Andrew Ross Sorkin has one of the most depressing articles in the NY Times today, linking the Great Recession to the rise of populism and Trump. It is depressing not only for its conclusion that great financial crises often result in conflict and potentially war but also for its total avoidance of actually discussing Keynesian economics as a potential panacea.
There is certainly no doubt, as Amir Sufi’s research shows, that “[f]inancial crises tend to radicalize electorates. After a banking, currency, or debt crisis, our data indicate, the share of centrists or moderates in a country went down, while the share of left- or right-wing radicals went up in most cases.” That result was clearly illustrated in the rise of both Occupy Wall Street and the Tea Party in the wake of the financial crash in 2008. And Sorkin is correct that the underlying problems of declining worker participation, automation and globalization, and stagnant wage growth were largely hidden for a time by the use of ever-increasing debt.
But his review of the response to the crisis seems to have an enormous blind spot. According to Sorkin, “For some, it is tempting to think that the government should have taken a more populist approach itself. If it had offered more help directly to the public rather than what was perceived as bailing out the banks, there is a suspicion that divisions could have been lessened, yielding a more united United States. But would it? In Britain, the government did all those politically popular things: It restricted banker pay, it fired executives, it lent money to banks on onerous terms, it restricted spending. It didn’t work. The British economy grew significantly slower than ours. And the resulting resentment and bitterness were much worse than our own, leading to a manifestation of populism even more drastic: the unimaginable vote to leave the European Union.”
Notice the bait and switch in that analysis. Perhaps the US could have done more by if it “offered more help directly to the public.” But the UK shows that wouldn’t have been effective because “it restricted spending”. Austerity is not offering more help to the public. It is starving an already starved demand side of the economy.
The reality in the UK is actually slightly different from the way Sorkin describes. In 2008, the UK actually did provide a fiscal stimulus of around 20 billion pounds which it was generally agreed would be far less than what was needed to avoid a painful recession. After 2008, the cost of the bank bailouts and the concern about the exploding deficit politically constrained any additional stimulus and actually led the new Conservative government to implement austerity measures in 2010. It is no wonder that UK growth lagged.
Similarly, in the US, the $787 billion stimulus plan passed in 2008 was recognized by many both inside and outside the Obama administration to be insufficient to stave off a severe recession but as much as was politically feasible. And with the Republican takeover in 2010, we actually engaged in our own austerity measures, just like the UK but not as extreme.
Sorkin continues to ignore the “populist approach” when he discusses the tools to mitigate such financial crises. “It doesn’t help that the economic medicine used by policymakers after a crisis exacerbates those feelings of anger. The most efficient fix — lowering interest rates — helps the wealthy because they end up with cheaper mortgages and enjoy the benefits that low rates have on corporate growth. Those lower on the economic ladder, on the other hand, get little in interest on their savings. The gap between the haves and the have-nots widens. But that approach actually works, pulling everyone along with it, even if it is uneven and there are greater beneficiaries than others.”
Of course, the actual most efficient fix is to simply put more money in the hands of workers, either through direct transfers or government-created jobs. In other words, actually engage in Keynesian economics. Even as Sorkin admits that his recommended fix actually exacerbates inequality, which was already extreme, he refuses to consider the enormous fiscal stimulus that the crisis demands as a possible alternative and inequality-reducing option.
He ends his depressing piece by declaring this is the best we can do. “It’s not popular to say, but it’s clear that the financial crisis was so deep and so painful that whatever populist positions policymakers took, the positive feelings would have been short-lived…There are, of course, many steps between populism and war. But Mr. Dalio said he saw similarities between the global environment that preceded World War II and the one we see today. That’s reason enough to never forget this crisis and its lessons.”
Of course, the most important lesson of the period that preceded World War II was that Keynesian economics actually worked in the US and Sorkin seems to have forgotten that entirely. The New Deal engaged about 60% of the unemployed in infrastructure projects around the country. In three years, FDR brought the unemployment rate from 25% to under 10% and sustained real GDP growth rates of over 9%.
That lesson was lost not only in Sorkin’s article but as a response to the Great Recession. Instead we got novel theories like “expansionary austerity” and bogus hyperinflation fears over high debt-to-GDP ratios. Sorkin’s despair over future crises, then, is certainly warranted, because he, along with the financial sector that he covers, refuses to consider the policy that has been proven to solve the problem.
Originally published at tidalsoundings.blogspot.com on September 11, 2018.