A Different Kind of Recession?

If we compare the current economy to history, it’s a pretty open-and-shut case that this has been the most disappointing recovery in six decades. Previous recessions have always been followed by much more robust recoveries. The current recovery is indisputably an anomaly in its weakness and longevity.

Well, you might say, the 2008 recession was much worse than most. That’s why this recovery is much more difficult, right? Well, no. The pattern has always been that the steeper the downturn, the steeper the subsequent upturn. Even taking into account the severity of the 2008 recession, this recovery is an anomaly. The 1981-82 recession was actually deeper than the 2008 one and unemployment had gone higher. Yet by the end of 1984 the recovery was strong enough that Ronald Reagan won reelection in a historic landslide.

The bottom line is that, four years after the 2008 recession began, real per capita gross domestic product is lower and unemployment is higher than when the recession began. That has never happened before in the post-World War II era. Beyond all the numbers, a lot of people are really hurting. You have to work really, really hard to explain this economy as something that was inevitable and beyond the power of any administration to ameliorate.

Okay, you say then, it’s like the Great Depression. President Obama frequently says that this was the greatest economic crisis since then. In other words, the 2008 recession was a once-in-a-lifetime economic event that is different from most others. The Great Depression took a decade for the country to get over. We just have to have that kind of patience with the current economy.

And you do hear this argument being made by some Democrats. When someone mentions that this recovery compares unfavorably to virtually all other recoveries, they answer that it’s because the 2008 recession was a “financial recession,” that is, it was a recession that stemmed from a financial crisis, and those always take a lot longer to recover from than your run-of-the-mill recessions, they say.

This notion as pretty much knocked down in a piece by former U.S. Senator Phil Gramm and former congressional budget staffer Mike Solon in The Wall Street Journal in February. As it happens, there were a number of major economic downturns (called panics in the jargon of the day) in the years before the Great Depression. None of them had such drawn-out recoveries as the one following the Great Depression or the current one. Specifically, Gramm and Solon point out that the Panic of 1907 stemmed from a major banking crisis and stock market crash. In other words, it was clearly a “financial recession.” Yet within two years the economy came roaring back.

It is clear that the 1930s and the 2008 recession are the two outliers in terms of recoveries. So what do those two events have in common that is different from all other economic downturns? Well, for one thing there was a marked increase in federal expenditures on a scale not seen in the other cases.

Does that mean that big increases in federal spending cause recoveries to drag out a lot longer? Obviously, it’s more complicated than that. But unless you believe that the laws of economics have somehow changed and the rules are now different than ever before in modern history, there is more than enough cause to lay responsibility for the bad economy at the feet of the Obama administration. Actually, to be fair, blame has to be apportioned between the two major political parties over many years, but the current administration has definitely given a major nudge in the wrong direction. The languishing Simpson-Bowles plan, or even the Ryan budget, would be a (admittedly painful) move in the right direction.

All reasonable people would agree that the government needs to provide a certain level of services and a social safety net. But we need to seriously examine why federal spending for 2012 is at an estimated 24.3 percent of GDP (higher than any time in history, excluding World War II) compared to 18.2 percent in 2000. The growth in spending—which has resulted in the government coopting more of the economy—is certainly motivated by compassion. But it appears that we may have reached a point where the more we spend in the name of helping those who are less well off, the more people there are out there who are made less well off by a bad economy—and who are thus added to the numbers of people who need to be helped.

If an individual—instead of a society—were doing this, it would be considered a disease and would be called Munchausen by proxy syndrome.

The Restaurant at the End of the Economy

One thing I love is a good simile. It’s a great device for making something clearer or for enabling people to see something in a different way.

In a speech to supporters last week, President Obama used a simile to explain how it was not fair to accuse him of running up deficits: “It’s like somebody goes to a restaurant, orders a big steak dinner, a martini and all that stuff, then just as you’re sitting down they leave and accuse you of running up the tab.”

There are a couple of minor tactical problems here. First, if you’ve been labeled for years by your opponents as a tax-and-spend liberal, you probably want to stay away from metaphors that portray your understanding of government as spending money on extravagant meals. Second, if you accuse your opponents of figuratively dining and dashing, then make darn sure that, for the next several days at least, that in any restaurant you go into the literal bill actually gets paid. Pundits had a field day with the fact that the very next day the president had an early Father’s Day dinner with some ordinary guys and no one on his staff (and certainly not the president himself) took care of the restaurant tab.

