What got us into this mess

Dad,

I’m afraid you are going to have to change your tactics now that we’ve taken this debate from ramblings at the dinner table to the internet. Logic that might be convincing after a few beers just doesn’t hold up when I have some free time and Google at my disposal.

With respect to the Stanford model and your “double-dip” recessions prediction, which one is it? Was the economy rebounding by Obama’s inauguration, or have we not seen the end of this recession? You can’t have it both ways. Your argument seems to be that the economy was coming out of the recession on its own, but it’s faltering over “fear” of Obama’s policies. Can’t we at least agree that fiscal stimulus has the short-term effect of boosting aggregate demand and increasing economic activity? It would be an interesting discussion to talk about whether or not the stimulus is wasteful in the long-term, but there isn’t any merit saying that fiscal stimulus is going to cause collapse in the short term because it wasn’t needed.

Another more blatant flaw in your logic is your use of the misery index to prove that Reagan’s economy was far worse than Obama’s. Using that metric, the 81 recession was almost twice as bad as the Great Depression itself! 1932 unemployment peaked at 23.6 percent, but there was 10% deflation, so the misery index was a mere 13.5%. It’s pretty clear that you don’t need inflation to be in world of economic hurt, so the misery index just isn’t as useful as it once was. If you want to see clearly how Obama’s economy was worse than Reagan’s look here:

http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/

Reagan’s percentage change in employment peaks at -3.1%, but the 2007 recession doubles that. Change in real GDP hits -3.7% for Obama, and -2.7% for Reagan. Obama’s recession is also significantly longer, even if the bean-counters haven’t figured out the exact ending date yet.

Your use of the misery index is about as outdated as the rest of your Reagan-era logic, and it’s that sort of thinking that got us here in the first place. According to Cheney: “Reagan proved deficits don't matter.” I guess that’s how you justify a massive expansion of the federal government, a huge military buildup and tax cuts that dwarf the size of Reagan’s tax cut (http://www.taxfoundation.org/news/show/323.html shows that Bush’s 2001, 2002 & 2003 tax cuts when combined equal 2% of National income vs. 1.4% for Reagan’s Economic Recovery Tax Act of 1981). And now that Obama has to simultaneously head off the worst recession since the Depression you start worrying about budget deficits? While the current budget deficits are sobering, at least we can have a discussion about the real numbers now that Obama ended special appropriations and other accounting tricks that shielded hundreds of billions from the real deficit under Bush.

We could play the blame game all day long between Bush and Obama, so let me suggest an alternative. According to George Soros, the real blame goes back to Reagan himself. Our discussion encouraged me to read through the transcripts posted here:
http://www.soros.org/resources/multimedia/sorosceu_20091112

Some of the more interesting points:

• By promoting the misconception that markets are self-correcting, Reagan and Thatcher spawned a mega bubble that is now breaking and we are paying for. Time and time again, governments have stepped in to rescue the “self correcting” markets, but we don’t learn from our mistakes. This financial crisis marks a turning point when the weaknesses of the Reagan-era market fundamentalism are exposed.
• Obama risks “owning” a predicted “double-dip” recession because he used the “confidence multiplier” to create a self-reinforcing but ultimately unfounded and premature rebound of the stock market and economy. [I threw this one to encourage you to read more even though Soros is a liberal]
• China will stand out as the clear winner in this chaos, and we need to replace our market fundamental brand of capitalism lest it be eventually replaced by China’s “state capitalism”. China’s system, despite the inherent flaws in political manipulation of the markets has done a better job of preventing the bubbles so prevalent in our system. Interestingly, he also predicts that China will not let the RMB float against the dollar because it would destroy “a remarkably efficient method of unleashing the creative, acquisitive, and entrepreneurial energies of the people who are allowed to pursue their self-interest while the State can cream off a significant portion of the surplus value of their labor by maintaining an undervalued currency and accumulating a trade surplus .“ (See the final lecture “The way ahead” for the China stuff.)
  

Son