Is This the Iraq Recession?

Posted by Matt Stoller, Open Left at 11:10 AM on January 23, 2008.

I just got back from the New America Foundation forum on the economic crisis, with presenters from the McCain, Edwards, Obama, and Clinton. Apparently the Romney, Paul, and Huckabee campaigns were going to send reps, but did not. I wanted to test out the 'Iraq Recession' frame, which Moveon put out in an email a few days ago when discussing the stimulus.

Basically, this is the closest any of us are going to get to Davos, the exclusive global elite conference going on in Switzerland right now where the freakout du jour is the credit crunch and coming recession. Multiple Democrats made the point that this is not a 'subprime' mortgage crisis, it's a credit crisis reflecting many sectors of the economy. Leo Hindery from the Edwards campaign said it's a crisis involving regulatory neglect combined with trade, current account, Federal, state, and consumer deficits and debt. He was by far the most radical in his diagnosis of the problem, which coheres with the politics of the Presidential campaign.

Gary Gensler of the Clinton campaign spoke, and I found his speech interesting for the way that he framed Clinton's thinking about policy. Gensler said that Clinton is an extremely thorough policy-maker, and won't put out policy unless she has personally ensured that it is rigorously done. But he also added that she is listening to voters on the campaign trail (he spoke of her 'conversation' with the country that she announced upon the start of her campaign), and she is hearing that middle income voters are suffering because of housing and energy costs. This explains why her plans are targeting these areas, and why she's become much more liberal in her rhetoric. Gensler also mentioned Clinton's embrace of 'smart trade' instead of simply free trade.

Kevin Hassett of the McCain campaign also spoke, and he gave a remarkably uninspiring and status quo argument for tax cuts for corporations as well as entitlement reform (ie. gutting Social Security). Hassett basically doesn't see anything particularly problematic in our current predicament except that the long-term crises of Medicare and Social Security are going to cause the markets to 'punish' us, and that corporate tax rates have stacked the deck against companies that invest in America due to lower tax rates abroad. In an unwitting nod to Naomi Klein's Shock Doctrine, he spoke of the current economic crisis as a great opportunity that we should not squander to fix our longer term problems, as well as lauding Bill Clinton's record on free trade and attacking Hillary's recent move away from it.

Obama's advisor, Austan Goolsbee, an economist at the University of Chicago, discussed the need for immediate stimulus in the form of disbursements of cash to low and middle income wage earners through existing channels. He stressed the need for speed in moving a stimulus package that gets money out quickly, and used the traditional Keynesian argument that a stimulus that moves to slowly will hit the economy during the recovery, leading to inflationary pressures instead of help for a sagging economy. In the question and answer session, someone analogized our current predicament and certain policy options to the Weimar crisis, and Goolsbee dismissed this notion out of hand, but I was impressed with his answer on trade. He pointed out that existing free trade agreements are 900 pages long and full of loopholes, and that they aren't in fact helping to open markets in any particularly consistent manner. He'd like free trade, but we don't have it.

After the session, I asked both Gensler and Goolsbee about the frame 'Iraq Recession', and Gensler brushed it aside. "It's not broad enough", he said. He then noted that this recession has deeper causes than just Iraq, that while Iraq is constraining our options (a Steve Clemons phrase) circles in with housing, credit, and oil prices. Goolsbee was much more open to the idea, though he agreed with Gensler that Iraq did not cause our current economic problems. I learned during our chat that the Chicago school economist Goolsbee is friendly with David Sirota. In an argument about free trade, Sirota actually encouraged Goolsbee to read a trade agreement, who was then horrified at what he found. I can see why elite liberals love Obama, since his advisors seem sincerely open-minded about policy ideas, in contrast to a much more lowest common denominator voter and poll-driven top-down approach from Clinton. Both approaches have their strengths and their weaknesses.

During the conversation, I brought up the FISA legislation and swing liberals with Goolsbee, and someone else mentioned that Obama is going to be in DC on Monday afternoon for a fundraiser. The arguments I've gotten from the Obama camp on FISA are that he has scheduling problems with coming to DC, so we'll see, if it's accurate he'll be in town, whether he can make time to help Dodd protect the Constitution. After Saturday in South Carolina, the contest goes national, and this is when Obama could shine and bring home some of those swing liberals with a clear fighting spirit against Bush's top priority.

In my final observation, I'll note that the topic of Iraq did not come up during the forum, and that no one touched on the military budget and its huge imprint on the American economy. It eats up something like 53% of discretionary spending, money that would be useful in dealing with a massive credit crunch and recession. But that money is apparently untouchable and not part of fiscal responsibility. Funny how the Blue Dogs never whine about the military budget in all their harping about excess government spending.

During the forum, I got an email from a super smart financial analyst who pointed out that there is probably very little experience with stagflationary policy-making. I'd feel a lot better about our bumpy road if any of the people who staffed the forum were policy-makers in the 1970s and knew how to deal with something other than the Goldilocks economy of the 1990s.

Matt Stoller is a political activist/blogger in DC, and was an editor at MyDD from November 2005 until June 2007. He also consults for the Sunlight Foundation, FreePress.net, and Working Assets as well as proactively networking other progressive bloggers/internet activists and progressive professionals.