Elliott Parker: Where we went wrong after Sept. 11
September 11, 2011
A decade ago we stood at a crossroads, and we made a choice.
Our economic output had been growing fast for the prior decade – faster than it had grown in any decade since the 1960s. Gross Private Investment reached 18 percent of GDP, its highest level since 1984. Total government expenditures – federal, state and local – stood at less than 30 percent of GDP, its lowest share since 1979. The federal budget was in surplus, and Alan Greenspan, chairman of the Federal Reserve Board, was cautioning Congress that we should not pay off too much of federal debt, since the financial system needed U.S. Bonds.
What a difference a decade makes.
There were warning signs of problems to come. The stock market had just gone through a speculative bubble, especially in tech stocks. There were also signs of a housing bubble starting in California. Private consumption was rising, along with imports, as household savings rates fell. Americans were letting their assets do their savings for them.
The Gramm-Leach-Bliley Act of 1999 had repealed the firewall between investment banks and commercial banks, along with the conflict-of-interest provisions, which had been put in place by the Glass-Steagall Banking Act of 1933. We let mergers create banks that were too big to fail. Some worried that allowing Citibank, Bank of America and other deposit-taking banks to trade in things like mortgage-backed securities and collateralized debt obligations might pose risks for the economy, and the Enron collapse showed that big firms could engage in financial shenanigans that were not in the interest of their shareholders.
But nobody, outside of those people putting together White House intelligence briefings, knew that there were people about to hijack four planes and fly them into the Pentagon, the World Trade Center towers, and, unintentionally, a field in Pennsylvania.
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After the heartbreak of that day, we then made a choice to go shopping.
Had we been called to make a sacrifice, I am confident that most Americans would have proudly responded. We should have cut our demand for foreign petroleum, to reduce the money we turn over every day to people who hated us. We should have invested in making our economy stronger for the long slog ahead, and invested in our education, our infrastructure, and our people.
Instead, we cut taxes and fought two long, unfunded wars with borrowed money. Instead of tightening our belts, we increased our consumption spending to all-time highs on borrowed money, and what we borrowed from abroad created the largest trade deficit in our history. Instead of taking care to prevent another financial asset bubble, we allowed a new one to take hold in housing. Instead of working together as Americans, we used the crisis for partisan purposes. What were we thinking?
The housing bubble frothed, and then it burst. Financial firms made risky bets for short-term gain with other people’s money. The damage done to household wealth led to a permanent decline in consumption; the damage done to banks still discourages them from lending; and the damage done to confidence still discourages private investment. Instead of a recession, we created a new depression. How can we fix it now?
Absent a time machine, there is no easy solution. We were consuming too much of our income, and so we can’t count on consumption to recover and think that will be a long-run solution. We need investment, both private and public, but where do we get the money from if we don’t save, unless we borrow more from abroad?
Export growth has been one bright spot during this slow recovery, but the economic problems abroad that this recession aggravated makes that hard to keep going.
When the private sector buys less of what we produce, a good fiscal policy would have the government step in and buy more. But in spite of what many people think, real per-capita government purchases – including what government pays its workers and what it buys from private companies – are lower now than before the recession began. The federal government has bought more, yes, mostly in military spending. But state and local governments have bought less.
What the federal government did, however, is give more away in tax cuts and benefits. Certainly this helped to slow the decline in consumption, but it was hardly enough to replace the fall in private investment. Certainly the millions who received unemployment benefits needed them, but how much better would it have been not to destroy their jobs in the first place?
This weak combined fiscal policy response only slowed the bleeding, but it was not a permanent solution. In the short run, borrowing made sense to keep the economy from spiraling downward, but in the long run we need to save more, in both the private and public sectors.
We need to invest more, in both the private and public sectors, in factories, infrastructure, and education. That will take getting banks to start lending out their excess reserves. We need to export more, and stop importing more, but that will take a fall in the dollar’s value that will be painful to take. We need to re-establish some sensible financial regulation to make sure we don’t go through this again. And we need to act together, as Americans, and not make our economy worse in hopes of winning the next election.
A decade ago, we had a choice, and we screwed it up. Sept. 11, 2001, could have made us stronger, but we chose not to let it, and we blithely walked over a cliff. It is time to pick ourselves up, learn from our mistakes, and make better choices. Is anybody with me?
• Professor Elliott Parker is chairman of the Economics Department at the University of Nevada, Reno.
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