The Sum of Some Global Fears

Setting the table for a smorgasbord recession.

The last global economic crisis, for all its complex detail, had one big, simple cause: A huge housing and debt bubble had emerged in both the United States and Europe, and it took the world economy down when it deflated.

The previous, milder recession, in 2001, also had a single cause: the bursting of a bubble in technology stocks and investment (remember Pets.com?).

But the slump before that, in 1990-91, was a messier story. It was a smorgasbord recession — a downturn with multiple causes, ranging from the troubles of savings and loan institutions, to a glut of office buildings, to falling military spending at the end of the Cold War.

The best guess is that the next downturn will similarly involve a mix of troubles, rather than one big thing. And over the past few months we’ve started to see how it could happen. It’s by no means certain that a recession is looming, but some of our fears are beginning to come true.

China: Many people, myself included, have been predicting a Chinese crisis for a long time — but it has kept not happening. China’s economy is deeply unbalanced, with too much investment and too little consumer spending; but time and again the government has been able to steer away from the cliff by ramping up construction and ordering banks to make credit ultra-easy.

But has the day of reckoning finally arrived? Given China’s past resilience, it’s hard to feel confident. Still, recent data on Chinese manufacturing look grim.

And trouble in China would have worldwide repercussions. We tend to think of China only as an export juggernaut, but it’s also a huge buyer of goods, especially commodities like soybeans and oil; U.S. farmers and energy producers will be very unhappy if the Chinese economy stalls.

The Real Governments of Blue America

Officially, a big part of the federal government shut down late last month. In important ways, however, America’s government went AWOL almost two years earlier, when Donald Trump was inaugurated.

After all, politicians supposedly seek office in order to get stuff done — to tackle real problems and implement solutions. But neither Trump, who spends his energy inventing crises at the border, nor the Republicans who controlled Congress for two years have done any of that. Their only major legislative achievement was a tax cut that blew up the deficit without, as far as anyone can tell, doing anything to enhance the economy’s long-run growth prospects.

Meanwhile, there has been no hint of the infrastructure plan Trump promised to deliver. And after many years of denouncing Obamacare and promising to provide a far better replacement, Republicans turned out to have no idea how to do that, and in particular no plan to protect Americans with pre-existing conditions.

Why can’t Republicans govern? It’s not just that their party is committed to an ideology that says that government is always the problem, never the solution. Beyond that, they have systematically deprived themselves of the ability to analyze policies and learn from evidence, because hard thinking might lead someone to question received doctrine.

And Republicans still control the Senate and the White House. So even when (if?) the shutdown ends, it will be at least two years before we have a government in Washington that’s actually capable of, or even interested in, governing.

Until recently Republicans had a virtual lock on state government. Almost half the population lived in states with Republican “trifectas,” that is, G.O.P. control of both houses plus the governorship. Democrats had comparable control in California, and pretty much nowhere else.

But elections since then have transformed the picture. New Jersey and Washington went full Democratic in 2017, and six more states, including Illinois and New York, flipped in November. At this point more than a third of Americans live under full Democratic control, not far short of the Republican total.

These newly empowered majorities are moving quickly to start governing again. And the experience of states that already had Democratic trifectas suggests that they may achieve a lot.

And health care isn’t the only front for new action. For example, Newsom is also proposing major new spending on education and housing affordability. The latter is very important: Soaring housing costs are the biggest flaw in California’s otherwise impressive success story.

Now, let’s be clear: Not all of the new Democratic policy proposals will actually be implemented, and not all of those that do go into effect will live up to expectations. There’s no such thing as perfection, in policy or in life, and leaders who never experience failures or setbacks aren’t taking enough risks.

The point, however, is that newly empowered state and local politicians do seem willing to take risks and try new things in an effort to make progress against the nation’s problems.

And that’s a very hopeful sign for America, because their example may prove contagious.

Justice Louis Brandeis famously described the states as the laboratories of democracy; right now they’re the places where we’re seeing what it looks like when elected officials try to do what they were elected to do, and actually govern. If we’re lucky, two years from now that attitude may re-establish itself in the nation’s capital.

 

Who’s Afraid of the Budget Deficit?

Democrats shouldn’t put themselves in a fiscal straitjacket.

On Thursday, the best House speaker of modern times reclaimed her gavel, replacing one of the worst. It has taken the news media a very long time to appreciate the greatness of Nancy Pelosi, who saved Social Security from privatization, then was instrumental in gaining health insurance for 20 million Americans. And the media are still having a hard time facing up to the phoniness of their darling Paul Ryan, who, by the way, left office with a 12 percent favorable rating.

There’s every reason to expect that Pelosi will once again be highly effective. But some progressive Democrats object to one of her initial moves — and on the economics, and probably the politics, the critics are right.

