The Lost Opportunity
Ryan Avent on the lost opportunity of the bubble years:
On the other side of things, it obviously would have been nice to have thought a bit more deeply about how to take advantage of the savings glut. The glut meant that the American government could borrow extremely cheaply (”deficits don’t matter,” said Cheney), which opened the door for a lot of deficit spending. One might have looked at the dynamics of the economy — a manufacturing economy struggling as China enjoyed catch-up growth — and determined to use deficit spending to shore-up the safety net (to help struggling workers) and invest heavily in education, health care, and infrastructure to secure long-term economic growth. Alternatively, one might have decided to spend several trillion dollars on wars abroad. But again, there was not much public demand for a large program of public investment, deficit funded or otherwise.
I think it lets the Bush administration off too easily to chalk this up to lack of “public demand” while at the same time framing the choice in an unduly partisan way to make it a “war or public investment” choice.
The fact of the matter is that after the economic successes of the 1990s, mainstream thinking in the Democratic Party became pretty narrowly obsessed with a particular view of the budget deficit’s role in economic life. The idea was that balanced budgets would keep private interest rates low and keep the economy vibrant. This was a good diagnosis of problems facing the country in 1992-94. But it meant that relatively few Bush administration critics were prepared to spend the years 2004-2007 arguing that it would be smart to engage in massive deficit-financed public investment. It’s not that nobody was arguing that—my former boss Bob Kuttner was—but the orthodox view among the opposition pointed in a different direction.
In retrospect, though, the private sector was taking advantage of low interest rates to make basically unproductive investments in housing.
This does leave us with a significant issue moving forward. It seems to me that when you look at the things that people buy with their private funds, that the United States is the greatest place on earth. We have the biggest houses, the best TVs and computers, tons of cars, etc. Even in the midst of an agonizing recession, this is basically a land of plenty. But when you look at the things that we buy collectively with public funds, you find many areas where the United States falls short. Our schools are not the best in the world. Our sidewalks are not the best-maintained. Our mass transit systems are sub-standard. Our cities are unsafe. Our intercity passenger rail is a joke. Our internet is not the fastest in the world and our electrical grid is incredibly outdated. As we move toward recovery, it seems to me that if we really want to boost living standards we need to shift the balance between private consumption and public investment.
20 Responses to “The Lost Opportunity”
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May 6th, 2009 at 1:23 pm
I’ll take any opportunity to link to Dutch cycling nirvana, I mean, worthwhile public goods:
http://hembrow.blogspot.com/
May 6th, 2009 at 1:27 pm
“Our schools are not the best in the world. Our sidewalks are not the best-maintained. Our mass transit systems are sub-standard. Our cities are unsafe. Our intercity passenger rail is a joke. Our internet is not the fastest in the world and our electrical grid is incredibly outdated.”
And it’ll be extremely hard to fix any of that without an American economy that actually makes tangible stuff that people want. Hmmm, maybe that whole global economy thing were we ship all the “making stuff” jobs overseas wasn’t such a great idea after all.
Mike
May 6th, 2009 at 1:27 pm
Matt,
You have a very good point here but there is something about the public demand that affects what the government does. It is the same thing about never going to church when things are great but becoming pious all of a sudden when things go badly. When the good times rolled, deficits did not matter because people did not respond to that issue. They all wrapped themselves in a flag and decided to get mucho with the world. Now, when they are struggling, they start getting scared about their economic future and pay attention to how competent the gov is. In the end, it is all about the money. If people have enough and they are positive about the future, they will care much less about what the government is doing to fix the long term problems with the economy. On the other hand, now is the time to make a difference. Look at the biggest gov expansions of the last 100 years. They all happened after some big crisis in the country. Think of the New Deal and the Great Society.
May 6th, 2009 at 1:39 pm
Another thing,
As a first generation immigrant, one of the biggest things I notice about America is that it is a country of business. Basically, business interests take precedence over public interest. You say that we do not have the best public transit. Who is going to make money off of that? Sidewalks? No one will get paid for that. Healthcare? If it does not pay, it is not worth it. This has its positives and its negatives. It makes America one of the best places to do business in the world. Actually, the best one to do business. On the other hand, it leaves us to fend for ourselves for even the most basic things. Think of the gun issue. When I talk to people who have guns, they all talk about protecting themselves from criminals. I am amazed at how scared Americans are. Basically, it has come down to this: “We can’t have enough police for you to feel safe but hey, go buy a gun and protect yourself”. Change some of the words to this sentence and you can apply it to schools (get your own private ed), healthcare, transportation (buy your own car) etc. In full disclosure, I am a business man and I would choose to do business in this country above almost any other. I am not complaining as I am stating what I observe.
