The Era of Complacency is Over
A generation has lived in the era of complacency. Recessions were "shallow" expansions were long, inflation was tamed. Monetary policy seemed to be able to stabilize the economy. It was the neo-conservative version of technocratic Keynesianism. Today a large neon sign went up that said "The End:"
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 6.2 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.
The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the decrease in real GDP was 3.8 percent (see "Revisions" on page 3).
The decrease in real GDP in the fourth quarter primarily reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by a positive contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.
Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports.
In short, there is almost no good news here. Buried in the release is an interesting note: non-defense government consumption and investment rose by 15% in the quarter, an indicator that there was, in fact, some fiscal stimulus in the economy, but it was not doing enough to stem the tide of a global slowdown: both imports and exports declined sharply.
The larger picture is in the graph: from the end of the 1982 recession to the present, the economy was managed, and primarily through monetary policy. Downturns in GDP, as opposed to payrolls, were short and shallow, expansions were long. Contrast this with the Keynesian era before it: recessions were frequent, often sharp, but they were interspersed with very strong GDP growth. As most readers here know, much more of productivity went to wages. In fact, the bounce back from the 1980-1982 double dip recession was a Keynesian rebound. One reason for the Reagan mystique is that never since has the economy bounced so far, so fast. Reagan’s recovery was front-loaded, Clinton’s back-loaded. Bush’s was unloaded. With the exception of the one invasion quarter, one could swallow the whole of the Bush economy in the second half of Clinton’s.
In this era, monetary policy sanitized, or canceled out, most fiscal policy. This is why politics has grown more partisan, more bitter, and more entrenched. It was the Fed’s job to increase the size of the pie, and the job of Congress and the President to split it. Compromise was not at a premium, because monetary, not fiscal, policy was responsible for the general equilibrium of inflation and growth. Cut taxes, and the fed would just tax every one through higher interest rates than would otherwise have been the case. Clintonomics tried to put more of the power and responsibility back in the fiscal authority’s hands, but the Republicans in Congress simply would not follow the script.
Beginning in 1998, a series of tremors began working their way through the economy. The era of complacency was an era of low volatility in the economy itself. GDP, payrolls, inflation, wholesale prices, all showed less and less volatility. With the late 1990’s that began to reawaken. In the 2000’s out right volatility returned to resources, and was eventually reflected in the larger economy, in no small part because the financial system bet more and more heavily that there was not general volatility.
These factors help explain why the entire elite class "walked into the propeller." Remember that almost every elected official in the United States has spent his or her entire career, or the bulk of it, in this era. As had the entire financial class. The job was to keep the paper for oil economy churning, make sure that ownership of key assets stayed in the US by channeling the money that once would have gone to improve technology into the financial system, and keeping the public happy by investing in factories that produced consumer goods and services. Brooks was a wise fool when he coined the term "Bobos in Paradise" – it is probably the only smart thing he has ever really said.
That era is over. The large volatility of key materials, the limits of consumer production, and the end of the monetary era are permanent features of the future. Not in the sense that we will never have good times again, or that there will not be times when monetary policy will not be sufficient, but in the sense that these problems will always be a few quarters away. The political and economic class, particularly the Republican Party and the reactionary movement, have not yet grasped this. What they think of as "massive" change, is still change on the margins of the cone of the complacency era, with Bush marking about the farthest right allowable, and Clinton and Obama the farthest left. The problem is that all of the acceptable choices within the era of complacency are not survivable. Obama can not be any more progressive than the pressure of the economy puts on the power structure in Washington and New York.
One good example is on the importance of a safety net. On the left half of the graph, in the Keynesian era, the need for one is obvious: people will frequently be economically dislocated, and have to move, change careers, or wait while factories retooled or waited for credit to return. In the right half it is much easier to believe that someone who doesn’t have a job, doesn’t want one badly enough. In the left half, to get people to trust the economy, they need to be assured that they will be picked up when the hammer falls, in the right half, downturns are so sporadic, that people can tell themselves that only the bad people, the excessive risk takers, are being punished.
We are now in a neo-fiscal era, and quite obviously in a Keynesian revival, and thus the very cone of acceptable is going to have to shift before the economic crisis can be dealt with. So far the people on the inside are not yet willing to do this. Reading carefully between the lines of various statements from the Obama Administration, it is clear that some people in it get this, while others do not – but that all are constrained by the fear of a right wing backlash, and the need to get people such as Senator Sue Collins to sign on board actions. Such is the consequence of dealing with a moment when about 40% of the body politic believes in the flat earth theory of economics and biology. Smug centrism, and rabid reactionaries still believe the same thing, that a few dials get fiddled and we will be back to growth.
However, as this number indicates, the era of complacency is truly over, and having an infantile electorate, and an infantile elite, is no longer a luxury we can afford.