Smart-alec pundits have written that the president’s restaurant simile was incomplete because it doesn’t include the much bigger dinner that he ordered up after he sat down at the table. Some wondered if the previous customer had eaten the dinner or left it for the president.

There are, however, more substantial problems with the president’s simile. His point was that the current record-breaking deficits were run up because of the 2008 financial crisis and resulting recession, which were not caused by him. It is absolutely true that Barack Obama did not cause the financial crisis and the recession. But the reason the deficit has become so mind-boggling large is directly the result of a stimulus package that the president put forward and which, he assured the country, would spur a recovery. Recoveries are a good antidote to deficits because they result in a growth in tax revenues.

There was indeed a recovery, but it was so weak that ever since, when people are polled they indicate that they still think the country is in a recession. I’ve gone into the reasons for the weak recovery before, but the bottom line is that the hundreds of billions of dollars spent were wasted in the sense that they did not have the promised result. The president and his supporters argue that things would have been even worse if not for the stimulus package, and maybe that’s true. But that’s an assertion that cannot be proved or disproved. But what cannot be disputed is that, judged by the forecasts made by President Obama’s own economic team, the stimulus was a failure in terms of its stated purpose. The president’s response to this fact? They say they just didn’t realize how bad things really were.

The fact is, though, while it is worthwhile to analyze the causes of the financial crisis to find ways to avoid a future reoccurrence, most people really don’t care who should be blamed for what happened four or more years ago. They want to know who knows what to do to get unemployment down. As a challenger, Mitt Romney has the easier job of making a case. He only has to make promises. The president has a track record and needs to explain how things will be better if he gets a second term. The only concrete plan he offers is raising taxes on the wealthy (something most economists and Bill Clinton think should wait until the economy is stronger) and passing the American Jobs Act, which is essentially another stimulus but on a much smaller scale. Unless he has more ideas he’s not telling us, a second Obama term looks to be more glacial recovery, if not another recession caused by looming global factors.

I’ll tell you what really worries me about the president’s restaurant simile. He uses the restaurant as a metaphor for the economy, but in his metaphor he is not even the manager of the restaurant. Or the owner. He is a customer. And a rather petulant customer at that. He is annoyed to find an unpaid bill on the table where he has been seated. In that situation in a real restaurant, the newly seated customer is not on the hook for the bill left for a previous customer; the restaurant is. The president’s simile does not give any indication that he has any responsibility for the deficit. He’s just some guy yelling at the staff to do something about someone else’s problem.

Doing Fine?

Every politician at one time or another makes a gaffe. This is usually an isolated comment that begs to be taken out of context. An example of this is Mitt Romney’s statement in January that “I like being able to fire people.” He was speaking specifically about liking to be able to drop one health care provider and switch to another, but the sound bite was too irresistible not to repeat multiple times. And it dovetailed nicely with the image of Romney as a vulture capitalist.

Another type of gaffe is the one defined by journalist Michael Kinsley thusly, “A gaffe is when a politician tells the truth.” An example of this is President Obama’s comment on Friday, “The private sector is doing fine.” No one took that bite out of context. Its meaning was clear. The president was saying that his main focus was on the cutbacks in the public sector, which is shedding jobs, and less on the private sector, which is adding jobs—although at a rate that will take ages to bring the country to anywhere near the employment level of the Bush administration. Many media outlets reported that the president “backtracked” or “walked back” his gaffe, but that’s not really accurate. In his clarification four hours later, he emphasized, “Listen, it is absolutely clear that the economy is not doing fine.” Now, that is a quote no president really wants to have coming out of his own lips, but he said it anyway to make sure people knew he was not out of touch. But he purposefully did not take back his comment that the private sector was doing fine. The president’s original comment should not be treated as a gaffe but as a clear indication of where his priorities are.

