Learning all the wrong lessons from the 2008 financial crisis

NYT should not fixate on debt as governments respond to the coronavirus pandemic.

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SOURCEFAIR
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I recently wrote a piece for FAIR (4/25/20) about how I felt more optimistic about media reporting on the economic aspects of the Covid-19 pandemic, despite what I saw as a failure to clearly call out capitalist market reliance. The New York Times was calling for people to remember FDR’s Four Freedoms, and even the Financial Times was encouraging readers to think about Beveridge’s Full Employment in a Free Society.

As the piece was set to go live, however, reporting and editorials warning against the scale of debt building up began to show up in the New York Times with greater frequency. While Neil Irwin (4/24/20) and Paul Krugman (4/27/20) are doing their best to remind Times readers that we should not start worrying about deficit spending in response to the pandemic, we also see lines (4/28/20) about the Italian government’s “dangerously high” pre-coronavirus debt in articles discussing Europe’s coronavirus reaction, and columns (4/22/20) warning Europe not to even think about pooling its debt, despite the worrying trends of another core vs. periphery divide in the Eurozone’s response to this crisis.

As a brief refresher, the traditional Econ 101 argument against increasing national debt is the possibility that global perceptions of the borrowing country’s risk of being unable to pay back that debt will lead that countries’ creditors to stop lending, and interest rates will rise precipitously, leaving that country seriously constrained, or even unable, to use non-tax-financed fiscal policy.

However, the actual relationship between debt and growth is ambiguous. First, we expect deficits and debt to rise countercyclically; in times of recession, tax revenues fall and government expenditures rise. These trends reverse when GDP resumes growth after the shock to the system has abated. Second, large economies with currencies that are widely used as reserve currencies or government bonds that are widely considered safe and liquid assets, like the United States or Germany, a dominant economy in the Eurozone, are less likely to see a decline in demand for their debt, even if their debt increases relative to GDP; this status is sometimes referred to as “exorbitant privilege.”

Smaller economies are at greater risk than the US of incurring private-funding problems if investors’ assessment of their risk of failing to pay back debts increases, as occurred with peripheral European economies in the Eurozone Crisis. The Eurozone doom loop was triggered in major part by the European Central Bank’s failure to act as a lender of last resort for European banks, in contrast with the Federal Reserve Bank’s actions in the US, in the wake of the global financial crisis. This set Irish, Spanish, Italian and other peripheral European governments up for debt crises, as those states rushed to bail out their troubled banks.

Exorbitant privilege generates problems of its own for other global economies, to be sure. But the costs of systemic economic failures in the US, Europe, and beyond are greater than the potential and probably unlikely scenario of rising borrowing costs for the US and German governments a few years in the future.

This makes it troubling to see headlines in the New York Times like “Congress Shovels Trillions at Virus, With No Endgame in Sight” (4/24/20), which introduced an article that described unprecedented congressional action to authorize “a series of ever-larger taxpayer-financed spending packages.” The tone of this particular article was discordant: On the one hand, the economy, and Americans, are in dire need of help, but on the other, this build-up of debt is unfocused and unsustainable, citing “Republican concerns about how much Congress was adding to the national debt with all of its government spending.” Jim Tankersley, one of the authors, has written extensively about the disparate costs of this crisis being born by the most vulnerable in the economy, which amplifies the incongruity of the messaging.

There seems to be some cognitive dissonance in this emerging trend of criticizing the debt. The New York Times editorial board’s “Failing to Help Those Who Need It Most” (4/24/20) indicted a crumbling relief system that strands households and small businesses lost in the process of applying for aid, implying the importance of spending now to prevent even greater economic calamity later. Times reporting before and after this editorial—“Jobless Numbers Are ‘Eye-Watering,’ but Understate the Crisis” (4/23/20) and “Stymied in Seeking Benefits, Millions of Unemployed Go Uncounted”  (4/30/20)—explicitly noted that this decrepit yet essential infrastructure has so slowed the process of administering unemployment insurance, a key statistic for gauging economic performance and labor market outcomes, that unemployment figures have likely been understated by one-third to one-half their actual levels. Delays in administering aid reflect the structural bias state governments have against offering unemployment insurance; the costs of these fiscal failures are apparent, as fewer people receive aid, and more people are rejected when they apply, all in the midst of an unprecedented economic crisis.

