Cross-posted at the NDN Blog.
As the economic recovery and investment package backed by the administration works its way through Congress, and more evidence about the nature of this recession surfaces, an interesting exercise is to think about how we want to emerge once it is over. In the midst of current economic turmoil, it may seem difficult to imagine the post-recovery world, let alone accurately predict it. Nonetheless, starting with an outcome and working backwards to a policy prescription is far preferable to policy based purely on the passions of the moment. Following are my thoughts on the world I would like to see in 2012 and the resulting implications for current policy.
First, by 2012, I certainly hope that a robust recovery is well underway. But to do that, we need to get through the pain now and resist any temptation to drag things out. In the years of true laissez-faire, before modern management of the economy, the typical business cycle ran about three to four years from top to trough. The United States entered recessions in 1893, 1896, 1900, 1903, 1907, 1910, and 1914, for example [PDF], with this pattern continuing through 1931. Modern economic policy combined with changes in the economy have tamed and extended the business cycle so that we have been averaging nine-year expansions interrupted by quick, shallow recessions. However, the Japanese example of the 1990s shows that policy can extend a slowdown if a country is unable to take its licks quickly, and then move on.We don’t want a Japanese-style lost decade. So a top priority is to face up to our problems now to clear the decks for the future.
Second, a recession of this depth virtually guarantees a strong expansion coming out. However, it is important that we lay the groundwork for an expansion that has three qualities. The expansion should create new high paid jobs, it should be broad-based, benefiting every income segment and region of the country, and it should contribute to our long-term productivity. The fact is not all expansions are alike. And the recent Bush expansion failed on all these counts. Lacking any science or technology component, it left tract houses and debt instruments, but no new industries to speak of. It benefited a small group at the top while the lower 80 percent -of Americans saw their incomes actually drop. And it made precious few investments in our future productivity. In contrast, the 1980s expansion created the personal computer industry, and the 1990s expansion saw the Internet — both dominated by U.S. firms. The 1990s built our broadband network on which much of our future productivity depends and raised middle class incomes. Both created great new American companies. So in 2012, I would like to see a recovery underway that is innovative, broad-based, and long-term.
Finally, in 2012, I would like to see the United States on a path toward environmental and climate sustainability. As the global population continues to explode, we can no longer take our earth’s health for granted. The consequences of ignoring the health of the earth are simply too dire to leave to chance and the negative consequences of pollution and climate change could easily eat up and make a mockery of the benefits of the next expansion.
So what are the implications for current policy?
First, we need to act decisively, but intelligently, to put this recession behind us. The stimulus package is not a cure-all, but it will help restore liquidity to the economy. The key here is to pass it quickly rather than haggling over details.The greatest task is probably to revamp and refashion the clumsy TARP program into a multi-pronged policy to restore the health of the financial sector. The government needs to help banks clear their books of non-performing loans. While new classes of bad assets are emerging daily, the largest class — as evidenced by the financial strength of banks who resisted their allure — remains the mortgage-backed securities and structured-investment vehicles that started the crisis. The government should corral these, buy them up and then sell them off to investors.
If the investors profit as did those who bought real estate from the Resolution Trust Company in the 1990s, so much the better. In turn, the government should also create a new U.S. mortgage with a stable, 5.25 percent interest rate to create the basis for secure, affordable home-ownership in years ahead. A comprehensive effort, building on Paul Volcker’s recent report, needs to begin to update our financial regulatory regime to prevent another crisis of this nature. And we need to dramatically strengthen the rights of the consumer of financial services. It is shocking that the financial services industry — with billions of taxpayers’ dollars in its hands and pockets — is at this moment lobbying against consumer protection. The gutting of usury regulation, credit and consumer reporting legislation, fairness in lending, and other post-war consumer protections by banking lobbyists in recent years clearly played a major role in the crisis.
Second, we need to ensure that the next recovery is broad-based. The answer here involves investing in education, middle-class tax relief, and our infrastructure to ensure that everyone benefits from the next expansion.
Third, we need to ensure that the next economy bolsters the long-term productivity of the United States. That means investing in science and technology to power innovation from which new industry must come, investing in greening our economy to cut energy costs, and investing in new infrastructure such as a smarter electrical grid, mass transit, and greener buildings to make our people more productive.The stimulus bill is an important down payment on the investments we need. However, by its very nature the stimulus bill is designed to get as much money out the door as quickly as possible. This means it cannot — in its current form — be expected to make all the long-term investments we need.
Finally, we need to make the energy investments and policy changes needed to restore our climate to health. Many of the green elements of the economic recovery and investment package that we at NDN began proposing last summer will help in this regard — from greening the federal government to providing tax credits for saving energy to investing in mass transit. However, the administration also needs to move forward on comprehensive energy legislation and a cap-and trade-system so that we can take a leadership role in global negotiations this year in Copenhagen.
As I often argued in the 1990s and discussed in my book, The Coming American Renaissance, and as National Economic Council chairman, Larry Summers, said this weekend on Meet the Press, America’s greatest days lie ahead of us. I am convinced that America will emerge from the current crisis stronger and that the years from 2012 to 2016 and beyond can be among America’s greatest.
To do that, however, we need to make the right decisions today to power the next round of prosperity. Cleaning up our financial sector, investing in our people, and investing in new clean technologies and infrastructure are the ways not only to get our economy back on track, but also to clear the decks for the the next great wave of economic growth.