Bust the Slump First

Originally posted at TNR.com

February 25, 2009

Two weeks ago, at his first press conference, President Barack Obama grabbed our attention by insisting that we face a potential "lost decade" of growth, a reference to the prolonged slump in Japan during the 1990s. As a statement of our predicament, this was brilliant, breathtaking, and refreshing: Remember that most American presidents choke on the word "recession" and would never consider hinting at anything worse.

The prospect of a lost decade concentrates the mind and urges consideration for bold proposals. We've never faced anything like this, at least in our lifetimes, so surely we must reach out for solutions that have never previously seemed reasonable.

Two weeks later, looking back and thinking about how Tuesday night's speech moves us forward, the storyline seems more confused. President Obama spoke at length and convincingly about the benefits of government action in the areas of energy, health care, and education. These are important, perhaps even vital, to the country's future, but none strike at the heart of our most pressing economic problems.

We now have in hand a fiscal stimulus that is only moderately stimulative. It might be as good as we could have expected-discretionary fiscal policy acquired a bad reputation for a reason-but it certainly seems unlikely to be the primary means of escape from this crisis.

We've also been handed down a housing policy that seems sensible but again rather moderate. There is no sign of a massive breakthrough on this front.

And this brings us to banking. On this, we have heard only vague statements from the Treasury Secretary; convincing details are apparently just around the corner. The president's speech tonight suggested some relevant points-we'll try not to be too nice to bankers-but there was no clearly laid out banking strategy. This was in striking contrast with the coherent energy, health, and education plans that the president plainly put on the table.

Are we in danger of losing a decade or not? If we are, then pulling the economy out of its slump should be the top priority and explaining the full strategy for recovery could easily occupy an hour in a major speech. We need to know more, for example, about how the administration wants monetary policy to be handled (as the Fed will listen), and what its global economy strategy will be (because this is a worldwide problem).

If we start to lose a decade-think about zero employment growth for a moment-and don't have an exit strategy, then no amount of energy, health, and education planning will make a difference.

It was a good speech to Congress on Tuesday night. The tone was positive. The longer-run vision was clear and well articulated. But how do we avoid a decade-long global economic slump? And when will the president lay out and begin to build support for his full, slump-avoidance strategy?

Simon Johnson is a senior fellow at the Peterson Institute for International Economics and a professor at MIT.