Economic History Lesson

I have always been fascinated by political and economic history. No matter how painful the era, it can prove to be both instructive and constructive in shaping our nation, our world, and our lives. We’re living through such a period.

Lawrence H. Summers, President Obama’s chief economic guru, offered his view of the current economic crisis as well as historical spin at yesterday’s meeting of the Economic Club of Washington. Ten years ago, he appeared on the cover of Time magazine with two officials who were considered the sharpest economic problem solvers of our times — Clinton Administration Treasury Secretary Robert Rubin and then-Federal Reserve Chairman Alan Greenspan. The triumvirate were hailed as the “Committee to Save the World,” having contained financial catastrophes in Russian, Asian, and Latin American financial markets. What a difference a decade makes. Rubin would have his reputation soiled after being forced to resign from the board of Citgroup this year. He was cited as being responsible, in part, for the once-powerful financial institution racking up a whopping $20 billion in losses due to the subprime mess. And Greenspan, once the economic oracle who could move markets by clearing his voice, now has to defend his record as a number of economists blame his monetary policies for wrecking the American economy. As for Summers, who served as Treasury Secretary when Rubin left the Clinton Administration in late 1999, he is now one of the architects of what one can characterize as Obama’s “Committee to Save America.”

He admits that “the challenges we face now are, frankly, much greater than the challenges we faced then … Then, the financial crises were in other countries. Now the financial crisis is here.”

What’s curious about Summers’ assessment of the Obama administration’s policies is the intent to make today’s economic tsunami a footnote instead of a volume in American history. “When my kids studied U.S. history, they learned a lot about the 1930s and what happened in the economy then. They learned almost nothing about what happened in the economy over the last four or five decades. [Events like] the fluctuations of the 1982 recession just wasn’t something that made it into a history lesson. I think our challenge now is to make sure that we do everything we can to contain what we inherited so this serious economic downturn will not be looked at a generation from now as a historic event.”

Summers’ discourse was optimistic for the most part. He maintained that the economic “free fall” was likely to end in the next few months. A bit of encouraging news over the past week may be viewed by some as confirmation of his assertion. Earlier this week, a New York Times/CBS News poll showed Americans had grown more confident about the direction of the country in the 11 weeks since President Obama’s inauguration. According to that poll, the number of people who held that view jumped from 15% in mid-January to 39% today, while the number of individuals who believed the nation was headed in the wrong direction dropped from 79% to 53%. And on Thursday, stocks surged more than 3% based on a better-than-expected earnings report from Wells Fargo, one of the nation’s largest consumer banks. As a result, the Dow Jones Industrial Average posted gains of 246 points to close at 8,083. And the S&P 500 has risen more than 25% since stocks hit bottom on March

9, considered one of the most impressive bear market rallies since the Great Depression. More important, recent news reports reveal that credit markets have started to thaw and historically low-interest rates have spurred home-buying activity in hard-hit markets.

But it’s much too early to say that the critically-ill patient is recovering. He just blinked his eye. To use Summers’ metaphor, the policy approach of the Obama administration can be compared to that of a high-wire act. “It’s a very delicate balance the administration is going to have to walk” to make sure that the country doesn’t spiral into a deflationary cycle reminiscent of Japan’s “Lost Decade” of the 1990s when the meltdown of the real estate and stock markets caused a prolonged economic slump in what used to be the world’s second largest economy. Economic historians maintain that the Japanese government was too tepid in its economic stimulus policies. As a result, consumers lost confidence as they held on to their money. Unemployment rose and businesses failed as prices plunged. To this day, Japan has never fully recovered. “That’s why the president thought it was so important to have such a

large program of fiscal stimulus at the beginning of the administration, why there’s been such an ambitious set of efforts to support credit markets,” Summers told his audience. “Now I do think that [we] really have a huge challenge for us as a country. You can think about it as a model for a company. It is really important that for the next two to three years the company step on the gas and expand its activities. After that, it’s going to be really crucial to restrain expenditures. That’s a difficult strategy to implement.”

But what’s needed will be a focus on the long term–and loads of patience. He asserts that “the president’s emphasis on health care, infrastructure, and, in particular, restructuring the energy economy aren’t luxuries to be deferred at a time of a weak economy. They actually are an integral part of a strategy for having a sustained kind of economic expansion. That really needs to be our objective so that these next years aren’t just a period of recovery but a period of renewal as well.”

Derek T. Dingle is the editor-in-chief of Black Enterprise magazine.