June 2, 2011
The Mistake of 2010By PAUL
Earlier this week, the Federal Reserve Bank of New York published a blog
post about the “mistake of 1937,” the premature fiscal and monetary pullback
that aborted an ongoing economic recovery and prolonged the Great
Depression. As Gauti Eggertsson, the post’s author (with whom I have done
research) points out, economic conditions today — with output growing, some
prices rising, but unemployment still very high — bear a strong resemblance
to those in 1936-37. So are modern policy makers going to make the same
Mr. Eggertsson says no, that economists now know better. But I disagree. In
fact, in important ways we have already repeated the mistake of 1937. Call
it the mistake of 2010: a “pivot” away from jobs to other concerns, whose
wrongheadedness has been highlighted by recent economic data.
To be sure, things could be worse — and there’s a strong chance that they
will, indeed, get worse.
Back when the original 2009 Obama stimulus was enacted, some of us warned
that it was both too small and too short-lived. In particular, the effects
of the stimulus would start fading out in 2010 — and given the fact that
financial crises are usually followed by prolonged slumps, it was unlikely
that the economy would have a vigorous self-sustaining recovery under way by
By the beginning of 2010, it was already obvious that these concerns had
been justified. Yet somehow an overwhelming consensus emerged among policy
makers and pundits that nothing more should be done to create jobs, that, on
the contrary, there should be a turn toward fiscal austerity.
This consensus was fed by scare stories about an imminent loss of market
confidence in U.S. debt. Every uptick in interest rates was interpreted as a
sign that the “bond vigilantes” were on the attack, and this interpretation
was often reported as a fact, not as a dubious hypothesis.
For example, in March 2010, The Wall Street Journal published an article
titled “Debt Fears Send Rates Up,” reporting that long-term U.S. interest
rates had risen and asserting — without offering any evidence — that this
rise, to about 3.9 percent, reflected concerns about the budget deficit. In
reality, it probably reflected several months of decent jobs numbers, which
temporarily raised optimism about recovery.
But never mind. Somehow it became conventional wisdom that the deficit, not
unemployment, was Public Enemy No. 1 — a conventional wisdom both reflected
in and reinforced by a dramatic shift in news coverage away from
unemployment and toward deficit concerns. Job creation effectively dropped
off the agenda.
So, here we are, in the middle of 2011. How are things going?
Well, the bond vigilantes continue to exist only in the deficit hawks’
imagination. Long-term interest rates have fluctuated with optimism or
pessimism about the economy; a recent spate of bad news has sent them down
to about 3 percent, not far from historic lows.
And the news has, indeed, been bad. As the stimulus has faded out, so have
hopes of strong economic recovery. Yes, there has been some job creation —
but at a pace barely keeping up with population growth. The percentage of
American adults with jobs, which plunged between 2007 and 2009, has barely
budged since then. And the latest numbers suggest that even this modest,
inadequate job growth is sputtering out.
So, as I said, we have already repeated a version of the mistake of 1937,
withdrawing fiscal support much too early and perpetuating high
Yet worse things may soon happen.
On the fiscal side, Republicans are demanding immediate spending cuts as the
price of raising the debt limit and avoiding a U.S. default. If this
blackmail succeeds, it will put a further drag on an already weak economy.
Meanwhile, a loud chorus is demanding that the Fed and its counterparts
abroad raise interest rates to head off an alleged inflationary threat. As
the New York Fed article points out, the rise in consumer price inflation
over the past few months — which is already showing signs of tailing off —
reflected temporary factors, and underlying inflation remains low. And smart
economists like Mr. Eggerstsson understand this. But the European Central
Bank is already raising rates, and the Fed is under pressure to do the same.
Further attempts to help the economy expand seem out of the question.
So the mistake of 2010 may yet be followed by an even bigger mistake. Even
if that doesn’t happen, however, the fact is that the policy response to the
crisis was and remains vastly inadequate.
Those who refuse to learn from history are condemned to repeat it; we did,
and we are. What we’re experiencing may not be a full replay of the Great
Depression, but that’s little consolation for the millions of American
families suffering from a slump that just goes on and on.