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Friday, April 24, 2009

"The Recovery to Come"

Jamie Galbraith explains why he believes the recovery will be slow, and what we might do to speed it up:

The Recovery to Come, Remarks to the 18th Annual Conference Honoring Hyman Minsky, by James K. Galbraith: ...The question before us is:... Will what went down, come back up?  ... It seems to me that there are four essential points to make about the expansion to come.

- It will surely be very slow to restore employment. At present writing jobs are being lost at the rate of over 600,000 per month.  To reverse this in six months would require a swing to job creation of the same amount, or a net swing of 1.2 million jobs a month for half a year. This is not going to happen - not even close. ...  As a result, we can expect the human wreckage of this slump to persist...  Without direct employment measures, many of the people most hurt will not again find decent jobs.

- As a result of the administration's determination to save the big banks, we will emerge from this slump with an unreformed financial sector in the hands of the same people who produced the disaster in the first place. ...

- In the expansion the early easy buck, especially for speculators, may well be in commodities, especially oil. A rapid increase in imported energy costs would reverse the effective stimulus now being given by low oil prices.  It will also generate CPI inflation, perhaps inducing the Federal Reserve to slam on the brakes.  There is little reason to hope that the recovery will be allowed to march us all the way back to full employment unless we overcome our vulnerability to volatile oil prices, and nothing in the plans so far suggests we have...

- A turnaround could bring the deficit hawks back out of the woodwork, arguing vociferously that "now is the time" for tax increases and entitlement cuts.  Should they prevail, the process could be thrown into reverse, in a recapitulation of Roosevelt's balance-the-budget recession of 1937-38.

The British used to call this scenario "stop-and-go." A future of short and incomplete expansions may be the most likely case, with no prospect for a return to full employment. For the working population of the country, this is no recovery at all. And it will be made all the worse rising financial markets and premature declarations of victory, the gloating of the bailed-out. ...

Let me close by laying out four steps that would help to avert this future, and help to assure a long and relatively stable expansion, leading ultimately back to high employment.

- Treasury should change its bank plan, recognize that too-big-to-fail is also too-big-to- regulate, and too-big-to-regulate is also too-big-to-manage.  ...  That choice is between preserving vast rogue companies whose major functions are tax and regulatory arbitrage, or allowing the smaller banks that have largely played by the rules to grow into the legitimate market niches the big players may vacate.  Apart from the vast political power of the big banks, this is not a difficult choice.

- The unmet human disaster of this slump remains urgent, and the way to meet it is to strengthen, not weaken, the social safety net. ...

- For the long term, we should build institutions now, including a National Infrastructure Fund and a cabinet Department for Energy and Climate, capable of planning and funding the reconstruction of the country.  The point of this is to build expectations for a sustained expansion and also to give it a direction, charting the course that private investments will follow when they eventually return.

- Finally, we should recognize that we are fortunate in this country to have the governing institutions established for us in the New Deal and Great Society, including a central bank with unlimited lending powers, a national government that can borrow and spend at will, and the global reserve currency. These institutions have -- despite flaws and mistakes -- served us well.  But we should recognize that the rest of the world is not so favored. In particular, Europe lacks the mechanisms and the inclination to take action as we can...

It is therefore quite possible that the rest of the world will not cooperate in economic recovery even if one gets started here.  It is possible that credit, debt and exchange-rate crises still to come will overwhelm the capacity of the global system to cope. We should be prepared, if we can, to deal with that risk.

    Posted by on Friday, April 24, 2009 at 12:17 AM in Economics | Permalink  TrackBack (1)  Comments (33)

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