Beltway Media Invent Populist Tight-Rope for Obama

My, here's a fascinating article in the Washington Post. It's revealing both in its uncritical reliance on the received wisdom of the day and its casual burial of what appear to be serious conflicts of interest in a ho-hum throw-away graph.

Let's begin with this lede:

In attempting to harness public anger over the financial crisis on behalf of his budget, President Obama is confronting the politically uncomfortable fact that the success of his long-term agenda and Wall Street's recovery are intertwined.

That depends entirely on what one means by "recovery." We certainly need a functional financial system that performs its core functions -- primarily lending -- adequately. But, as I wrote a few months back, the financial sector has become a large, tumorous growth on the "real" economy:

Here’s a fun fact about the finance industry. Historically, it’s grown and contracted along with the business cycle. When the economy was going gang-busters and businesses were expanding, it was there to provide capital and insurance and connect investors with entrepreneurs and innovators. Then, when the business cycle took its inevitable turn and the economy slowed down, it would contract. But a funny thing happened on the way to the financial meltdown; as the Associated Press noted, "when the Internet bubble burst in 2000, the sector never stopped growing. Instead, it ballooned over the past eight years to around 10 percent of the U.S. economy, puzzling economists."

It’s not such a puzzle. In large part, the continued growth of the sector was based on the explosion in derivatives -- high-value vapor -- rather than anything connected to real growth in the "nuts and bolts" economy.

The recession of 2001 officially started in March, when the financial services sector employed 5.7 million people. At the time, the total value of derivatives held by U.S. commercial banks was estimated to be around $42 trillion. By the third quarter of 2007 -- before the crash -- the financial sector was employing almost 6.2 million people, and the value of derivatives held by American banks had skyrocketed to almost $170 trillion -- almost three times the value of the entire world’s economy.

Presumably, Obama's "agenda" is economy-wide. How'd the rest of America do while Big Finance was growing like a mushroom on a cow-pie:

During the intervening period, the "real" American economy was in doldrums: between 2000-2007, median household income dropped; the number of families living in poverty grew by almost 11 percent and the economy added jobs at the lowest rate in the post-World War II era. (I should add that those employment numbers look a lot worse when you take out the job growth in government and our uniquely inefficient health sector -- between 2001 and 2006, health care added 1.7 million (net) new jobs while the rest of the economy added zero.)

So the connection between Wall Street's health and the broader economy, taken as a given by the WaPo's reporters, isn't that concrete. Or, as economist Dean Baker put it in an interview we did a few months back:

We have to understand, the financial sector is a drain on the economy. That's not a moral statement; it's an intermediate good. This isn't like recreational activities or health care, goods that make us better off as an end in itself. It's an intermediate good, like trucking.

So, if we suddenly saw that more and more of the economy's resources were being used up by the trucking sector, we'd be inclined to say, well, what's going on there? Why do we have 10 percent of the economy in trucking? Of course, we have about 1 percent, but suppose it jumped to 10 percent. We'd think, "we have a really inefficient trucking sector." And that would be the same way we should look at the financial sector.

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