In the status hierarchy of my profession, the Wall Street economist holds a strangely prominent role. Typically, though not always, he lacks academic standing, analytical achievement, or significant publication. Research is foreign to him; independent thought unknown. His job is mainly to get his name into the papers. At this he works exceptionally hard. And the financial pages, which in their turn exist mainly to celebrate the great financial houses, oblige. Hence the Wall Street economist has the luxury of seeing his thoughts in print, without the burden of actually, well, of actually thinking.
This tribe, a year ago, was predicting up to three percent growth for 2001. They now concede that, yes, sorry to say, the economy has slowed. But, one reads, "no one saw this recession coming." And so, of course, none can blame the Wall Street economist for failing to warn of the trouble we are in. Moreover, these roosters crow in joyful chorus today. Recovery, everyone agrees, is on the horizon for early next year. And so, while a few more tax cuts for business would be nice, thank you very much -- nothing very serious need be done.
Notice the fine logic. We cannot cite a forecast for error if everyone made the mistake. And yet, the fact that we have consensus today validates the present forecast. If recovery fails to develop, in part because of failure to act effectively now, the defense will be ready-made. Since no one foresaw that a recovery would not occur, again they will say that no one can be blamed.
But the claim of zero past foresight is actually false. It was possible to predict the present disaster, if not its timing, on simple grounds. Let me demonstrate this, at risk of nesting a quote within a quote, from a so-far-unpublished column I wrote early this fall:
"The jump in joblessness is brutal news for working Americans, for investors, for politicians of both parties -- and also for many economists.
"Last spring, forecasters were optimistic. We were told that the economy might recover in a "V" -- or a "U" -- or in the worst possible case, an "L". But there is no letter, in the Roman alphabet anyway, to describe the pattern we are actually observing (though Hebrew has "
" which is pretty good). " which is pretty good).
"By late summer, we were grasping at straws. Perhaps interest rate cuts would save us. Or the rebates. Or lower oil prices. Or a consumer rebound. It didn't happen. Now, the jobless surge has cut sharply against these illusions.
"Like most Democrats, I'm tempted by a simple tale: Things were wonderful, and then the Republicans screwed up. But in truth this slump should be blamed in part on the Robert Rubin-Larry Summers Democratic policy of debt reduction at all costs -- on what economists used to call "fiscal drag," against which a few of us were already warning two years ago.
"Let me quote my review of the Economic Report of the President for 1999:
The future of fiscal policy. . .is written into law. [B]udget analysts now project vast excesses of tax revenue over public spending, sufficient if sustained nearly to eliminate the public debt within twenty years.
How likely is this actually to happen? The [CEA] provides evidence, inadvertently, in a chart showing. . .fiscal surpluses since 1945. In every single case, excepting once during the Korean War, the achievement of budget surplus was followed by a slump, with falling real GDP, rising unemployment, and a return to deficit spending. As a matter of history, the actual achievement of sustained budget surpluses is unheard-of.
Why is this so? The old Keynesian answer is fiscal drag: the fact that excess taxation and inadequate public spending deplete private incomes and slow down private consumption and investment. This simple phenomenon of yesterday's textbooks has not disappeared. It has, merely, been forgotten, over-ruled by the mass amnesia concerning basic Keynesian principles that seems to afflict the economics profession.
"When taxes go above public spending, public saving is high. But households are crunched, and growth can continue only if private Americans stop saving. They did so, completely, and household debts soon mounted to record levels. This could not last forever. And when the Federal Reserve raised interest rates in 1999-2000, that hit the consumer at her vulnerable point."
The recession, in short, not only could be predicted. It was predicted. Moreover, given that household debts do not disappear overnight, it could prove long and deep. Recovery early next year is not only uncertain. It is unlikely. The issue now becomes, what to do? My prescription followed after a short rant against Republican tax cuts:
". . .Democrats should. . .focus on their real achievement: full employment without inflation. This is what Americans rightly care about: they want jobs. And if the private sector will not provide jobs or the spending that creates them, then government will have to. Only Democrats, God help us, can make this point.
"We need a short list of immediate actions. Extend and expand the tax rebates. Expand unemployment insurance and the Earned Income Tax Credit. Enact a prescription drug benefit for seniors -- cutting the expense by opening the borders to, ahem, free trade. And raise the minimum wage. None of these actions will likely get through the House or past the White House, but they should be proposed, under a banner reading: Save The Economy First.
"And here's one idea that might attract bipartisan support -- a slim hedge against disaster. States and localities now buy almost twice as many goods and services as the federal government does. They will cut back massively as their revenues fall. So, why not re-enact general revenue sharing -- for Democratic and Republican states alike -- and let Washington pay the bills for the teachers, clinics, roads, and renovations that states and cities need? If they have more money than they want to spend, let them rebate their sales and property taxes for the next few years."
This column was accepted for publication by The New York Times. I sent off the final version to my editor there late on the evening of September 10. I wanted it to be on her desk when she arrived for work, at nine the following morning.
This column will appear in the Texas Observer.
