Lessons of the “Great Recession” & Next Steps

September will mark the three-year anniversary of the collapse of Lehman Brothers, the catalyst for the market meltdown that triggered the “Great Recession.”

After nearly three years of practical experience with the radical turns in our economy, there are lessons for today’s decision-makers as we grapple with debt, economic growth and regulation.

First, a lesson for Republicans.

The social safety net that Democrats have been advocating for and assembling since 1933 has worked.

There is no doubt that millions of Americans have undergone painful upheaval in their lives, with lost jobs, depleted 401Ks and foreclosure. For those that were highly leveraged, the pain has been worse. Millions still live in uncertainty.

But there can be no doubt that the social safety net cushioned the blow for millions. 

Social Security and Medicare stabilized the livelihoods of seniors. Unemployment benefits, Medicaid and food stamps provided a floor for citizens in free-fall after the market collapse.

As bad as the recession has been, it could have been much worse without these programs in place.

And the empowerment of “Big Government,” which led to the creation of the social safety net over the years, served as a precedent for the large, targeted and ultimately decisive interventions in the private sector that saved global financial sector from complete collapse.

Critical here were the creation of the TARP program, and the Federal Reserve intervention to provide liquidity and keep the credit markets open.

First, TARP.

By backstopping private sector financial institutions, the Federal government arrested imminent financial collapse.  And it ultimately did so for a fraction of the money appropriated for the program. 

Of the $700 billion appropriated for TARP, the ultimate cost to taxpayers for all TARP related initiatives will be about $30 billion; equal to  about a week of federal spending at today’s rates. TARP’s primary initiative – the Capital Purchase Program – which disbursed $265 billion disbursed to distressed banks, will be repaid in full, with interest. An unqualified success.

But TARP itself would not have been enough unless the Federal Reserve had intervened to provide liquidity for the market to prevent interest rates from skyrocketing, and a concurrent freeze lending, which would have been even more devastating to to the US economy.

So, in a moment of maximum crisis, the social safety net and Big Government thinking, credited to Democrats, proved its worth in 2008-09.

But that is not the whole story. Now, a lesson for the Democrats.

The crisis of 2008-09 was actually the apogee for Democratic thinking. 

Indeed the steps taken by the Democrats since 2009 has proved the limits of the Democratic philosophy, as well as the major systemic weaknesses and excesses in the Democratic approach.

First the Stimulus.

The $862 billion Stimulus of 2009 was the single greatest waste of taxpayer money in American history. 

Designed in the Keynesian tradition which holds that government should replace a collapse in private sector demand with massive public spending, the bloated and bureaucratic Stimulus had disbursed only $36 billion before the US economy returned to growth in the third quarter of 2009. Despite being advertised as a jobs bill, unemployment rose from 7.6% to over 10% after the program was approved.

The most damning indictment for the Stimulus can be found in tracking the seven consecutive quarters of positive economic growth and the disbursal of Stimulus monies. It becomes sadly clear that the USG blew nearly a trillion dollars on a pointless program that was ultimately irrelevant to the nascent US economic recovery.

The same holds true for temporary, market distorting programs, such as “cash for clunkers” and the “Making Homes Affordable” tax credit, which provided temporary relief for the auto and housing sectors, but did not contribute to organic economic growth, and was unsustainable without government support.

The Federal Reserve comes up for criticism here. While its initial intervention was necessary to stabilize markets, its actions to “goose” the economy in 2010 by flooding the market with dollars through “QE2” is questionable at best and counterproductive at worst. Manufacturing may have benefited from a lower dollar, but the vast number of Americans suffered more from high commodity prices based on the inflated currency.

Speaking more broadly to the power of government intervention, Obamacare is a prime example of Democratic overreach.

Advertised as a program to make health care available, affordable and cost effective, the final product is a new entitlement built on the creaking pillars Medicare and Medicaid that will wreak havoc on employee sponsored health care regimes, increase costs, limit care and bust the budget.

But Obamacare is crucial to understanding core, Democratic orthodoxy.

Obamacare speaks to a fundamental Democratic conceit; that the best test of success, indeed the only test of success for an entitlement program is how much the government is involved in spending on it. Anything that isn’t “more” is less.

And that is the bright red line between Republicans and Democrats now.

Indeed, this is the basis for the hysterical Democratic reaction to efforts by Republicans to reform entitlements to conform with a tax base that can sustain it, without leaving our children with mountains of debt.

What is missing from today’s narrative is notice that even the most harshly criticized Republican plan does nothing to slash benefits for current or prospective retirees. 

That is a simply, undisputed fact.

GOP reforms would gradually impact people who are currently 55 or less, over a period of years. 

And critically, the reforms being proposed are anything but radical; raising the eligibility age for benefits and means-testing benefits for well-off retirees, providing subsidies to the poor.  Indeed, the “radical” idea of providing premium support for retirees to shop for health insurance on the private market is not all that different from the medical exchanges envisioned by Obamacare.

But for orthodox Democrats, any plan that alters delivery of service, that modernizes a program to take advantage of technology or tools that weren’t yet created at the program’s founded, that correlates benefits to the nation’s ability to pay, that even takes current health, mortality and income into consideration, above all, any program that dilutes the role of government in the process, is automatically a plan to roll grandma off the cliff.

It is a false narrative and ultimately counterproductive.

Here is the unheralded truth.

Today’s crop of elected Republicans are more conservative than any cohort of GOP lawmakers dating back to the Great Depression. Yet the most “radical” plan created by these Republicans to deal with entitlements is a plan that preserves the entitlements.

As late as the 1960s, some conservatives continued to oppose the Social Security program, and the newly enacted Medicare plan.

Now, the fight in not over whether there should be Social Security, Medicare and Medicaid, but how we can afford them. Even the most conservative Republicans have acknowledged the permanence of of these social safety net programs.

Democrats need to declare victory and move on. The big test of the 20th century has been resolved in the 21st.

But having acceded to the permanence of entitlements, Republicans are seizing the high ground in the crucial and practical issues of adapting these programs for a new century with the radically different needs of the population.

Who is for change, and who is for the status quo?

America of 2011 is not the America of 1935, or 1965.

The quantum leaps in technology that have enabled a revolution in personalization – in everything from the music we listen to, to the news we read, the banking and insurance services we use, the health care we seek and even the education we choose – has far outpaced the government’s ability to quantify, define and provide for the public at large in a manner that is either qualitatively better or more cost effective. What worked in the Great Depression is simply irrelevant to the global conditions of today.

Recognizing that fact isn’t a defeat.

Indeed, embracing it is the key to solving our structural and long term financial challenges.

We are closer to basic, philosophical agreement than we realize.  We just need to seize the day.