I have the sense that the Obama administration's economic policymakers have forgotten one of the most basic lessons taught by Robert Rubin during his stewardship of economic policy during the 1990s. The lesson is to think probabilistically: to project yourself forward into the possible futures, to ask in each one what would be the actions that you would then wish you had undertaken today, and then to actually take the appropriate action today. Looking forward into the future, (a) I see a 10% chance that something happens to create renewed cliff diving--a recession that bottoms out not with an unemployment rate in the 10-12% range that we currently anticipate but an unemployment rate that blows through 12% and keeps on rising. (b) I see a 30% chance of a rapid recovery as confidence and asset prices recover, and firms take advantage of high unemployment to hire new workers in droves at wage levels that make increasing production very profitable. But (c) I see a 60% chance of the end of the current cliff-dive in employment being followed by what happened in Japan in the 1990s, in the U.S. after 1991, in the U.S. after 2001, and to some extent in the U.S. after 1933--a recovery that does not see the market exert sufficient upward pressure on employment to return the unemployment rate to normal levels in two or three years, but that instead sees a jobless or low-job recovery during which the unemployment rate continues to drift upward for years, or falls only then to rise again.This is the great tragedy of the Obama administration. It had the possibility of being a great Presidency. It did pass a historic (but watered down) health care bill. But it failed miserably to treat the Great Recession with full strength efforts to revive the economy. It failed to disengage the US from Bush's war's "of choice", it failed to stop the hideous torture prison of Guantanamo, it failed to stop the slide into the "security state" of Bush where rights and freedoms disappear as police and unknown, secretive agencies spy on everybody, and it has failed to face up to the evil right wing politics of the Republican party. Obama admired Lincoln. But Obama doesn't come anywhere close to a Lincoln. At best, Obama is a clever, silver-tongued politician who was mediocre in his accomplishments but failed in the big important and strategic needs of the country. Sad.
The Obama administration's policies appear to me to be the ones that would be adopted if we believed that there was a 75% chance of scenario (b) and a 25% chance of scenario (a). But I don't think those are the probabilities.
Saturday, August 28, 2010
Brad DeLong Sizes Up the US Economy's Prospects
From a post on Brad DeLong's blog. I've bolded key bits: