Fool Me Twice: How Democrats Risk Repeating the Mistakes of the Financial Crisis in the Era of Covid-19

Economist James Galbraith explains what the U.S. economy will need to get back on its feet.

Photo illustration: Soohee Cho/The Intercept, Getty Images


As the U.S. economy was spiralling out of control in 2008 and 2009, economist James Galbraith predicted that an insufficiently large stimulus would lead to a prolonged recession. He was right, and today he has a different set of economic prescriptions to address the economic crisis brought on by Covid-19. If Biden wins, will he listen? Senior politics editor Nausicaa Renner talks to Galbraith about his recent piece for The Intercept.

Ryan Grim: In the fall of 2008, the U.S. economy was spinning out of control. The housing crisis had sent the financial sector into a tailspin, and Wall Street demanded that Congress pony up a $700 billion, no-strings-attached bailout. If they didn’t, there would be financial armageddon.

With a gun to its head, Congress passed the bailout bill. Huge payouts were made to financial institutions with little accountability, and the Great Recession followed.

Twelve years later, it’s starting to feel a bit like déjà vu, isn’t it?

Sen. Bernie Sanders: Some of our Republican friends still have not given up on the need to punish the poor and working people.

Rep. Alexandria Ocasio-Cortez: One of the largest corporate bailouts, with as few strings as possible in American history.

Robert Reich: Now is not the time to worry about the national debt.

[Musical interlude.]

RG: Today on the show, we’re gonna talk to someone who made the right call when it counted — 12 years ago. Someone who predicted that the approach the white house was taking was too weak to seriously address the banking and housing crises. Because if we want to avoid the mistakes of 2008 and 2009, we might want to listen to him this time around.

I’m Ryan Grim, D.C. bureau chief for The Intercept. Welcome to Deconstructed.

[Musical interlude.]

RG: Back in 2008, when I was a congressional reporter working for Politico, I spent hours in the hallways of the Capitol, chasing lawmakers who felt huge pressure to deliver the ransom that Wall Street was demanding.

And one morning there, I ran into the economist James Galbraith. He was on the Hill to brief a group of congressmen from both parties who were skeptical of what bank lobbyists were telling them. He told me then that what was being proposed would not be enough to prevent a major recession.

A few months after that conversation on Capitol Hill, lawmakers were back at the drawing board. The financial crisis had sparked an economic collapse; Congress was preparing to pass the famous $787 billion stimulus bill. So I reached back out to Galbraith and asked what advice he was now offering. He used an analogy that has stuck with me since.

Imagine there’s a massive hurricane headed your way. You’re the mayor of the town, and you have a warehouse full of sandbags. You have to decide how many sandbags to use, but you’re not sure just how big the hurricane will be. Some people are urging you to use all the sandbags, but others think you should just use half of them, and save the rest for the next time they’re needed.

If you use too few and you’re wrong, you lose everything. If you use too many, well, you have extra sandbags lying around. So, for James Galbraith, the answer was simple: Use them all.

He warned Democrats that if they went too small with their stimulus, the result would be a deep recession, a slow recovery, and mass unemployment. But they went small anyway. Everything he predicted came true.

The following year Democrats were wiped out by a different sort of flood, the Tea Party wave in the 2010 midterms. By Election Day, the unemployment rate was 9.8 percent. There was a lot of pain around the country, and voters punished the Democrats for it. Losing that election effectively ended the legislative ambitions of the Obama administration; he never got back his House majority.

If a Joe Biden administration wants to avoid the same fate, they might want to listen more closely to Galbraith this time around. Because he says that what we need today is entirely different than what he recommended over a decade ago.

He made that argument in a recent essay for The Intercept, which was edited by my colleague Nausicaa Renner.

Nausicaa, welcome to the show.

Nausicaa Renner: Thanks, Ryan, for having me.

RG: Yeah. So, Nausicaa, why Galbraith?

NR: So I was interested in getting outside of the political orthodoxy when it comes to thinking about the economy. You know, as you noted, in 2008, Galbraith had really different ideas than everybody on the Hill about what exactly it was going to take to fix the economy. And he’s always seemed to me to be somebody who’s really clear-eyed but also not horribly politically biased.

I really wanted to hear from him what sort of radical vision was actually necessary to get us back up and running again. So we asked him to write a piece, and for the show this week, I called him up to talk more about what he thinks the U.S. economy needs to get back on its feet.

[Musical interlude.]

NR: Jamie Galbraith, welcome to Deconstructed

James Galbraith: Thank you very much. Good to be with you.

NR: So I want to just start by asking you a question that I’ve been asked a lot in the course of this election, and in the course of the pandemic, which is: What is the economy going to look like in the long run? If we keep doing what we’re doing now, how many small businesses do you think will survive? And what does the economy look like in a year?