This is similar to Romney’s “gaffe” in February when he told CNN, “I’m not concerned about the very poor.” Just as Obama was making the point that one group presented a more urgent situation than other, so Romney was emphasizing his concern for the middle class. There may be valid reasons for this emphasis, but it never sounds good politically when you say you’re not concerned about the very poor. Similarly, if you’ve been laid off by a company, it cannot be very comforting to hear the president say that the private sector’s doing fine. Does the president really want to be seen favoring one group of workers (public employees) over another (private sector employees)—especially when the group he is favoring represents only eight percent of the workforce?

Any damage to Obama from this particular remark goes beyond the fact that people out of work may resent him for not feeling their pain. It betrays a faulty understanding of the economy. After all, if the private sector were “doing fine,” then it would be producing enough tax revenues so that state and local governments would not have to be laying off employees. Moreover, there is an all-too-easy rebuttal for Republicans to make. Yes, local and state entities are shedding jobs faster than the private sector but, even so, unemployment in the government sector is still at only 4.2 percent (according to the Bureau of Labor Statistics) compared to an overall 8.2 percent unemployment rate. So on what basis would the president be singling out government employees for special concern?

Think about it. If you work for a private company, you are helping to earn profits that pay for your salary. Moreover, you and your employer are paying taxes that pay for public employees’ salaries. On the other hand, if you have a government job, you may be doing something very worthwhile, but you are not helping to generate profits. You might be collecting taxes or fees, but overall you and your fellow public sector employees collectively are not bringing in enough to pay your own salaries.

You may ask, what is the difference between being paid a salary out of company profits and being paid out of taxes or fees collected for government services? It is true that services like education and law enforcement are ones that people would willingly pay for in the marketplace if they were not provided by the government. You can think of teachers and police as being hired by their local districts or cities and that the taxes and fees that pay their salaries as being little different from the profits earned by private companies. And those particular jobs nearly approximate the private sector because citizens theoretically have some control over them as services because budgets are subject to elections and bond levies. But the more that funding for these services comes from the federal government, the less like a marketplace it becomes. And keep in mind that we are speaking of public services that people value. We are not even talking about the federal bureaucracy which, in spite of any public good it does, is a net drain on the economy moneywise.

This is not to say that employees in the public sector do not provide necessary services. But employees in the private sector only get paid as long as it makes economic sense to pay them. When the economy turns bad, they are at risk of losing their jobs. When those workers lose their jobs, there is less money for paying workers in the public sector.

Morally, a national leader shouldn’t distinguish between workers in one sector and another when it comes to showing his concern. And economically, it makes absolutely no sense to favor public employees over private employees. After all, you need people in the private sector to be working so that you can pay people in the public sector. The president’s position is a bit like addressing a food shortage by saying the farming sector is doing fine and we should be worrying instead about supermarkets.

Che's Ghost

In a strange way, since I have moved to the west of Ireland, I have come to feel like Che Guevara is a neighbor of mine.

I don’t mean that he is literally living here. That would be one heck of a scoop. But I’ve felt his presence in a strange way.

Almost immediately after we moved to our rural location, I found myself regularly accosted for a chat on the road by a neighboring farmer. He is a man in his early sixties, although he looks older. He lives with his brother in the same house that their parents lived in. The two of them are bachelors. During our occasional chats, I have come to realize that he has never been more than a few miles from home but, not surprisingly, he knows the local area very well. During one of our meandering conversations, he mentioned an old estate house on a nearby shore of Lough Corrib. It belonged to the Lynch family, he said. He added that a daughter of the Lynch family emigrated to Argentina and became the grandmother of Che Guevara.

I had known that Che had roots in the west of Ireland. At the 2003 Galway Film Fleadh I saw a stunning short film by Anthony Byrne called Meeting Che Guevara and the Man from Maybury Hill. It was a fanciful riff on 1950s film noir and science fiction, and included actual footage of an interview Che gave in 1964 to RTÉ’s Sean Egan when weather forced an unscheduled stopover at Dublin Airport. As Cuban Minister for Industries, he was en route from New York to Algeria, and he can be heard in the film speaking of his grandmother’s Irish roots in Galway. As best as I have been able to determine, it was not actually Che’s grandmother who emigrated from Ireland but rather his great-great-great-great grandfather, Patrick Lynch. Patrick was born in Galway in 1715. He relocated in the 1740s to Bilbao, Spain, and then to Río de la Plata, Argentina. His great-great granddaughter Ana Lynch became the mother of Ernesto Guevara Lynch and grandmother of Ernesto “Che” Guevara. (Other accounts have Che’s forbearers coming from Clare or Cork.)

