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August 7, 2011
David Warsh, Proprietor


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The Debt Problem Is Like the Cold War

“Grim week echoes depths of 2008 crisis,” headlined the Financial Times yesterday. Not exactly, at least not yet. But the sense of foreboding in the United States is considerable, illustrated daily on the front pages of newspapers by photographs of frightened traders and lines of job-seekers.

How do Americans respond to daunting news? The hundred days of Franklin Delano Roosevelt’s New Deal in 1933 is the episode most commonly cited. Other memorable adjustments include the response to Sputnik and the game-changing atmospherics of the incoming Kennedy and Reagan administrations.

But writing about the debt-limit hold-up in Congress last week got me thinking about the way the reality of the Cold War dawned on American in 1949-50.

So I spent a couple of evening last week poking around the library, looking through old magazines, those informal indices of popular sentiment. I re-read portions of David Halberstam’s The Coldest Winter: America and the Korean War, and looked for the first time at his book The Fifties.

And I wound up, I think, with a better sense of the situation facing President Obama and the Republican Party.

The bleak winter of 1949-50 is today little more than a fleeting history lesson to the young; its memory fading among the old. Germany had been split into two separate states, East and West, following a Soviet blockade of land routes to Berlin. Chinese Communist armies had driven Chiang Kai-shek and his Nationalist armies from the mainland to Taiwan. The Soviets exploded their first atom bomb (the news was delayed slightly by the White House because the British pound had just been devalued, throwing international financial markets into panic).

Behind the scenes, policy-makers debated plans  for the Super, as the hydrogen bomb was known. There were revelations of Communist spying, and, the next summer, the beginning of the Korean War. Time and Newsweek published dark fantasies of a nuclear war with the Soviet Union; George Orwell published Nineteen Eight-four. In the US, a divisive Red scare had already begun.

Is the 2007-09 crisis comparable in magnitude? There are no objective indices of apprehension; certainly it doesn’t have the overtones of outright war. There is no counterpart in the last sixty years to the implicit threat posed by the rise of China – a more formidable competitor than ever was the former Soviet Union in what must be, as the title of Aaron Friedberg’s new book has it, A Struggle for Supremacy in Asia. A certain sense of end times speaks for itself in the titles of books that appeared soon after the crash: The End of Wall Street and All the Devils Are Here.

The biggest difference between now and then is to be seen in the advertisements in American magazines. In 1950 the US economy was muscular and confident: ads boasted the trappings of industrial might. If the Internet could be effectively sampled today, it would reveal an interdependent just-in-time economy of distinctly more modest ambitions.

There is good reason to contend that the Obama administration bungled the beginning of its tenure. Taking office four months after a spectacular but ill-understood financial crisis, the president gave no clear explanation of what he thought had happened, and offered no very cogent response.

Rather than calling for a rapid Congressional reorganization of the financial industry, a la the Glass-Steagall Act of 1932, the president acquiesced to the wave of mergers that had been engineered by the Federal Reserve Board and the Bush Treasury. That reinforced the conviction that Congress had become the captive of banks that had grown even more powerful and risky.

Instead, Obama made the case for massive stimulus – necessary, no doubt, but ill-designed, unpersuasively presented, and, above all, unwelcome, after the massive spending of the preceding autumn for the Troubled Asset Replacement Program, the sums necessary to keep Fannie Mae and Freddie Mac afloat, and the massive expansion of the Fed’s balance sheet in its role as lender of last resort.

The bail-out itself would pay off (and even turn a profit), a fact noted in no uncertain terms by Fortune’s Alan Sloan the other day. But otherwise the overall success of the emergency measures has been little remarked. The recapitalization of the automobile industry was the administration’s main victory in its first few months.

The economy stabilized. The administration turned its attention to health care reform, not unreasonably. Medicare’s cost crisis was steadily growing worse; without some way of generating broad consensus about desirable treatments – “bending the curve,” as it is known – the US budget deficits grow to the moon. And a filibuster-proof majority in Congress necessary to get the process started occurs only every thirty years or so.

But the bill finally passed only in March 2010. When anxiety stemming mainly from the slow recovery welled up in the summer in the form of the Tea Party, Congressional Democrats were sitting ducks in the November election. (A harbinger was Scott Brown’s victory early that year in the Massachusetts special election to fill the seat left vacant by the death of Edward M. (Ted) Kennedy’s death.)

Anxious times make for demagogues. In the early 1950s, Sen. Joe McCarthy and various other legislators fomented an anti-communist crusade. Since 2010, it’s been the congressional caucus of the Tea Party on the warpath. (See this excellent Washington Post reconstruction of their campaign, Origins of the debt showdown, for details.) The premise of the Red Scare was that a situation so perilous obtained that presidential leadership (never mind ordinary civil liberties) had to be subordinated to the investigator-in-chief. The Tea Party caucus insists that its demands are non-negotiable; matters are so desperate that the ordinary rules of compromise don’t apply.

Though McCarthyism was a bipartisan doctrine, appealing to resentful Democrats and Republicans alike, it gave rise to Congressional dynamics similar to those we saw last month between House Speaker Boehner (R-Ohio) and majority leader Eric Cantor (R-Virginia). The Republican leadership caved to the insurgents for a time in the ’50s, but survived. Having previously knuckled under, Sen. Everett Dirksen became majority leader in ’59 and retained influence well into the ’60s; Richard Nixon, who had converted from a communist hunter to a mainstream Republican, eventually became president.

Just as irresponsible, but far less influential, are progressives calling today for massive stimulus. If entrepreneurial politicians, left and right, can be expected to exploit suddenly fearful circumstances, what’s left for the president to do? Mainly he needs to soldier on.

