The recent stock market rally has started to lead some Americans to wonder if the economic meltdown has bottomed - perhaps even begun a recovery. I'm both skeptical of these claims - for too long our media has substituted "the stock market" for "the overall economic health of the nation," and this rally could well resemble the 1930 sucker rally that preceded the lurch into the deepest part of the Depression - I'd also like to see an end to mass layoffs, repair of 401Ks, and an easing of the financial crisis.
However, I'd like to suggest that we need to not focus on the small-bore question of whether we're seeing a mirage or a true economic bottom. Instead we all need to focus on what true economic recovery looks like - otherwise we could well repeat the mistakes that were made just a few years ago during the Bush "recovery", where fundamental problems were ignored and in fact made worse while the economy had the appearance of growth and prosperity.
Our job isn't to wish and hope that things magically get better. We elected Obama as part of a broader plan to produce fundamental change. Let's see what that might look like.
The biggest threat we face right now is that an economic recovery, however slight, might let us feel less urgency to produce the dramatic changes we need.
The Bush "recovery" was a perfect example of this. As millions of jobs were shipped overseas, the Federal Reserve's loose money policy promoted the growth of a housing bubble in order to provide the appearance of economic growth. Lax regulation of the financial industry allowed it to play with financial weapons of mass destruction. And our dependence on oil produced rising costs throughout the economy. By late 2006 all of these had come together to produce a major economic crisis, which started to unfold in mid-2007 and has merely accelerated since then.
Job growth during the Bush "recovery" was particularly anemic, as this 2007 chart from Jared Bernstein (now a top advisor to Vice President Joe Biden) shows:
During the Bush years other major economic problems worsened. Health insurance premiums far outpaced inflation, rising some 78% between 2001 and 2007. The Bush years were the era of dramatic worsening in the availability and affordability of health care - it was in the "boom" years that people like nyceve began writing of the health care crisis facing our country.
Another key facet of the Bush "recovery", a problem left to fester and worsen, is inequality:
The concentration of wealth is one of the main economic problems we face. Since 1975 wages for the middle- and working-classes have stagnated:
The gap was filled by debt. Massive, stunning, unsustainable amounts of debt. Debt was the Reaganite solution to wage stagnation and the upward redistribution of wealth. Households wouldn't actually have more money to buy things and keep the economy going - but if you made debt cheap and available, well, you could solve the problem. The Bush years were the height of this perverse notion, and our present crisis is the predictable product of trying to substitute wealth for real economic gains.
There were many other problems neglected or made worse during the Bush "recovery", but the last one I want to mention is perhaps the most damning - the deliberate undermining of government. Who can forget these scenes from the summer of 2005:
The devastation of Hurricane Katrina, the Bush government's inability or unwillingness to provide assistance, and the lack of rebuilding and reinvestment all took place at the height of the Bush "recovery".
All of the above is intended as a stark reminder of what we must avoid - a fake "recovery" where the stock market rises and a Potemkin prosperity that isn't sustainable blinds us and leads us away from tackling the underlying problems. The worst possible outcome right now is that the economy slowly "recovers" without fundamental change. That WILL produce anemic job growth. Governments will not recover their lost finances, their lost ability to provide basic services. The safety net will fray further. Poverty and unemployment will become more widespread and more persistent, as John Edwards' Two Americas become locked into place. And eventually, with the basic problems left unattended, within a few years we'll face yet another severe economic blow, and be left off even worse than before.
Already the financial industry is seeking to use the appearance of recovery to avoid reform:
With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration — along with other key authorities like the New York Fed — appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression.
This is what we must avoid at all costs - letting the possible stabilization of the situation delay needed reforms. Maybe Obama will follow through on the reforms, maybe not, that's not really what I'm after here today. Instead I want us to understand exactly what is needed to produce true economic recovery - fundamental root and branch reforms that will leave America in a better place than we found it in 2008.
During the Great Depression President Franklin D. Roosevelt built a New Deal that had three related components: relief, recovery, and reform. Relief to ameliorate the crisis - food, housing, government jobs. Recovery to grow the economy again. And reform to ensure that another Depression would never happen again. That must be our model now.
So what does true economic recovery include:
- An end to financial dominance of the American economy. As Paul Krugman wrote last Friday, we need to make banking boring again:
The banking industry that emerged from that collapse was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.
Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.
We must put a permanent end to the kind of unregulated speculation that financial companies have engaged in for the last 30 years. We must return to the regulations and practices of the mid-20th century.
- Ensuring economic security, not pursuit of profit, becomes the basis of economic policy. Whether the stock market or corporate profits are rising or falling must cease to become the key barometers of economic performance. Instead we must focus on full employment, job security, housing security, food security as the basis of economic performance.
- Ending the great disparities of wealth in America. President Obama is moving in this direction with his tax policies, but I would argue we need to be much more aggressive in this - the upper income tax brackets should be dramatically increased to their 1970s or 1960s levels, perhaps even to the 91% rates that existed from the end of World War II until 1964. This has the added benefit of providing government with the funds to do some of what I outline below, as well as helping pay down debt.
- Providing guaranteed access to affordable health care. If we let this slide because of the appearance of economic recovery, all of us will have failed. There can be no lasting economic recovery without universal health care that is actually affordable to Americans. It is necessary to our economic competitiveness, to our household balance sheets, to our ability to live happy and safe lives. It is my belief that there will be no meaningful economic recovery, certainly not one that can be sustained for any length of time, unless this is done.
- Repairing the safety net. 30 years of anti-government policies have left state and local governments in particular struggling to provide aid to those in need, as an article in today's NYT shows:
Battered by the recession and the deepest and most widespread budget deficits in several decades, a large majority of states are slicing into their social safety nets — often crippling preventive efforts that officials say would save money over time....
Perhaps nowhere have the cuts been more disruptive than in Arizona, where more than 1,000 frail elderly people are struggling without home-care aides to help with bathing, housekeeping and trips to the doctor. Officials acknowledge that some are apt to become sicker or fall, ending up in nursing homes at a far higher cost.
This is a consequence of tax cuts made over the last 30 years, particularly during supposedly "good" times. A robust safety net is necessary not only for the immediate term, but over the long haul it has to be repaired so that when we see the next downturn in the business cycle, the safety net can catch people and provide a brake to a downturn and the counter-cyclical stimulus that is needed.
- Fixing education. American education is in crisis, under sustained attack from conservatives and business-types who either want to privatize education or simply break it entirely. K-12 schools are suffering under the twin burdens of budget cuts and the insane No Child Left Behind law. Higher education is unaffordable to most people now - student loans made up the difference in the past, but as tuitions rise, wages stagnate, and loans become harder to get, student loans are neither a desirable nor workable solution to paying for education. If someone can show how we are to have economic recovery without fixing education, I'd like to hear it - and then next you can tell me why 2+2=5.
- Getting America off of oil. Oil prices are on a long-term upswing. When they rose steadily between 2004 and 2008, the economy eventually contracted. The housing bubble burst in mid-2006 because gas prices passed $3/gal, causing household costs to rise above what they could afford, and housing purchases fell as a result, as foreclosures rose.
Gas prices are low right now because of the recession. As soon as a recovery of any kind begins, the prices will rise again, and could choke off that recovery. It is imperative that we boost public transit instead of cutting it. We must make even larger investments in high speed rail and other electrified passenger rail than are being planned now. Wind and solar power must become the basis of national energy and even national jobs policy. Ultimately we must enact laws to stop sprawl dead in its tracks, and direct households back into urban centers, providing laws and dollars to encourage greater urban densities.
- Rebuilding a genuine manufacturing base. This follows neatly on #7 - trains, rails, wind and solar power materials, all can and should be built here at home. We need to then shift toward greater production of products here in the US as a strategy to grow jobs and wages. This may mean abrogating free trade agreements - so be it.
- Doing all of the above while also solving our environmental crisis, particularly global warming. As the global climate changes due to a warming planet, not only our economy but our civilization is imperiled. Economic recovery must be green and sustainable - and it must be aimed in no small part at curbing carbon emissions and preparing our country for the global warming impacts that are already inevitable.
I'm certain that there are things I left out of the list - it is not intended to be comprehensive. Instead it is intended to remind us all that unless we attend to these fundamental changes, any economic "recovery" will simply not be worth it, will not be real, and will not be effective.
Don't let the gyrations of the stock market or bank balance sheets cause you to lose focus on what truly matters. We have to rebuild the basis of our economic security. The time to do so is now.