May 6th, 2009 at 1:51 pm
So Matt is saying that a role for government during periods of low interest rates is to crowd out private sector borrowing? Milton Friedman reborn as social planner!
May 6th, 2009 at 1:56 pm
Typical Yglesias:
Sentence one:
“But when you look at the things that we buy collectively with public funds, you find many areas where the United States falls short.”
The he lists a number of sectors that fail because they rely on government investment.
Sentence two:
“..we need to shift the balance between private consumption and public investment. ”
In sentence two he did not define the shift, but a rational reader would conclude the shift would be from public to private investment. You know, to move private investment to sectors where government screws up.
But I know that is not what he means, what he really means is that regardless of logic, his favorite programs should continue to get government funds.
I mean, why bother with the discussion?
May 6th, 2009 at 2:08 pm
You know what we should have borrowed money for? The levies around New Orleans. Because no matter how much it cost, it would have been cheaper than what we’ve done instead. And afterwards we would have actual levies, plus a city, instead of thousands of formaldehyde-leaking trailers.
May 6th, 2009 at 2:15 pm
In sentence two he did not define the shift, but a rational reader would conclude the shift would be from public to private investment. You know, to move private investment to sectors where government screws up.
Is Matt required to rehearse the argument from transaction costs and net positive externalities to the provision of social goods in every single post referencing social goods?
May 6th, 2009 at 2:40 pm
Even your private Great America is a fantasy as well. We do not really have the best computers or televisions, we certainly don’t have the best phones, our houses are really not all that well made for all that they take up (and waste) a lot of space, they burn energy like a bonfire, our cars are meh, our food sucks, and so on.
It’s a great country to be a rich person. If you remove the upper 1% or even 0.1% and look at what it’s like for everyone else, it’s mediocre at the very best. Add the nonexistent-to-shoddy state of public goods that you mention, and, yeah. USA! Dreamland.
May 6th, 2009 at 2:56 pm
tatere:
If you remove the upper 1% or even 0.1% and look at what it’s like for everyone else, it’s mediocre at the very best.
Nah, you’re a spoiled brat. Unless you’re poor or working poor it’s pretty good, not that it couldn’t get better, in ways Matt suggests or Obama suggests.
Alternatively, one might have decided to spend several trillion dollars on wars abroad. But again, there was not much public demand for a large program of public investment, deficit funded or otherwise.
Like Obama is doing now in Afghanistan? I love it when so-called “progressives” play the tribal/patriotic card and try to get populist on us, but it’s not convincing. Avent and Yglesias can’t comprehened that Iraq and Afghanistan are preventative measures and it’s just demogogueing the issue to say that foreign aid is better spent at home. Failed states will come back to bite us as 9-11 showed this to be the case. It’s not like the Cold War where the CIA would replace democracies with dictatorships in the name of fighting communism.
In fact it’s interesting that Russia just tried a coup on neighboring democratic Georgia and neither Ryan nor Matt have any comment.
May 6th, 2009 at 2:58 pm
The re-education of America regarding economics over the last 30 years has to be the most successful propaganda program in history.
The University of Chicago, AEI, Heritage Foundation, etc. have done a fabulous job of distorting economic history.
Richard Mellon-Scaife, The Coors family, the Walton family, etc. must be very proud and happy.
May 6th, 2009 at 3:03 pm
The re-education of America regarding economics over the last 30 years has to be the most successful propaganda program in history.
Thomas Frank’s One Market Under God is your primer.
May 6th, 2009 at 3:57 pm
I seem to recall some spectacular infrastructure failures during the Bush administration. All attributable to neglect and/or lax regulations.
For years, we’ve had a steady drumbeat of stories about crumbling public and private infrastructure. Every time, the politicians are quoted as saying the money isn’t available. Every time, the decision is to postpone repair and replacement until its someone else’s problem.
May 6th, 2009 at 4:23 pm
“But when you look at the things that we buy collectively with public funds, you find many areas where the United States falls short. Our schools are not the best in the world.”
Did you really have to start with that example? We spend more money on our schools than any of the large Western competitors. You have to drill down to the small states like Belgium and Luxembourg to find countries that spend more than us on education. If there is a problem with education in the US (and there is) it definitely isn’t that the private/public investment ratio is off.
