “never let a good crisis go to waste” excesses. Neither major corporations nor entrepreneurs are investing in growth. And why should they? In every possible way, the administration has made clear its contempt for the private economy, private decision-making, and private wealth. Expanded regulation and increasingly arbitrary government are the orders of the day. If that were not bad enough, the largest tax increase in American history – one targeted directly at entrepreneurs and potential entrepreneurs – kicks in on January 1st, when the 2003 tax cuts expire. Meanwhile, spending and the deficits have gone into an upward spiral that even the administration’s friends call unsustainable.
But don’t expect The New York Times, academics like the Times’ Paul Krugman, senior policymakers at the White House, or the Democratic leadership controlling Congress to seriously grapple with these failures. Their answer is pedal to the metal. It is a sad day when more economic sense comes out of one Tea Party rally than out of the senior ranks of our media, our intellectual class, and our government.
November can’t arrive too soon.