The history of the Lynch family in Ireland goes back to 1185 when William “le Petit” de Linch settled in Galway. The clan was one of the fourteen Tribes of Galway, merchant families who dominated Galway’s political, economic and social life from the 13th century onward. As time went on there were several branches of the Lynch family. My farmer friend’s story notwithstanding, the branch that had the house near me did not produce Argentina-bound Patrick Lynch. He seems to have come from Lydican Castle, near Claregalway, some five miles east of the city of Galway.

The link between Che and Ireland endures. There is an oft-repeated quote from Che’s father telling of “the blood of Irish rebels” that flowed in his son’s veins. Also, one of the most iconic images of Che—and the one that may have most contributed to the marketing of his radical chic image—was the work of an Irishman. In 1968 Dublin-born Jim Fitzpatrick created the ubiquitous two-tone portrait of the revolutionary from the famous photo (called Guerrillero Heroico) taken by Alberto Korda in 1960 of Che in a black beret at a memorial service for victims of a ship that exploded while munitions were being unloaded in Havana. Fitzpatrick printed a series of posters of his portrait. Last year he announced that he would belatedly copyright the image—which was intended for free use by revolutionary groups—and hand over the rights to Guevara’s survivors in Cuba. In one of the many ironies about Che, that un-copyrighted image has generated a lot of money from a lot of capitalist merchandise. Fitzpatrick, who would go on to produce artwork for Thin Lizzy, Sinéad O’Connor and The Darkness, says on his web site that he actually met Che, while working as a barman in a hotel in Kilkee, County Clare when the revolutionary made (another) unscheduled stop in Ireland in 1962, this time at Shannon Airport. (Other sources say that stopover happened in 1961.)

Che’s ghost began haunting Galway again earlier this year when Labour Party City Councillor Billy Cameron proposed erecting a monument to the revolutionary, who died in Bolivia in 1967. At least some of the funding would be coming from the embassies of Cuba and Argentina. Reaction has been heated on both sides of the issue. As Cameron put it, “We’re honoring one of our own from a distance.” The most eloquent objection came from Yale professor and National Book Award winner Carlos Eire. A Cuban of Irish descent, Eire wrote in a letter, “Che was my neighbor in Havana, and I actually saw him in the flesh several times. He lived in an opulent mansion just a few blocks from my very small house, and also ran the prison of La Cabaña, where some of my relatives ended up being tortured and murdered.” Interestingly, The Irish Times declined to print Eire’s letter, but a local Galway paper did.

Eire ended his letter with a tongue-in-cheek suggestion. If a monument is built for Che, he wrote, then there should be one right next to it for Oliver Cromwell, one of the most hated figures in Ireland. Explained Eire, “Like Cromwell, Che proclaimed himself a liberator and felt justified in committing thousands of atrocities in a land other than his own, all in the name of a higher cause.”

There is a lovely symmetry to Eire’s suggestion. After all, the Tribes of Galway (including Che’s ancestors) had their properties confiscated by Cromwell in the 17th century. In fact, it was Cromwell himself who came up with the name “Tribes of Galway,” as a mark of his contempt for them.

The ironies abound. In the wake of the brouhaha over the statue, there has been some criticism of the annual Che do Bheatha festival held in Kilkee to commemorate Che’s visit there. But it’s not political, explains Kilkee Mayor Elaine Haugh Hayes. “His name was famous and we just worked off that to create a festival where we can get people in to help local business.”

The fact is, Che the man disappeared long ago. All that’s left is a dashing visual image that is one more tool for greasing the gears of commerce.

Liars Figure

I worry that people are going to think that I’m obsessed with Paul Krugman. But he keeps showing up on TV saying the most ridiculous things. And I cannot figure out why the people who are sitting next to him are not staring at him as if he has two heads—like I am.

He was back at it on Sunday on ABC’s This Week with George Stephanopoulos arguing that the economy is so bad because the government has essentially been following Mitt Romney’s economic policies for the past few years. I’m not kidding. Go to the ABC News web site and watch it yourself.