RG: Oh, a year is a long way away from where we are now. The situation is extremely fluid, it’s extremely unpredictable, and extremely fragile. We know we’re in an exceedingly dangerous period, in which, fundamentally, the economy was, to a degree, stitched together in April by pouring a great deal of money into people’s pockets, and into the pockets of businesses. And a good deal of that is now drying up.

You have many, many businesses that are hanging on because the owners have some capital, and they may hope that things will get better. But if they don’t get better, they’re not going to be there indefinitely. And so we could see another wave of closings and another wave of unemployment as the situation unfolds over the course of the fall and winter.

NR: So the worst is definitely not over.

JG: Dangers are certainly not over. We don’t have the pandemic under control to begin with, so we don’t have a real basis for asking people to go back to their ordinary routines.

But beyond that, there’s a huge psychological impact. People are uncertain of their future, their own jobs, they’ve either ended or they might end pretty soon. They’re facing cutbacks, even if they’re in relatively stable sectors like state and local government; they’re facing severe budget cutbacks. So everybody is going to be looking at their own, you know, own bank account, their own savings and saying: Look, I’m going to be storing up to make sure I can make my rent, make my mortgage payment, pay my utility bills, and I’m not going to be going out even if the health situation improves. I’m not going to be going out to restaurants, or bars, or concerts, or any activities, for that matter, that I can do without for the time being.

And so you have an enormous retrenchment, which is only partly the direct result of the health situation, but also because people are uncertain of their economic futures — and rightly so.

NR: So let’s say that Joe Biden wins the election in November, and he comes in in January. What is his strategy to deal with this?

JG: Well, we don’t really know because there are conflicting signals coming out of the Biden campaign. You know, some people have said, “Well, he’s going to be the next Franklin Roosevelt” and others have said, “No, he’s not really going to do very much. Because the cupboard is bare.” That was Ted Kaufman’s unfortunate message. So that needs to be clarified as to what Vice President Biden’s intentions actually are.

And I can talk more effectively about what they should be [laughs] — the one thing that we don’t know, which is where is he in his thinking of these various currents, who’s got the upper hand?

NR: Well, what you wrote in your piece is that the signal is that the Biden administration will be taking its clues from 2008 and reacting in a similar way.

JG: That’s fair enough; that seems to be the case, that what one sees is the dominant tendency. They believe that what they did in 2008, 2009, and 2010 worked; that they can pull the economy out through a short-term program of stimulus and then shift to rich transmitted one kind or another in the following years.

And I think it’s fair to say that that is a projection of a situation that was very different then from what we have now. It doesn’t have the complication of the public health issue. And it did have a certain degree of uncertainty, but the uncertainty over what was going to happen next was resolved in a fairly short period of time. And that’s not necessarily going to be the case now.

NR: And so tell us what’s different about how the Obama administration reacted to 2008? And why just extending unemployment benefits, giving money to small businesses, the Federal Reserve, pouring money into the economy, why won’t that work in the long term?

JG: Well, I think there are two or three basic problems here — let’s call it three basic problems — that are really signatures of the situation.

The first is: the major industries in which the United States is competitive, which depend upon world markets, are seeing their markets basically dry up. And that’s true if you think about aerospace, the civilian aircraft industry — a major industry, major employer — it depends upon world demand for aircraft. And since nobody’s flying, there is no demand for new aircraft.

One can go down the list, the oil industry, you may not like it, but it fueled the recovery in the last 12 years, and it now operates in the United States in a situation where the price that they get is half the cost of extraction. It’s not going to go on like that indefinitely.

So all these elements that make up the advanced sectors of the economy are in limbo at the moment, and there’s nothing much you can do just by pouring money into the firms. You can keep the firms alive, but you can’t make their markets function; you can’t make it profitable for them to produce what they’re accustomed to producing.

So that whole sector needs to be reorganized and mobilized to do things that we actually need doing, like dealing with climate change, for example, or reconstructing our living environments so that we can handle the public health emergencies that obviously have hit us now, and may well hit us again in the future. Those kinds of things require reorganization and mobilization of the most advanced sectors.

That’s not where most of the jobs are. Most of the jobs are in services. The problem in services, small and medium businesses, is that if I’m in a service sector and you’re in the service sector, your job depends upon my willingness to buy the service you’re providing. And your job depends upon my having an income and therefore me having a job. And the service sector, of course, is in this enormous retrenchment. So one has to think about how to restructure that sector so that at least a significant part of it can keep going.

And the third thing is that yes, all these incomes have become, the economists call this contingent — they’ve all become uncertain, and people are anxious over whether they have incomes. And their incomes, in many cases, are being cut off: The unemployment insurance that they got in April and ran out in June and July.

