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HOW SAFETY NETS PROTECT AGAINST FISCAL COLLAPSE.
Speaking at New America just now, Laura Tyson, who served as president of Clinton's Council of Economic Advisers and is now a member of the Volcker Commission, drew an interesting contrast between the impact the economic crisis has on American consumers and European consumers.
"Think of this from the perspective of individual citizens," she said. "We're the ones who are going to see a huge increase in homelessness, in people without health care, in people without unemployment benefits, and in people not getting the education they need. The Europeans are right to say that they have strong automatic stabilizers in effect. From the perspective of Americans, it's worse for them. They're undercapitalized, overleveraged, and they don't have a serious safety net protecting the key things they need to worry about."
This might, she implied, help explain why America has been so much more aggressive about countering the crisis. They are much more vulnerable to recession than the Europeans. As evidence, she brought up every economist's favorite bugaboo: Japan's lost decade. It was bad for growth, she argued, but not particularly devastating to individuals. "The Japanese households, in the last decade and a half, they never experienced the economy the way economists experienced it," she said. "The economist saw the economy as in dire shape. You asked the average Japanese person if they were in dire shape, they didn't see it that way."
You could argue, on the one hand, that this serves the American system well. We're not insulated from emergency and so we respond swiftly and, relative to the Europeans, decisively. But it also worsens crises by further slackening economic demand. A consumer afraid of losing her health care and her child's college education and her income will pull much further back than a consumer who feels the fundamentals of her existence are secure.
At dinner last night, Tyson spoke of the downward multiplier that crises of confidence can inflict: The economic impact of Lehman's collapse, she says, was multiplied because it devastated the financial system's confidence in its own survival. The analogy holds to our safety net, where consumer reactions to fiscal instability are multiplied because they can't be certain of their economic survival.
COMMENTS (10)
"...They're undercapitalized, overleveraged, and they don't have a serious safety net protecting the key things they need to worry about."
And who is responsible for Individauls being undercapitalized and overleveraged? Who is responsible for not getting the education they need?
Who forced all these people to not save and to live beyone their means? Who put the gun to their heads?
That being said, I am not unsympathetic. However, it's wholly unfair to not ask individuals to take at least some responsibility for their lives. Paleeeze!
Posted by: El Viajero | March 26, 2009 12:35 PM
"You could argue, on the one hand, that this serves the American system well."
If the "American system" doesn't actually include the health and welfare of the people who live under it.
GDP per capita is a lousy measure of national prosperity; any decent economist not speaking for publication will tell you that (and a lot will say it for publication). Its only virtue is that it's relatively easy to estimate and better than a lot of the other really lousy measures.
It's too bad Amartya Sen never existed, because if he had people wouldn't say such bizarre things in polite conversation.
Posted by: paul | March 26, 2009 1:21 PM
Take a look at France - the bugaboo America uses when talking about the economic "straight jacket" of socialism.
They run deficits higher than us (and have lower growth) normally. But right now, their deficit is about 1/3rd of ours (esp. the projected deficit this year) and their GDP decline much less than ours.
This is because they fund a generous social safety net all the time, so they don't have to take decisive, deficit-increasing action during busts.
The argument that our system is better because the growth is "better" during boom times has proven false. It's only better from some number an economist measures, or the increase in wealth amongst the already wealthy. For everyone else the boom times are barely helpful and the bust sucks.
We've got it wrong here, and could do worse than looking to the more generous safety net countries for some guidance. There's a long way to go from our "you're on your own" status to "cradle to grave complete welfare state". I'm pretty confident we'll find the right place to stop if we try.
Posted by: jcricket | March 26, 2009 3:26 PM
Take a look at France - the bugaboo America uses when talking about the economic "straight jacket" of socialism.
They run deficits higher than us (and have lower growth) normally. But right now, their deficit is about 1/3rd of ours (esp. the projected deficit this year) and their GDP decline much less than ours.
This is because they fund a generous social safety net all the time, so they don't have to take decisive, deficit-increasing action during busts.
The argument that our system is better because the growth is "better" during boom times has proven false. It's only better from some number an economist measures, or the increase in wealth amongst the already wealthy. For everyone else the boom times are barely helpful and the bust sucks.
We've got it wrong here, and could do worse than looking to the more generous safety net countries for some guidance. There's a long way to go from our "you're on your own" status to "cradle to grave complete welfare state". I'm pretty confident we'll find the right place to stop if we try.
Posted by: jcricket | March 26, 2009 3:27 PM
Nice and succinct dismantling of right-wing Republicanism, as much so as I've ever seen. Good to spread around.
Posted by: urban legend | March 26, 2009 4:00 PM
And who is responsible for Individauls being undercapitalized and overleveraged? Who is responsible for not getting the education they need?
Viajero seems to forget that those who got the "education they needed" in the last couple of decades also got a millstone of debt. For all that he wants to blame this on his usual bugbears, it's the educated middle-class that has been royally screwed over.
Posted by: Viajero = Clueless | March 26, 2009 6:12 PM
Yeah, you're right.
Why try
The deck is so stacked against you that you might as well just give up, work in a restaurant and complain about your problems.
Posted by: El Viajero | March 26, 2009 6:50 PM
You know, I think we're painting "Europe" with too broad a brush. There's western Europe that most people think of (Sweden, France, etc.) when they're bringing up the better support networks.
I really wonder if this is at all true in Eastern European countries and whether the lack of initiative on the part of the Western Europeans might have unfortunate consequences for countries which but twenty years ago were still living under communist dictatorship.
Even beyond the newer members of the EU, what about the other countries that used to lie behind the 'Iron Curtain'? I'm thinking in particular of Ukraine, etc.
Bad times aren't good for nascent democracies. We see how this played out pre-WWII. I'd be very concerned.
Posted by: leo | March 26, 2009 8:22 PM
You are missing the main story: measuring "the economy" by GDP is fundamentally flawed. The US economy has been a train wreck not just since 2008 but since at least 2001. Median household income has gone down and employment has gone down (though incompletely measured by official unemployment numbers) *despite* economic growth of more than 10% *per capita* during that period (if we can believe the official figures). The vast majority of Americans have not benefited from any of that growth.
Americans are chasing after the wrong hare. Neither is economic growth a good per se nor is its absence a problem per se and orienting policy towards restoring "growth" at all cost will turn out to be a costly and perhaps tragic mistake. Policy goals should be employment and sustainability.
Posted by: piglet | March 27, 2009 11:19 AM
...those who got the "education they needed" in the last couple of decades also got a millstone of debt.
Gee, why doesn't liberal thought ever look beyond the surface? Screw Wall Street. Wanna be rich? Go into academia!
http://www.thecrimson.com/article.aspx?ref=525392
University President Drew G. Faust’s first-year salary will not be released until this spring. In 2006-2007, Ivy League presidents earned between $1—former University President Derek C. Bok forewent a salary during his interim term—and $1,411,894, taken home by Columbia University’s Lee C. Bollinger.
Median pay and benefits for the heads of 184 public research universities was $427,400 in the 2007-2008 academic year, up 7.2 percent from the year before.
Ohio State University’s E. Gordon Gee, whose $310,000 bonus announced earlier this month brought his total compensation for last year to $1,346,225, was the highest-earning executive at a public university.
Posted by: Anonymous | March 28, 2009 9:51 AM