Krugman’s reasoning is that Romney is advocating “austerity” and that the country has been enduring “austerity” for the entire length of Barack Obama’s presidency to date. Note: I have decided to put the word “austerity” in quotes any time it is used by a politician or a pundit. This is to highlight the fact that different people use the word to mean different things, which only confuses things. Some people use the word to mean private sector austerity, which translates to higher taxes. Other people, like Krugman, use it to mean public sector austerity, which translates to reductions in government spending.

So Krugman is arguing that, under President Obama, the government has been cutting spending. And he even has a chart to illustrate this, and darned if it doesn’t show a huge drop in public spending during the past three and a half years. But his chart—which I discussed in April and which he brought out again on Sunday—is hugely and ineptly deceptive. By combining state and local spending with federal spending, it masks the huge increase in federal spending. The fact that it shows overall public spending going down just reflects how bad the economy is. State and local governments have cut spending because they have run out of tax revenues. So, like a lot of people, Krugman is disappointed in Obama, but in his case it’s because Obama has been cutting government. I suppose that’s indirectly true, but it’s completely untrue when speaking of the federal government.

Krugman is not the only one trying to argue that the president is miserly with public monies. A couple of weeks ago global commentary editor Rex Nutting wrote on MarketWatch.com contended, “Of all the falsehoods told about President Barack Obama, the biggest whopper is the one about his reckless spending spree.” He supported this assertion with a chart showing the annualized percentage growth in spending during each presidential term going back to Ronald Reagan’s first one. According to the chart, the biggest spender was Reagan (in his first term) followed by George W. Bush (in his second term). So the Reagan years weren’t the era of greed and government cutbacks after all!

This was a clever trick on Nutting’s part, but as plenty of others (including fact check columnists and web sites) have pointed out, how much spending has gone up or down from one term to another doesn’t really tell you how much spending happened during a term or how much the deficit was added to. Comparing deficits under each president is a much better way to compare spending policies. Even better is to compare deficits stated as a percentage of gross national product, that is, how much of the U.S. economy is in hock to creditors. At the end of Reagan’s two terms, this percentage was 52.6 percent. At the end of George W. Bush’s two terms, it was at 74.1 percent. At the end of 2011, it was at 99.7 percent—by far an all-time high. In other words, the money owed by the federal government is now very close to the value of the country’s entire economy.

If the percentage increase in spending under Obama comes out low, it is only because the baseline for his spending was the emergency stimulus authorized by Congress in the last days of the Bush administration. What should have been a one-off jump in spending simply became the plateau for even more spending growth. There’s your economy-killing “austerity,” Professor Krugman. What drives me crazy is that people like Krugman and Nutting, who manipulate numbers to create false impressions that don’t fool anybody, are very intelligent people. So they clearly know that they are misleading (or trying to, anyway) people. What I can’t figure out is, why do they do it? And why don’t more people laugh at them and stop inviting them to be on news panels?

Implicit in this manipulation is this argument: Obama isn’t as bad or, at least, any worse than other presidents when it comes to spending. You often hear the president’s defenders point to the fact that George W. Bush and a Republican Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act without paying for it. They also point to Bush’s two wars that he didn’t pay for. And you know what? They’re right. He did exactly what they say. What they don’t explain is how this justifies even more federal spending, by several magnitudes, that also isn’t paid for. It’s like the guy who pours gasoline all over the living room blaming the guy who left the burning cigarette in the ashtray.

Whatever you think of the stimulus packages that were passed in 2008 and 2009, they did have bipartisan support at the time and were worth a try to boost the economy. Unfortunately, the larger one (2009) did not spend its $831 billion in a very stimulative way. And it was eclipsed by the business uncertainty that derived from, first, a prolonged fight over the Patient Protection and Affordable Care Act and, second, the looming provisions and inevitable cost increases of the act itself.

When it comes to the economy, both Republicans and Democrats have let the country down. Voters may feel justified in punishing one party or the other or both. But the only question that matters is which presidential candidate is more likely to move things in a better direction. Mitt Romney has endorsed Paul Ryan’s budget. If he sticks with that, there will be plenty to attack him on because it is very detailed and guarantees significant pain. But it would, over time, reduce the deficit.

