Austerity & The Coming Lost Decade

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Rob Johnson is the Director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and is a regular contributor to the Institute’s blog NewDeal2.0. He serves on the UN Commission of Experts on Finance and International Monetary Reform. Previously, Dr. Johnson was a Managing Director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. He was also a Managing Director at the Bankers Trust Company. Dr. Johnson has served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire and was Senior Economist of the U.S. Senate Budget Committee under the leadership of Chairman Pete Domenici. Dr. Johnson was an Executive Producer of Taxi to the Dark Side, an Oscar Winning documentary produced and directed by Alex Gibney.

Here, Johnson talks with Paul Jay of The Real News Network about the economic fallout from the past couple of years and the 2010 mid term elections, and concludes that…

…the baseline scenario now is one of prolonged stagnation, gridlock in the government, unless Obama essentially capitulates to the agenda of the right. But will we go into a deep downturn similar to 2007, ’08, early 2009? Not necessarily. We may just remain stagnant. Perhaps the best model is the so-called lost decade in Japan, where you have negligible growth, negligible inflation, or even modest deflation, and you just kind of bump along the bottom. The danger of that, as I alluded to previously, is the long-term, persistent unemployment allows the skills of many people in society to atrophy. And the United States, unlike Europe and Japan, does not have a strong safety net, so it probably foments more social unrest, kind of like what we saw in the formation of the protest movements and Tea Party as we approach this election.



Real News Network – November 04, 2010

Austerity Could Lead to Lost Decade

Rob Johnson: They could accelerate foreign policy conflict to direct attention outwards

..transcript follows..

Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And in Tuesday night elections, the Republicans had a blowout in the House, up 57 seats; they’re-made big gains in the Senate, although as far as things stand at the moment I’m talking, it looks like the Democrats will keep control of the Senate; and massacres in different parts of the country, places like Ohio, where the Republicans now have 13-to-5 control of Ohio’s House seats. Now joining us to talk about the issue of the day that everyone knows decided this election is Rob Johnson. Rob was formerly chief economist for the Senate Banking Committee, he’s been a hedge fund manager, and he’s now a senior fellow at the Roosevelt Institute. Thanks for joining us, Rob.

ROB JOHNSON, ROOSEVELT INSTITUTE: My pleasure.

JAY: So it was all about jobs and the economy, and people made a choice. How do you account for what went on Tuesday night?

JOHNSON: I think it’s what you might call standard political business cycle theory. When unemployment is very high, when people don’t have a sense that we’ll come back any time soon, they’re going to look-how do I say it?-look at the despair and register it at the voting booth. I think it’s no mystery when you look at Pennsylvania, when you look at Ohio. These places have just been in pain, and too much pain, for far too long, and it was reflected in the results tonight.

JAY: But do you think it had to be that there was nothing that President Obama could have done? Or is it really more about his policies, that he was seen to be, you know, not the fighter for the middle class. When he first-when-days after the inauguration, I remember that Vice President Biden was put in charge of a commission whose mission was to work for the middle class. I myself never heard of that commission again, and certainly he didn’t come into this election looking like the man who fought for the middle class.

JOHNSON: No. I think you must admit that he was dealt a very bad hand at the outset. After eight years of Bush and Cheney, people asked for great change. The economy was collapsing, the financial sector was on the edge of going over the cliff. But to refer to your question, the stimulus programs were not well designed in terms of composition. There was nothing tangible or long-term that resulted from the stimulus, where people could look up and say, that’s new, I see that bridge, my life is different, it’s getting better. Secondly, the stimulus program wasn’t big enough and didn’t last long enough, so that essentially the economy started to decelerate and stagnate right into the election. And that’s a recipe for disaster.

JAY: Now, you would have thought that in this kind of situation the bad guys would have been Wall Street. But when you hear the kind of things people are saying that are supporting the Tea Party and many of the Republican candidates, it’s all about government and essentially letting Wall Street off the hook, which is really hard to compute, given that there was so much anger about the kind of size of the bonuses executives were getting. It’s really hard to understand how this message gets converted the way it did, quite successfully.

JOHNSON: It is somewhat difficult, though at the end of July, Pew Research had a big poll which said to the American people, what do you think happened with the stimulus money? They said, in that poll result, large corporations, powerful people, and large financial institutions benefited; the middle class did not, and the poor did not. And when you looked at the kind of context of these surveys, what people in essence were saying is, I would rather shut off government if it will only back the rich and powerful than put a tax burden on my future or my children’s future, because the benefits in this broken political system do not transmit to the people in need. And I think in that context it’s not so much left or right, Republican or Democrat; it’s incumbents are out, challengers are in.

JAY: Now, President Obama gathered around him a pretty old guard Wall Street team of advisors. Does he not have to make some radical rupture with that team? And if he called you tomorrow morning and say, “Rob, what should I do?” what would you tell him?

JOHNSON: I think he does need to shake things up. On the other hand, Rahm Emanuel and Larry Summers have already left. It’s open to interpretation, though. Many will say, well, since the Republicans did well, Obama needs to turn to the right. Others will say, he deserted his base, the young people who brought him into office. Those young people cannot find jobs now. Those young people are looking for something to believe in. They’re looking for that hope. They’re looking for a kind of change that they didn’t see materialize in the first two years. So I think you’re right. They may need to do something drastic. We need to [bring] major changes in. But they may also do things like accelerate foreign policy conflict, going back to the time of Bismarck. Whenever things aren’t working right at home, we try to redirect the public’s energy abroad.

JAY: Well, they’ve got a built-in ally with that, with the Republicans coming in, controlling the House, and wanting very much to make Iran the issue. If that’s the way Obama wants to go, he’ll have some help. But, again, if he asked you then, “If I was to do something dramatic,” says President Obama to you, “what should I do? Even if I have to get into a war with the Republican House, what should I be pushing?”

JOHNSON: I think he should be pushing a very, very strong domestic infrastructure plan. A couple of months ago he talked about a $50 billion plan. That’s maybe one-fifteenth of the size of what he needs, maybe one-twentieth. The United States is now falling way behind in research and development spending compared to the Chinese on clean energy, many parts of information technology, even biomedical engineering. We’re seeing more and more R&D spent in Asia and not in the United States. Education spending. Early-stage capital markets could be invigorated, ’cause those early-stage capital markets are what bring new firms and new jobs to the market. We need to transform and we need to believe that we’re going to transform this economy. My father is a physician, retired physician, and he often says, when people are in pain, the way you heal them is, first and foremost, convince them it’s transient. President Obama needs to step forward now and start fighting for a vision that will convince the American people that this pain and this dislocation that we’re mired in right now will come to an end in the not-too-distant future.

JAY: Well, you’d think the time to have really put out a vision was in ’09 when he had some clout to do it with. The pressure now is going to be, is the Republicans are going to say, well, we’ve got a mandate for no taxes, less taxes, smaller government, no stimulus. I mean, he has to go out and wage a war against what essentially the elections supposedly just told him.

JOHNSON: Well, he’s in a situation where what you might call the philosophy of the New Deal versus the economic philosophy of the time before that, with very little government involvement, is what’s at issue. At some level, people arguing about stimulus and its impact and so forth is all a sidebar. What they’re really arguing about is the scale and the scope of the role of government. Franklin Roosevelt convinced people that government could make a difference and could be a positive influence in their life to large portions of the population. The bailouts convinced people that Ronald Reagan was right when he said government is the problem, not the solution.

JAY: Well, the biggest argument is the deficit and the debt is the biggest problem, and if you deal with that, employment will come back. President Obama does not seem to have really taken that on, at least not in a way that’s effective. How would you take that on?

JOHNSON: I would say, when you look at debt or deficits, it’s always in relation to GDP growth. And when you have 10 percent unemployment, you’re not collecting tax revenue. When you’re allowing persistent unemployment, you’re allowing the skills of the American people to atrophy. That’s going to put you into deeper debt and deeper slump. You have to start a process of growing your way out and transforming the economy to again attract private investment and perhaps engage in some kind of readjustment-I’d say pretty substantial readjustment-of the US exchange rate vis-à-vis Asia. Right now, when you look at the campaign ads in Ohio, the demonization of China, which at some level is quite unfair, is getting traction. The US economy is struggling, and the Chinese are doing very, very well. But the Chinese are reinvesting in themselves, in their infrastructure, in high-speed trains, in education, and the United States is allowing these things to wither, in large part so that wealthy people don’t have to pay more taxes.

JAY: How concerned are you that what’s going to happen now is two years of paralysis in Washington? And then, if that’s the case, what are the possibilities we head into a very deep or deeper recession/depression?

JOHNSON: What I would say is, first of all, I’m very concerned. I think the baseline scenario now is one of prolonged stagnation, gridlock in the government, unless Obama essentially capitulates to the agenda of the right. But will we go into a deep downturn similar to 2007, ’08, early 2009? Not necessarily. We may just remain stagnant. Perhaps the best model is the so-called lost decade in Japan, where you have negligible growth, negligible inflation, or even modest deflation, and you just kind of bump along the bottom. The danger of that, as I alluded to previously, is the long-term, persistent unemployment allows the skills of many people in society to atrophy. And the United States, unlike Europe and Japan, does not have a strong safety net, so it probably foments more social unrest, kind of like what we saw in the formation of the protest movements and Tea Party as we approach this election.

JAY: Thanks very much for joining us, Rob.

JOHNSON: My pleasure.

JAY: And thank you for joining us on The Real News Network.

2 comments

  1. Johnson, with this statement, seems to imply agreement with my own view that Obama right now has an opportunity to take complete control and with his power to sign or veto bills could dictate to the house and senate what kinds of legislation they can produce that have a hope of being signed into law, and what kinds of legislation they shouldn’t bother wasting their time trying to produce.

    But that would take more balls than I think Obama has, and his capitulation to the right seems his more likely route.

