Costly caution

In a very depressing column, Martin Wolf asks an interesting question: what if the election of 1932 had in fact taken place in 1930, and what relevance does that have to the election of 2008?

Suppose that the US presidential election of 1932 had, in fact, taken place in 1930, at an early stage in the Great Depression. Suppose, too, that Franklin Delano Roosevelt had won then, though not by the landslide of 1932. How different subsequent events might have been. The president might have watched helplessly as output and employment collapsed. The decades of Democratic dominance might not have happened.

On such chances the wheel of history turns. But this time was different: the crisis brought Barack Obama to power close to the beginning of the economic collapse. I (among others) then argued that policy needed to be hugely aggressive. Alas, it was not. I noted on February 4 2009, at the beginning of the new presidency: “Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused.” A week later, I asked: “Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much.” This was right.

The direction of policy was not wrong: policymakers – though not all economists – had learnt a great deal from the 1930s. Sensible people knew that aggressive monetary and fiscal expansion was needed, together with reconstruction of the financial sector.

But, as Larry Summers, Mr Obama’s chief economic adviser, had said: “When markets overshoot, policymakers must overshoot too”. Unfortunately, the administration failed to follow his excellent advice. This has allowed opponents to claim that policy has been ineffective when it has merely been inadequate.

This is not some idle, what if, thought experiment. It will have real, and disastrous consequences for years, if not decades, to come.

So what is going to happen? I assume that, after the midterm elections, resurgent Republicans will offer new tax cuts and ignore the fiscal deficits. They will pretend that this has nothing to do with any reviled stimulus, though it is much the same thing – increasing fiscal deficits, thereby offsetting private frugality. That would put the administration on the spot. It would have to choose between vetoing the tax cuts and accepting them, so allowing the Republicans to get the credit for their “yacht and mansion-led” recovery. Any recovery is better than none. But it could have been much better than this. Those who were cautious when they should have been bold will pay a big price.

Or, as Krugman puts it succinctly, by going Keynes-light, the Obama administration, abetting the "centrists" in the Senate, may have helped to damage Keynes' credibility when the next crisis hit (much the way FDR did in 1937, I'd add).

I'm not saying the stimulus that the administration did get through Congress isn't working. It is. It saved a million jobs according to the CBO and it is changing our infrastructure in meaningful ways. But it didn't do enough to lower the unemployment rate which in turn means it didn't do enough to bolster consumer confidence, which will likely continue to lag in to November. It's that on which elections turn, I'm afraid.

Solving problems is why they're there

Obama previews his campaign for health care reform and the 2010 midterms.

So, I know everybody in the media is all in a tizzy -- "Oh, what's this going to mean politically?" Well, let me tell you something. If Republicans want to campaign against what we've done by standing up for the status quo and for insurance companies over American families and businesses, that is a fight I want to have. (Applause.) If their best idea is to return to the bad policies and the bad ideas of yesterday, they are going to lose that argument. What are they going to say? "Well, you know, the old system really worked well; let's go back to the way it was"? That's not going to appeal to seniors who are now seeing the possibility of that doughnut hole finally closing and so they can finally get discounts on their prescriptions. (Applause.) That's not going to appeal to the small businesses who find out all the tax credits that they're going to get for doing right by their employees -- something that they have been wanting to do, but may not have been able to afford. It's not going to be very appealing to Americans who for the first time are going to find out that they can provide coverage to their children, their dependents, all the way up to the age of 26 or 27.

And that's why I'll be out there waging a great campaign from one end of the country to the other, telling Americans with insurance or without what they stand to gain -- (applause); about the arsenal of consumer protections; about the long-awaited stability that they're going to begin to experience. And I'm going to tell them that I am proud we are putting the future of America before the politics of the moment -- the next generation before the next election. And that, after all, is what we were sent up here to do: standing up for the American people against the special interests; solve problems that we've been talking about for decades; make their lives a little bit better; make tough choices sometimes when they're unpopular. And that's something that every one of you who support this bill can be proud to campaign on in November.

Now, I know that some of the fights we've been going through have been tough. I know that some of you have gotten beaten up at home. Some of the fights that we're going to go through this year are going to be tough as well. But just remember why each of us got into public service in the first place -- we found something that was worth fighting for. There was something we thought was important enough that we were willing to stand up in the public square, risk loss, risk embarrassment, because we knew in our hearts that something wasn't right, that we weren't in some measure living up to the American ideal, and that we thought that if we got involved and engaged in the democratic process, somehow we could make it a little bit better.

Echoing Ezra, I have no idea how persuasive this is to the public at large, but the Democratic base needs to hear stuff like this. As for the general public -- getting something done and solving problems is exactly what many voters feel isn't happening in Washington. Having a huge piece of legislation under their belts, regardless of how much their opponents will rail at it, is a lot better than having come this far and failed going into November.