What is Obama’s alternative? We don’t know because he speaks only in generalities and criticizes the House of Representatives for not passing bills that would make little difference anyway. The president’s problem is that people have to be wondering if he even has a plan. After all, if he did have a plan, wouldn’t he, as a sitting president, be implementing it already?

Chile, in Perspective

So, after spending a few weeks reminiscing (starting here) about the time I spent as a student in Pinochet-era Chile, what are the lessons to be drawn from the experience?

I did some moral wrestling before I even went to Chile. It occurred to me that the act of accepting a fellowship to live and study in the country could be construed as a form of support for the Pinochet dictatorship. I asked myself if I should decline the fellowship on that basis alone. But as a candidate for a master’s degree in journalism, who had written for a number of student and community newspapers, I considered myself a journalist. And no self-respecting journalist would refuse to visit a country because he disapproved of its government. In fact, that would be a reason to go.

After I began living in Chile, I came to appreciate that it was not a black and white situation morally. As with other countries under dictatorship (the USSR, Franco’s Spain, Cuba, probably even North Korea), the vast majority of people were just getting on with their lives and loved their country. And there was strong support for the government. There was also fierce opposition, but that necessarily remained in the shadows or abroad.

During those years there was a concerted campaign to make Chile an international pariah. But my experience living there had the effect of making me skeptical about boycotts and sanctions against countries, even ones with clearly immoral governments. The problem is that, to the extent that they have any effect, they mainly inflict hardship on average citizens rather on than the government. Apartheid-era South Africa was treated similarly, and it is worth remembering that, if musician Paul Simon had adhered strictly to the cultural boycott of that country, we would not have gotten the album Graceland a quarter-century ago.

It is relatively simple (and easy) for a North American like myself to criticize the Pinochet regime for the violent means it used to take and maintain power, for the killings, the torture, the lack of democracy and the human rights abuses. But there are a few factors that mitigate judgment of (not excuse) the regime. Clearly, the junta and its many supporters saw the actions of September 11, 1973 not as a coup but as a counter-coup and ultimately a civil war. President Salvador Allende had clearly decided to ignore the country’s constitution with some of his actions. The Supreme Court had unanimously declared that Salvador Allende’s government represented a “disruption of the legality of the nation” for ignoring judicial rulings. The Chamber of Deputies passed a resolution 81-47 to demand that Allende stop ignoring the constitution. When the military made its move, its power was overwhelming, but Allende’s supporters were not exactly hapless victims. Allende had a coterie of personal bodyguards (led by a Cuban-trained commando), of which 46 were killed in battle. The Revolutionary Left Movement (MIR) also fought against the military on that day and after. Among the military, there were 34 casualties on September 11 and a further 162 during the following three months. For years the two sides would argue over whether Allende was killed or had taken his own life, but a year ago an exhumation and autopsy finally established once and for all that he had killed himself with an AK-47 that was given to him by Fidel Castro. Official investigations after the return of democracy would put the number of the junta’s victims at (at least) 2,115 dead and (at least) 27,265 tortured.

Frankly, the argument that, if not for the September 11 coup, Chile would have become a Cuban-style dictatorship is not without merit. Does that justify the coup and the human rights abuses? For a lot of Chileans at the time, it clearly did. But as time has passed, succeeding generations have had to come to terms with the violence of the 1970s. You can see this in the country’s popular culture, such as in films like Andrés Wood’s Machuca. In 2006 Michelle Bachelet was elected president of Chile. Significantly, in the 1970s she had been arrested, tortured and subsequently spent a few years in exile, and her election was seen as symbolically healing.

Another major factor that complicates a blanket condemnation of the Pinochet regime is the fact that his government transformed and modernized Chile’s economy. Studiously following the economic policies of Milton Friedman, the government tamed the out-of-control inflation of the Allende years and led the country to prosperity. It is a record that flies in the face of the usual patterns of dictatorships. Usually, a lack of democracy breeds corruption and abuses and a need for the regime to perpetuate its own power. Pinochet’s regime certainly engaged in terrible abuses, but it also led the country to a bright economic future and kept its promise to step down and reinstall democracy at the end of the 1980s.

Morally, we can only condemn the Pinochet’s overall role in Chile’s history. On the other hand, when compared to someone like Fidel Castro in Cuba, in completely relative terms, he doesn’t look all that bad.