In “Fed Suggests Tough Road Ahead as It Pledges to Help Insulate Economy” (4/29/20), Jenna Smialek emphasized Fed chair Jay Powell’s message that, as bad as things are now, the economy will be worse three months from now. The editorial “Covid-19 Threatens Global Safety Net” (4/22/20) extended this view to the global level, arguing that neglecting the needs of emerging market economies, let alone the Trump administration’s tactic of antagonizing international organizations like the World Health Organization, courts humanitarian disaster and raises global health risks beyond their present intolerable levels. Even reporting on Western economies emphasizes this—in “European Slump Is Worst Since World War II, Reports Show” (4/30/20), Jack Ewing and Matina Stevis-Gridneff identified the scale of European recession in 2020 as between 5% and 12% of total GDP.

These New York Times pieces highlight something important: We need our government to spend to alleviate the crisis; fiscal expenditure also helps society to function outside of crisis times. All spending is not graft—whether in the form of misdirected checks to households, deals with cronies or family members of the president and his cabinet heads, or grants to the largest firms in certain industries. The New Deal had hits and misses among its myriad programs, and Keynes (General Theory, p. 162) argued at the time that it was too small by half for his preferences.

At the same time, as Tankersley and Emily Cochrane emphasized in “Congress Shovels Trillions at Virus, With No Endgame in Sight” (4/24/20), the destination of spending and forms of relief deployed by our government and central bank do matter. All debt is not equal, and as Ruchir Sharma noted in an op-ed, “This Is How the Coronavirus Will Destroy the Economy” (3/16/20), the structural indebtedness of major corporations is a large-scale problem in the midst of the crisis triggered by the pandemic.

The point, as all seem to agree, is that Congress should be authorizing expenditure to the degree possible, while best directing it both to the people and businesses in need, as well as improving the administrative capacity federal, state and local governments have to actually distribute that aid. This is particularly urgent as states’ tax revenues decline with the progress of the economic crisis, given their individual inabilities to run deficits (New York Times, 4/15/20).

Irwin argues, in “Did America Learn Anything from the Last Economic Crisis?” (4/24/20), that Congress, or at least congressional Republicans, seem on course to repeat their insistence (bipartisan in the aftermath of 2008) on worrying about deficits and debt too soon, what Irwin calls “bailout fatigue.” Irwin also notes, in his report (4/29/20) on the Federal Reserve chair’s April 29 news conference, that the Fed was prepared to take whatever steps necessary to facilitate as much spending as possible now in the moment of crisis.

Media reports on the economy shape popular narratives of how we experience crises and their aftermaths; when reporters and editorial contributors to the New York Times reiterate the notion that government spending is anathema, or that we need to be worrying about debt even as we fight the coronavirus, we are setting ourselves up for a rerun of the response to the global financial crisis, with a bigger crash in honor of its sequel status.

If consensus is that depression circumstances are likely to prevail for the next five years, Ben Casselman notes in his article “Worst Economy in a Decade. What’s Next? ‘Worst in Our Lifetime’” (4/18/20), then reporting by papers like the New York Times should do what it can to open readers’ minds to the range of policies necessary to respond, and prepare them to accept that long-term stagnation, not debt, is what they should be worrying about. Reporting that identifies the way that aid should work, or the infrastructural failures that hamper responses to the crisis, are essential now, both for addressing the present moment and for changing the system to benefit us all in better times that may be a long time coming.

FALL FUNDRAISER

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