The election victory of Barack Obama offers a breathtaking hope for economic recovery, indeed a hope of historic proportion for America and the world. Change we can -- if we escape from narrow thinking and tinkering around the edges of public policy.
More gimmicks such as one-off rebate checks or 0% interest rates at the Fed, as some now propose, will not suffice. The government needs a clear medium-term strategy to reinvigorate private investment spending, and it will need increased budget revenues in the years ahead for urgent public investments and long-term restructuring. Short-term recovery will be promoted by clarity on the long-term direction of economic change.
In short, the U.S. economic crisis requires a new kind of macroeconomics, and it is the most urgent task before President-elect Obama.
The Humpty Dumpty of the housing and consumer bubbles cannot be put back together, no matter how many Wall Street bailouts, liquidity injections or tax rebates are put in place.
The end of the consumption boom marks the collapse of an era that began with Ronald Reagan. Some pundits and politicians would like to return to the policies of the Clinton years, but those policies were compromises with Reaganism that will no longer suffice. Twenty-first-century problems cannot be solved by trying to resurrect the policies of the 20th century.The U.S. economy is spiraling downward into recession and gargantuan budget deficits. The Fed pumped up the economy for years and encouraged the reckless overlending and overborrowing for housing and consumer credit, all in the name of keeping the economy growing. (Remember, after all, how George W. Bush encouraged us to shop as the patriotic response to 9/11).
A country that sustains zero or negative household saving rates for years and borrows heavily from abroad is bound to pay a heavy price, and that time has come for the United States.But even worse, while the housing and consumption bubbles were ballooning and the Iraq war was bleeding lives and money, a range of other crucial challenges -– the environment, energy, infrastructure, inequality, global poverty -- were all neglected.
Now, the macroeconomic and structural crises are coming to a head simultaneously. Here is a quick tour of our macroeconomic miseries, with roots that go back 40 years.