.. The issue in question is “paygo,” a rule requiring that increases in spending be matched by offsetting tax increases or cuts elsewhere.

You can argue that as a practical matter, the rule won’t matter much if at all. On one side, paygo is the law, whether Democrats put it in their internal rules or not. On the other side, the law can fairly easily be waived, as happened after the G.O.P.’s huge 2017 tax cut was enacted.

But adopting the rule was a signal of Democratic priorities — a statement that the party is deeply concerned about budget deficits and willing to cramp its other goals to address that concern. Is that a signal the party should really be sending?

.. Furthermore, there are things the government should be spending money on even when jobs are plentiful — things like fixing our deteriorating infrastructure and helping children get education, health care and adequate nutrition. Such spending has big long-run payoffs, even in purely monetary terms.

Meanwhile, the federal government can borrow money very cheaply — the interest rate on inflation-protected 10-year bonds is only about 1 percent. These low borrowing costs, in turn, reflect what seems to be a persistent savings glut — that is, the private sector wants to save more than it’s willing to invest, even with very low interest rates.

Or consider what happened after Democrats enacted the Affordable Care Act, going to great lengths to pay for the additional benefits with tax increases and spending cuts. A majority of voters still believed that it increased the deficit. Reality doesn’t seem to matter.

.. Anyway, the truth is that while voters may claim to care about the deficit, hardly any of them really do. For example, does anyone still believe that the Tea Party uprising was a protest against deficits? From the beginning, it was basically about race — about the government spending money to help Those People. And that’s true of a lot of what pretends to be fiscal conservatism.

.. In fact, even the deficit scolds who played such a big role in Beltway discourse during the Obama years seem oddly selective in their concerns about red ink. After all those proclamations that fiscal doom was coming any day now unless we cut spending on Social Security and Medicare, it’s remarkable how muted their response has been to a huge, budget-busting tax cut. It’s almost as if their real goal was shrinking social programs, not limiting national debt.

.. So am I saying that Democrats should completely ignore budget deficits? No; if and when they’re ready to move on things like some form of Medicare for All, the sums will be so large that asking how they’ll be paid for will be crucial.

Bad Faith, Pathos and G.O.P. Economics

On professionals who sold their integrity, and got nothing in return.

As 2018 draws to an end, we’re seeing many articles about the state of the economy. What I’d like to do, however, is talk about something different — the state of economics, at least as it relates to the political situation. And that state is not good: The bad faith that dominates conservative politics at every level is infecting right-leaning economists, too.

This is sad, but it’s also pathetic. For even as once-respected economists abase themselves in the face of Trumpism, the G.O.P. is making it ever clearer that their services aren’t wanted, that only hacks need apply.

.. Professional conservative economists are something quite different. They’re people who even center-right professionals consider charlatans and cranks; they make a living by pretending to do actual economics — often incompetently — but are actually just propagandists. And no, there isn’t really a corresponding category on the other side, in part because the billionaires who finance such propaganda are much more likely to be on the right than on the left.

.. Even during the Obama years, it was striking how many well-known Republican-leaning economists followed the party line on economic policy, even when that party line was in conflict with the nonpolitical professional consensus.

Thus, when a Democrat was in the White House, G.O.P. politicians opposed anything that might mitigate the costs of the 2008 financial crisis and its aftermath; so did many economists. Most famously, in 2010 a who’s who of Republican economists denounced the efforts of the Federal Reserve to fight unemployment, warning that they risked “currency debasement and inflation.”

Were these economists arguing in good faith? Even at the time, there were good reasons to suspect otherwise. For one thing, those terrible, irresponsible Fed actions were pretty much exactly what Milton Friedman prescribed for depressed economies. For another, some of those Fed critics engaged in Donald Trump-like conspiracy theorizing, accusing the Fed of printing money, not to help the economy, but to “bail out fiscal policy,” i.e., to help Barack Obama.

It was also telling that none of the economists who warned, wrongly, about looming inflation were willing to admit their error after the fact.

But the real test came after 2016. A complete cynic might have expected economists who denounced budget deficits and easy money under a Democrat to suddenly reverse position under a Republican president.

And that total cynic would have been exactly right. After years of hysteria about the evils of debt, establishment Republican economists enthusiastically endorsed a budget-busting tax cut. After denouncing easy-money policies when unemployment was sky-high, some echoed Trump’s demands for low interest rates with unemployment under 4 percent — and the rest remained conspicuously silent.

What explains this epidemic of bad faith? Some of it is clearly ambition on the part of conservative economists still hoping for high-profile appointments. Some of it, I suspect, may be just the desire to stay on the inside with powerful people.