    Also, check out Pluto’s lastest post The United States of Austerity

    Beginning in January 2011, we will experience astonishing lifestyle changes as our economic leadership in the world comes to an end.

    [snip]

    By refusing to put a floor under the real estate assets of America by extending mortgage payoff lengths an extra five or ten years — and by not nationalizing the banks and forcing them to do the right thing — the banks imperiously went on a frenzied foreclosure hysteria, which dragged down all asset classes in the United States and bankrupted the consumer class, destroying the US economy.

    The US consumer has become insolvent — the consumer who, during the last thirty years, had gradually become the central economic heart of the United States (with more than 70% of U.S. growth dependent on household spending). It is this insolvency of US households (which the government refused to address by stabilizing their assets and trickling stimulus UP instead of handing the nation’s treasure to the greedy unregulated financiers) that has broken the Fed’s efforts.

    [snip]

    The international community is well aware that the United States is no longer “the land of plenty” but instead a nation with largely Third World metrics and a shriveling consumer class. For this reason, the agencies that rate the nation’s credit worthiness have threatened the United States with a strong downside re-rating if it does not implement comprehensive austerity programs as quickly as possible.

  2. was trying to compromise with the Republicans. the Blue Dogs and Lieberman at all. He should have told Reid to use whatever means necessary to keep the these pseudo Dems in line at the peril of the chairmanships.

    He should have made the recess appointments and called “bullshit” on unconstitutional Senate Rules like filibuster and proforma congressional sessions. brooklynbadboy at DK this AM made the case for this.

    I’ll repeat it again:

    All that was needed was for Vice President Biden to take a cab over to the Senate chamber, sit in the chair (as is his right under the constitution) and simply rule all filibusters out of order because they are unconstitutional. Blow the whole thing up. Go ahead and get the procedural problem out of the way first.

    When people object, rule their objections out of order. When people hem and haw, rule their hemming and hawing out of order. Blow the whole fucking place to smithereens. Then, when it is time to have votes sustaining or overruling the ruling of the chair, that is when the President comes in and makes THAT VOTE the big fight because that vote is a straight up or down majority vote. Win that with 50 votes plus the chair, and no you have precedent. No more filibuster.

    Then you move on to legislating what you want. Majority rule, exactly as the founders intended.

    Links right here:

    U.S. Constitution:

    The Vice President of the United States shall be President of the Senate, but shall have no Vote, unless they be equally divided.

    The constitution established the Vice President as the president of the Senate. He presides over that body.

    Each House may determine the Rules of its Proceedings, punish its Members for disorderly Behavior, and, with the Concurrence of two-thirds, expel a Member.

    The Senate gets to make its own rules. That is all that is said. Nothing about a filibuster or cloture or anything else.

    Now, on to the Senate Rules:

    From Senate rule 1:

    1. In the absence of the Vice President, the Senate shall choose a President pro tempore, who shall hold the office and execute the duties thereof during the pleasure of the Senate and until another is elected or his term of office as a Senator expires.

    If the Vice President is not present, the chair is the President Pro Tem, who is appointed every day by unanimous consent. If he is present, he is the chair, point blank.

    Now, to the questions of order:

    From Senate Rules Article 20:

    1. A question of order may be raised at any stage of the proceedings, except when the Senate is voting or ascertaining the presence of a quorum, and, unless submitted to the Senate, shall be decided by the Presiding Officer without debate, subject to an appeal to the Senate. When an appeal is taken, any subsequent question of order which may arise before the decision of such appeal shall be decided by the Presiding Officer without debate; and every appeal therefrom shall be decided at once, and without debate; and any appeal may be laid on the table without prejudice to the pending proposition, and thereupon shall be held as affirming the decision of the Presiding Officer.

    So you see, as soon as someone asks for unanimous consent to move a bill forward for a vote, there is an objection by the other side. This is how a filibuster begins. The chair usually says “an objection is heard” and that is the end of it. Move towards the byzantine procedures to get cloture.

    Well, what if the chair says “the objection is out of order.” Shocking! Then someone will raise a point of order “this objection is in line with Senate Rules! AGGGHGH!!!!” A Democratic Senator will raise a point of order requiring that the measure be voted on and that the objection is unconstitutional. Chaos will ensue. WHAT ABOUT OUR TRADITIONS!!!

    At that point, you go nuclear:

    The presiding officer of the Senate, usually the vice president of the United States or the president pro tempore, makes a parliamentary ruling upholding the senator’s point of order. The Constitution is cited at this point, since otherwise the presiding officer is bound by precedent. A supporter of the filibuster may challenge the ruling by asking, “Is the decision of the Chair to stand as the judgment of the Senate?” This is referred to as “appealing from the Chair.” An opponent of the filibuster will then move to table the appeal. As tabling is non-debatable, a vote is held immediately. A simple majority decides the issue. If the appeal is successfully tabled, then the presiding officer’s ruling that the filibuster is unconstitutional is thereby upheld. Thus a simple majority is able to cut off debate, and the Senate moves to a vote on the substantive issue under consideration.

    Simple.

    I’m with bbb, time to tear down the house to the foundation.

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