Most Americans have a lot riding on the success of the government's efforts to pull the U.S. economy out of its ditch: individual investors, bankers, Federal Reserve Chairman Ben Bernanke, Democratic politicians, and taxpayers. A somewhat smaller group has a lot riding on the failure of these efforts. I'm not simply talking about investors who are betting against the markets and who believe the recent stock-market rally is overdone. I'm talking about the Failure Caucus, a group spanning the political spectrum that has invested reputations, egos, and, in some instances, their political futures on the notion that we're in for several more years of economic trauma.
The Failure Caucus has several divisions.
A small group of analysts, economists, and journalists accurately predicted the financial apocalypse of 2008. As a result, their reputations have justly been enhanced. The vindicated bears are generally suspicious of the recent turnaround efforts, because they believe that the excesses that caused the problems have yet to be worked off. (I sympathize with many of these folks and consider myself something of an intellectual fellow-traveler.) Peter Schiff, a libertarian money manager who warned of a debt apocalypse, sees much more pain in the future. After all, he says, the rescue—cheap money and government spending—is simply trying to reinflate the original bubble. Nouriel Roubini, who has been dubbed Dr. Doom, believes that we could be in for a double-dip, W-style recession for similar reasons. But at a certain point, negativity can become shtick. And forecasting is extremely difficult. Just because somebody was right in late 2007 doesn't mean he'll be right in 2009.
As I've noted in the past, professional economic forecasters are often wrong at inflection points. When the economy is about to pitch into recession, they forecast growth. When it's about to bottom, they forecast continued contraction. When it's about to shift into higher gear, they see continued idling. Why? Forecasters frequently fall victim to primacy bias: They tend to extrapolate recent trends into the future. That, combined with a suspicion among modern-day economists about Keynesian-style stimulus, has translated into a general sense of pessimism. As recently as May, the professional forecasters surveyed by the Philadelphia Fed predicted the economy would grow at a 0.4 percent annual rate in the third quarter. According to Macroeconomic Advisers, that's likely to be low by a factor of eight! In their most recent projection, the same forecasters upgraded their forecast. They said the economy would grow at a 2.3 percent annual rate in the second half of 2009. Better, but still probably behind the curve.
A surprising number of analysts—the Wall Street Journal op-ed page, my NEWSWEEK colleague George Will, Tories, supply-siders; you know the type—insist on viewing economic and market performance through the lens of politics. Democrats, they know, are bad for markets and the economy, while Republicans are good for both—evidence be damned. They don't need any stinking data to tell them the rescue efforts are going to end in disaster.These are folks who believe that the stock market fell in February and March because it hated Barack Obama (and has rallied since then because he's become less popular)*; who believe that the New Deal prolonged the Depression; and who act as if the last 16 years of fiscal, monetary, and economic history didn't take place. In their view, fiscal stimulus can't work because it's done by the government and the Fed's expansionary efforts must, at all times, always be inflationary. Ergo, we're doomed. (This was the substance of the Paul Krugman-Niall Ferguson feud.) What's both impressive and annoying about these folks is their inability to process information that runs counter to their bedrock beliefs. When data comes in that suggests otherwise, they ignore it or declare victory. Niall Ferguson recently told the Times of London that he "won the argument" he and Krugman had about "the future path of long-term interest rates." (As this chart of the 10-year treasury note over the past two years shows, he's done no such thing.)
This crowd is downright hostile to the optimists. I spent some time on the phone this morning with Michael Darda, an economist at MKM Partners. Darda is no squish. He used to write a lot for the National Review. But when he tells conservative audiences he's expecting the economy to grow at a 4 percent annual rate through the end of 2010, the reaction is frequently disbelief. Darda bases his conclusions largely on his reading of leading indicators, credit markets, and past performance in the wake of recessions—not on who controls the White House. Yes, taxes are likely to rise in 2011, and the Fed will have to tighten monetary policy. But that's no reason to be bearish now, he argues. "The real risk is in being too negative."
That risk is highest for the political division of the Failure Caucus. The conventional wisdom on the right holds that President Obama and his Democratic allies in Congress are setting themselves up for a big fall through their overreaching. But I'd argue that it's the Republican Party, which was always on the side of greater growth, higher stock prices, and more wealth, that has painted itself into a corner. Many Republicans opposed the initial bailouts because they were conducted by an unpopular Republican president in conjunction with a Democratic Congress. (In Todd Purdum's Vanity Fair article , former Treasury Secretary Henry Paulson conspicuously praises congressional Democrats and conspicuously says little about congressional Republicans.) Then they doubled down with virtually uniform opposition to the Obama stimulus bill, which had been watered down to attract Republican votes. In order for Republicans to be vindicated politically, the bailouts and the stimulus—and the economy at large—must fail. Thus considered, every positive data point, every sign of stabilization in the housing market, every rise in the S&P 500, every TARP repayment, is something of a rebuke. As the clouds part, the historic party of economic sunshine is in the strange position of praying for rain.
Before all the members of the Failure Caucus start flaming me as a naive idiot, let me stipulate that there's plenty to be pessimistic about, even with the strong turn in the markets. The recession may be over, but we must still grapple with significant structural problems—a poor labor market, more credit losses tied to commercial real estate, huge chunks of the bailout spending that won't be recouped. But the flow of news isn't uniformly bad, as it was a year ago. And it has to enter our minds—and the debate—that the combination of extraordinary fiscal and monetary efforts, combined with the private sector's natural healing process, may produce growth. There's a chance that it might all fall apart again. But there's a chance—an increasingly likely one, I believe—that it'll all work.