After all, the economic situation he faces is fairly well understood, thanks in large measure to economist Carmen Reinhart, of the Peterson Institute of International Economics, and Kenneth Rogoff, of Harvard University. Most frequently mentioned is their history of various mania, panics and crashes, This Time is Different, but they should be reading After the Fall, the paper Reinhart wrote with her husband, economist Vincent Reinhart, for the Fed conference at Jackson Hole last year.

Comparing fifteen crises in various countries and three global contractions in which financial systems were seriously damaged, the authors underscored the ways in which the current episode is in fact very different from the ordinary recessions to which it is frequently compared. Carmen Reinhart yesterday summed up for The Washington Post’s Ezra Klein:

Debt de-leveraging takes about seven years. That’s the essence. And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before.

An uncommonly lengthy crisis in other words – which makes one more similarity to the situation that confronted the US in the early ’50s. The Korean War started poorly, too – near disaster followed by confidence, hubris, and more disaster. The US forces that were rushed to Korea were nearly pushed into the sea by the North Korean army, before a flanking maneuver, a surprise landing at Inchon Bay, put their army to rout. American forces chased them all the way to the border with China, only be brutally flung back when the Chinese entered the war. How is war parallel to management of an economy? Each requires a sound grasp of strategic principles, tactical flexibility and a light touch.

So Obama should take several leaves from the Eisenhower playbook. He has done a pretty good job; he has earned a second term. (The Republicans naturally will seek to portray him as Harry Truman.) He should continue to negotiate with Boehner over the combination of spending cuts and tax increases necessary to achieve long-term budget balance, and give the Tea Party caucus the back of his hand. He must also begin to make a much better case for himself and his party.

Meanwhile, we should pay much more attention to Tea Party allies Cantor and Paul Ryan (R-Wisconsin.) Joe McCarthy was a poor Irish kid from wrong side of the tracks of Appleton, Wisconsin. Ultimately he defeated himself. Whatever else, Ryan and Cantor are not rustics. But they most certainly are demagogues riding on a wave of fear.

.                                                    XXX

Writing about national matters from Boston for an audience of a few thousand readers on the Web, I sometimes feel like a man who hasn’t kept up with the times. The blogosphere has grown into a powerful new realm of commentary since I began doing this. Yet here I am, popping out a column once a week, as if I were writing for a newspaper.

In a sense I am. For many years I was the twice-weekly economics columnist of the The Boston Globe, its equivalent of Paul Krugman, in the years when the Globe was an independently managed paper. Ten years ago last month the New York Times Co. brought its own editor to Boston. He shut the column down and I left the paper.

It wasn’t certain that I would continue writing weekly. Looking back on the past decade, I’m glad that I did. It took a couple of years to find the right business model. EconomicPrincipals is supported by readers through annual subscriptions to its bulldog edition (an early email version); most people read it for free on the Web, much like public broadcasting. But it has worked pretty well ever since.

Krugman has done many things in his column that I couldn’t do. As an economist he has always been a brilliant diagnostician, and the way he has adapted to the news business has been astonishing. Then again, as a veteran newsman, I’ve done many things that, for one reason or another, Krugman couldn’t – pursuing the Harvard-Russia scandal of the 1990s, for example. My take on the recent history of the profession differs significantly from his. I’ve also kept a wary eye on the NYTimes Co., and written about it occasionally over the years.

We have friendly, if distant, relations. Krugman (in the Sunday Times) praised my last book when it appeared. I have sought to explain why he deserved his Nobel prize and regularly make the case for his newsmanship.

But we do have different temperaments. I was (and still am) an enthusiastic Obama supporter. He plumped until the last minute for Hillary Clinton to be the Democratic Party nominee. He regularly excoriates those who seek a middle-ground; I write hopefully about how the middle ground sometimes tips suddenly to one of the poles. (Yes, I can be optimistic to a fault, and he is sometimes too pessimistic.)

In some sense, then, I represent not a substitute for Krugman, but a parallax view. We write about many of the same things, but ultimately we are members of communities organized along dissmilar lines. He is an economist, I am a journalist, and my angle is often both different from his and yet close enough to be of some use in calibrating distances and judging obstacles in the path.

Besides, there just aren’t many other economics columnists out there. It’s not a perfect way to make a living, but, all things considered, it’s not bad. I look forward to another ten years.

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3 Comments

  1. Tom Geraghty wrote:

    The following statement is just flat-out wrong:

    “Just as irresponsible, but far less influential, are progressives calling today for massive stimulus.”

    The US economy faces a large and growing output gap and high unemployment. Under these conditions, a stimulus is exactly what is called for to move the economy closer to full employment. This is basic Econ 101. Is it too much to ask that self-styled “economics journalists” understand the basics of economics?

    Monday, August 8, 2011 at 11:54 am | Permalink

  2. Dale Worley wrote:

    In regard to comparison with Paul Krugman, be careful to be aware of the deep similarities — the “New England” culture (of David Foster Wallace’s “Albion’s Seed”), which gives one a particular view of the proper relationship between government, society, and the individual. Within American politics, this attitude is the core of the liberal coalition. Dukakis’ failure to realize that this attitude is specific to the culture and region that he came from is what caused him to fail in his national campaign.

    Hmmm, let me try to be more clear… I don’t mean that either you or Krugman are *wrong*. (Though I am a child of the “Mid-Atlantic” culture, and it still grates on me when Massachusetts politics is on the “wrong side” of the differences between the New England and the Mid-Atlantic mode.) But if a fish is not aware of the water, it can never get out of the pond it was hatched in.

    Monday, August 8, 2011 at 2:49 pm | Permalink

  3. susan wrote:

    David Hacket Fischer wrote Albion’s Seed. not David Foster Wallace. Wallace is a novelist, not a historian.

    Monday, August 8, 2011 at 7:25 pm | Permalink

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