The Old Remedies Won't Work This Time

A Different Recession
By Harold Meyerson
In a normal recession, the to-do list is clear. Copies of Keynes aredusted off, the Fed lowers interest rates, the president and Congresscut taxes and hike spending. In time, purchasing, production and loansperk up, and Keynes is placed back on the shelf. No larger alterationsto the economy are made, because our economy, but for the occasionalbump in the road, is fundamentally sound.This has been the drill in every recession since World War II.Republicans and Democrats argue over whose taxes should be cut the mostand which projects should be funded, but, under public pressure to dosomething, they usually find some mutually acceptable midpoint and enacta stimulus package. Even in today's hyperpartisan Washington, the oddsstill favor such a deal.This time, though, don't expect that to be the end of the story --because the coming recession will not be normal, and our economy is notfundamentally sound. This time around, the nation will have to craft newversions of some of the reforms that Franklin Roosevelt created to steerthe nation out of the Great Depression -- not because anything like amajor depression looms but because we face an economy that's been warpedby two developments we've not seen since FDR's time.The first of these is the stagnation of ordinary Americans' incomes, aphenomenon that began back in the 1970s and that American families haveoffset by having both spouses work and by drawing on the rising value oftheir homes. With housing values toppling, no more spouses to send intothe workplace, and prices of gas, college and health care continuing torise, consumers are played out. December was the cruelest month thatAmerican retailers have seen in many years, and, as Michael Barbaro andLouis Uchitelle reported in Monday's New York Times, delinquency rateson credit cards, auto loans and mortgages have all been rising steeplyfor the past year.What's alarming is that this slump in purchasing power doesn't appear tobe merely cyclical. Wages have been flat-lining for a long time now, thehousing bubble isn't going to be reinflated anytime soon, and the upwardpressure on oil prices is only going to mount. As in Roosevelt's time,we need a policy that boosts incomes and finds new solutions for ourenergy needs.FDR's long-term income remedies included Social Security, the Wagner Act(which made it possible for many workers to join unions) and publicworks projects -- including a massive electrification of rural America.A comparable set of solutions today would include the passage of theEmployee Free Choice Act, which would enable workers in nonexportableservice-sector jobs to unionize without fear of being fired. It wouldinclude a massive, federally financed program to retrofit America,creating several million "green jobs" in the process.On these issues, there's a clear difference between the two parties.Barack Obama, Hillary Clinton, John Edwards and the congressionalDemocrats favor these measures; the Republicans oppose them (though JohnMcCain at least has begun speaking about creating green jobs).What Republicans favor is simply more tax cuts, which will do nothing toaddress our deeper problems of income distribution and energy dependence.The second way in which the current downturn echoes the Depression isthe role played by our deregulated financial sector. Now, as then, thefinancial foundations of our leading banks and other lendinginstitutions have turned out to be made of mush. Now, as then, this newshas come as an appalling surprise not just to consumers but to many ofthe banks themselves. Now, as then, the banks created such complex anddeliberately opaque financial vehicles -- all devised to make them abuck every time they swapped some paper -- that they long ago lost trackof the paper's true value.In his time, Roosevelt, through the Securities and Exchange Act andother legislation, compelled banks to be both more prudent andtransparent. Over the past 30 years, however, Wall Street has created ahost of new, unregulated institutions (such as private equity companies)and devices (such as the bundled, and bungled, resale of mortgages intoever-larger investment pools). Now it's time to enforce sometransparency and prudence regarding financial institutions that havebeen gambling with other people's money and lives.When it comes to reining in Wall Street, however, the Democrats havebeen AWOL almost as much as the Republicans have been -- not leastbecause their presidential candidates get so much money from WallStreet. By refusing to take on the Street, however, they forfeit whatcould be a potent issue this fall and lay the groundwork for yet anotherrecession.