But their debts are not contingent, their debts continue to pile up. So the rent bill is still there, the mortgage bill is still there, the utility bill is still there. And all of these things can put them under enormous pressure and end up putting them out of a house, a place to live, as soon as the moratorium on foreclosures and evictions is lifted. And so one has to think about how to deal with that.

And that’s a major reset, because there’s no reason why people who were put out of work by a public health emergency should be put out of their homes, because they couldn’t maintain incomes while their debts continued to pile up. That’s a fundamental injustice. As that problem develops — for the moment it is held in abeyance — it’s going to have to be dealt with, because it should meet an enormous amount of popular resistance of contracts to be fully enforced.

And that means working it out, because you have a whole lot of mom and pop landlords who own a few units, and their incomes depend upon being able to get the rental payments that they have. So one has to work out a general resetting of the situation that can hold people, more or less harmless in their situations.

Simply pumping money into the economy can hold things up for a period of time, but it’s not going to produce the recovery, in my view.

NR: So the recommendations that you make sound a lot like the New Deal to me. I mean, a jobs guarantee —

JG: [Laughs.] They do to me, too!

NR: So just to go over them: I mean, you have the jobs guarantee, you have rebuilding domestic manufacturing, basically inventing a new economy to deal with climate change and putting people to work there. Do you think that we’re prepared to make such a large shift in the economy?

JG: Well, I think the American people are prepared to do it, sure. I think they’re anxious for the kind of leadership that would give them the opportunity to show what they can do. And that was true in 1933, as well; people were ready for the leadership when Roosevelt provided it.

Could you get it done in the present political environment? Well, you know, that depends upon what the people decide to do in November, and whether the elected leadership gets the message. And that’s obviously going to be, under any circumstances, a pretty tough road to hoe.

But the New Deal is the right example. The New Deal showed that it is possible to reconstruct the economy. And it wasn’t that Roosevelt simply revived the pre-existing economy of the 1920s or the early 1930s. No! They set out to change, fundamentally, the nature of American agriculture, to provide economic development through the American South, and electricity — it had never been there before — and to rebuild the entire, what we now call, infrastructure of the country: the roads, the bridges, the airfields, the schools, the courthouses, university buildings, it’s all over the country, the legacy of the New Deal. And this was imagined at the time.

And that strikes me as fundamentally the mindset we need to have in dealing with the aftermath of this, because we’re not going to get back. Whatever one thinks about the economy that existed, and that developed over the last 40 years and it took a mature form in the last dozen years: We’re not going to get it back. It’s not coming back in that form.

We’re going to have to find new things for millions of people who’ve been working in offices who will find themselves no longer needed; millions of people who have been working in services that are not going to be revived very quickly, to do. And there are lots of things to do. There’s never a shortage of work to be done, but we have to organize people to be able to do it, and bring to bear the the talents of the advanced sectors and their capacity and get them off of doing things which people are not going to be needing, and not going to be demanding, and into doing things that are actually, the future generations are going to say, “Yes, that was a good idea.”

NR: One of the most surprising things to me about the run-up to the election, and I know you’re you’re an economist, not a political pundit, but is that Trump is polling so well in the economy. Do you have a read on that?

JG: Oh, yeah, that is a bit of a mystery. But I suppose that, first of all, over the three and a half years before the pandemic, the economy played out reasonably well for him: The unemployment rate went down, the stock market went up, and it’s so hard for people to overlook that. And it appears to be that his strategy may be succeeding, which is to persuade people that the pandemic was something for which he is not to be held responsible. And, furthermore, the idea that they’re promoting, which is that when it’s over the economy will come back.

And there, I think it’s understandable why a politician would express that message. But it’s not a message to be believed. It’s fundamentally unlikely that that’s the case.

NR: Thank you for coming on here. It’s such an intense, important issue. And I’m sort of shocked by the amount that it seems like normal people are not paying attention to the long-term effects this is going to have.

JG: I don’t know. I think a lot of normal people do understand that the long-term effects are going to be very serious, but they have no voice —

NR: Yeah.

JG: — for, you know, for making that concern concrete. You need to have real alternatives out in front of people before they can grasp them.

NR: Yeah. Well, Jamie Galbraith, thank you so much for being here to discuss this important and, in my opinion, under-covered topic.

JG: Thank you very much.

[Musical interlude.]

NR: That’s our show! Deconstructed is a production of First Look Media and The Intercept. Our producer is Zach Young. The show was mixed by Bryan Pugh. Our theme music was composed by Bart Warshaw. Betsy Reed is The Intercept’s editor in chief.

I’m Nausicaa Renner. You can find me on Twitter if you just search my name. If you haven’t already, please subscribe to the show so you can hear it every week. Go to to subscribe from your podcast platform of choice: iPhone, Android, whatever. If you’re subscribed already, please do leave us a rating or review — it helps people find the show. And if you want to give us feedback, email us at Thanks so much!

See you next week.

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