Economist: U.S. won't tolerate a 'Lost Decade'

WASHINGTON — The long-simmering problems that boiled over into a global financial crisis last September require a strong government hand in the workings of the U.S. economy and financial system, according to economist and author James K. Galbraith.

Galbraith, a professor and scholar at the University of Texas at Austin, is the son of the late economist John Kenneth Galbraith, whose books in the 1950s influenced how Americans viewed economics and American capitalism.

In a wide-ranging interview, he shared his views on how the crisis has changed our economic system. Here's some of his thinking, edited into a question-and-answer format:

Q: Has the U.S. financial system changed since September 2008?

A: "Superficially, the administration has tried and succeeded largely in keeping the banking sector alive following the calamities of last year. The question is, 'How have those institutions changed?' And the answer is they changed utterly, and they're not going to change back anytime soon."

Q: There are concerns that the Federal Reserve's incurring massive debts through lending programs could spark a return to 1970s-style inflation if it doesn't trim its holdings. Can the Fed avoid this?

A: "It is not a given. The Fed is acting as a de facto investment banker. It has been talking about an exit strategy, but that's not the same thing as being able to implement it."

Q: Are government stimulus and spending efforts really necessary?

A: "The world has lived with less credit before. It requires that you operate with a stronger, more expansionary fiscal policy. If we are right that we're not going to see the revival of a broad credit-based expansion, you can have economic activity, but it is going to be financed by the government. Any attempt to move toward a 'contractionary' fiscal policy, when you haven't got an expanding private credit system, is going to produce a return to recession very quickly."

Q: So you're not worried about the projected deficit of $1.58 trillion for the current fiscal year?

A: "It doesn't change anything about what has to be done. There is no way around this. If the private economy starts to recover, and you get private contributions . . . then the budget deficit will fall, and anything you are doing can be scaled back. There is nothing that stops government from doing too much and cutting back on it."

Q: Some economists fear a double dip back into recession next year and sluggish growth for years to come. Are we looking at a 'Lost Decade' similar to Japan in the 1990s?

A: "There's no way we're going to tolerate a Lost Decade in this country. It's a fantasy, because the House of Representatives has elections every two years. The country is not going to tolerate 10 percent unemployment indefinitely. People (in power in Washington) need to be aware of that. If they don't take the opportunities now . . . someone else will."

Q: There are economists who think the recession may already be over. When will it start to feel like recovery?

A: "This one it's very hard to see, in part because it is so rooted in the collapse of (fast-rising) credit and home values. It's hard to see a similarly rapid end and turnaround. That's the challenge for policymakers, whose time horizons are probably focused on next year's election."


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