In a word - no.
Populists on the left and opportunists on the right have taken to condemning the series of “bailouts” the government has undertaken since the fall of Lehman Brothers. And certainly I think these situations have been mishandled in a number of respects. And beyond that, I think these situations are inherently problematic in a variety of ways. But there’s a strong case to be made that the policy response to the recession has made things better than they might otherwise have been. When I say something like that, people tend to pester me in response for specifics: What, exactly, would have happened if we’d just let AIG and Citi and Bank of America and others collapse? The problem is that it’s impossible to say, in detail, what would have happened.
Yglesias is right: It’s hard to say exactly what might have happened without the bailouts and stimulus.
But something much bigger is at work today then in the 1930s. It’s the structure of our economy that’s the key – and that dwarfs the effects of government bailouts, stimulus, and related policy.
Our economic class composition and occupational structure have changed dramatically over the past several decades. In the 1930s, the majority of Americans worked in manufacturing and related industries. We had an enormous working class. These industries and jobs are very vulnerable to recessions and business cycle shifts with tremendous ups and downs. Recessions – never mind bigger events like the current crisis – devastate manufacturing and working class jobs - as Michael Mandel, Ryan Avent (which Yglesias more recently cited), and our own research at the Prosperity Institute has detailed. The creative class, which now accounts for some 40 million workers and about a third of the workforce is much more flexible and resilient. It is this changed economic class and occupational structure which are keeping us from Depression-level unemployment rates.
The bailouts and stimulus, while they may help at the margins, also pose an enormous opportunity costs. On the one hand, they impede necessary and long-deferred economic adjustments. The auto and auto-related industries suffer from massive over-capacity and must shrink. The housing bubble not only helped spur the financial crisis, it also produced an enormous mis-allocation of resources. Housing prices must come a lot further down before we can reset the economy – and consumer demand – for a new round of growth. The financial and banking sector grew massively bloated – in terms of employment, share of GDP and wages, as the detailed research of NYU’s Thomas Phillipon has shown – and likewise have to come back to earth.
On the other hand, there is the classic question: What better and more effective things might have been done with these trillions? That’s for historians to ponder and decide. But the combination of the massively misallocated resources produced by the bubble (plus the costs of military adventures) combined with humongous bailout spending puts the U.S. behind the economic eight-ball in a way it has not been in more than a century. Having hold on the reserve currency helps, but it cannot absolve all these compounded sins. Sooner or later the money will run out; bills will come due.
That creates a wide open structural opportunity to accelerate what Fareed Zakaria has dubbed the “rise of the rest” to accelerate. Crises are periods where the relative position of nations and regions can and do change dramatically. (Do I think the U.S. will lose its hegemonic position: Of course not. My hunch is that the U.S. is in the same position structurally as England at the onset of the Long Depression of 1873. It was not until the next major crisis – the Great Depression of 1929 and the onset of WWII that it lost its position to the United States. So worst case: The U.S. has one more long-cycle at the top of the heap). But, just think of all the ways the trillions of bailout money could be used to build the economy of the future. And while you’re doing that imagine that some other places outside the United States that have been patiently building and conserving their resources may start to figure out how to do just that.
The clock of history ticks on. Over time, it tends to leave behind those places who get stuck, get trapped, or try too hard to breathe life back into the old order, neglecting the new one that is emerging. And that’s what really worries me.