May 6th, 2009 at 6:31 pm
Re: And it’ll be extremely hard to fix any of that without an American economy that actually makes tangible stuff that people want.
Why? all we need is the political will to do so. The problem of course is that we (at least the “we” the comprises the budgeting process in the political system) has been unwilling to spend the money on infrastructure.
By the way, when it comes to the electrical rid I am wondering what other nations of comparable size e.g., Canada, Russia, China, India, Brazil) have that we do not.
May 6th, 2009 at 8:31 pm
In fact it’s interesting that Russia just tried a coup on neighboring democratic Georgia and neither Ryan nor Matt have any comment.
Bollocks!
May 7th, 2009 at 2:26 am
What really hampered any thought about investing in public infrastructure was the Republican takeover of congress in 1994. This impeded any attempts by the Clinton administration to invest more money in America.
May 7th, 2009 at 7:15 am
MY: “it seems to me that if we really want to boost living standards we need to shift the balance between private consumption and public investment.”
Even if we can’t boost living standards enhanced public investment is our last good chance. The reality of globalization is that the private sector in this country will continue to shed jobs and find cheaper labor elsewhere. Only the government can fill the void. Otherwise, we will find ourselves stuck with 15 to 20 percent real unemployment, or worse, in perpetuity.
Without a modern infrastructure we are in big trouble. Without an advanced electric grid and a changing of our auto fleet to electric cars were are doomed. We are one big oil shock away from possible total collapse. And a big oil shock is coming. It is only a matter of time.
May 7th, 2009 at 7:37 am
As we move toward recovery, it seems to me that if we really want to boost living standards we need to shift the balance between private consumption and public investment.
This point is just as true as when John Kenneth Galbraith made it in 1958. Sigh.
May 8th, 2009 at 11:52 am
Deficit spending on infrastructure would never have passed the U.S. consensus. This is all good in hinds-sight, but Democrats have cried out “deficit” for years. Republicans (whether appropriately or not) under Reagan and Bush have done just the opposite. They’ve pointed at GDP, employment, and inflation (again with inflation – whether appropriately or not) as key factors.
Yglesias is suggesting a paradigm shift in the fiscal mentality of the Democratic Party – from a retroactive basis at that. I must say that Democrats do “overemphasize” the national deficit. (In a situation like the one we’re in today, the deficit is enabling the U.S. to stay at the helm of the economic recovery. Countries are grossly invested in US (not the IMF), and therefore must cross their fingers that a correction takes place).
I agree with Yglesias that investment in education has been grossly overlooked by administrations over the last 50 years. Were funds to be properly allocated in this sector, it would indeed be a worthy long-term investment on the future of America. That said, billions of dollars are invested in health care – on a private and public basis. That, my friend, is why you have access to the best doctors, medicine, and medical / surgical advancements in the world. Yglesias is touting health care investment in this article, when his underlying motive is health care reform. The issue of reform never would have crossed the Bush administration’s mind because it’s a fundamental political difference between Bush and his cohorts verses Obama, Clinton, and other leading Democrats.
Again – “unproductive investments in housing” is a crock. To pin the financial crisis on one political party societal class, or single monetary pitfall in the last seventeen years is comical.
As for his last tidbit: we are a nation founded upon the idea of “manifest destiny”. This has consequently fallen into our mindset of private estates (whether you’re a rapper or CEO). And capitalism has been a major proponent in affording us the luxury of obtaining such a mindset. This land of plenty could always have better infrastructure, and over time will – though perhaps not at the rate in which you and many Democrats would like. You’re desires are not unmerited. They’re just that – desires – and are therefore natural. But, in general, I find it hard to agree that our roads are poor or cities are unsafe. (Come on!). I’ll give him a major pat on the back in pointing out the shortcomings of our education system. Our mass transit systems are sub-standard because we are a nation that’s people are FAR MORE widespread geographically than any nation with superior transit or railway systems (i.e. Europe). Europe’s been at this “population growth” gig a little longer than we have, and their citizens migrate to inner cities at a rate and number much greater than ours. Our Internet and electrical grid are outdated – but barely so – and understandably given the MAJOR technological advances in the last twenty years. We’ll try to accommodate the 300,000,000 Americans as fast as possible. I’d suggest one thing though: DON’T ALLOW CAP AND TRADE! You do that, and it will be decades before our electrical grids catch up to us. We need readily available coal energy to keep us running as is. Take that away, and you can bet that nations like China and their lack of EPA standards and daily increasing coal infrastructure will leave us in the dust (or smog).
Mac