Wednesday, June 9, 2010

Financial Follies

Think Progress: Trumka: Lawmakers Worried More About The Deficit Than Jobs ‘Have Been Reading Too Much Fiction’

Before it adjourned for its Memorial Day recess, the House of Representatives passed a scaled down tax extenders bill, that didn’t include extensions of COBRA health insurance subsidies for unemployed workers, or an extension of FMAP funding to help states meet their Medicaid responsibilities. The bill also only extended unemployment benefits through November, instead of December as had been originally planned.

Despite 9.7 percent unemployment, and long-term unemployment at record highs, the bill was cut down because of concerns regarding its effect on the deficit, as only part of it was offset by revenue raisers. A group of Blue Dogs and freshman Democrats, as well as lockstep Republican opposition, helped to produce legislation with significantly less impact.

Today, ThinkProgress posed a couple of questions regarding such deficit hysteria to AFL-CIO President Richard Trumka, who appeared at the America’s Future Now conference to advocate more robust job creation measures from Congress. Trumka said that those more concerned with the deficit than the fact that 15 million Americans are currently out of work have “been reading too much fiction or they have their head in the sand”:

We do not have a short-term deficit crisis, we have a short-term jobs crisis in this country. And anyone that doesn’t believe that has either, I think, been reading too much fiction or they have their head in the sand. Every economist I know says we have a jobs crisis, and yet the people on [Capitol] Hill say we can’t really fix the crisis, we have to worry about deficit reduction.

Watch it:

Later on, when ThinkProgress asked why Washington is so focused on deficits when the country is much more concerned with unemployment, Trumka blamed “timid leadership. Timid leadership gets any kind of pushback, they say we’ll stop. What they need to do is stand up and explain that if you really want to cure deficits, put people back to work.”

It’s true that short-term concern over the deficit and favoring deficit reduction over job creation is counterproductive. As CAP’s Michael Ettlinger and Michael Linden wrote, in the face of the Great Recession, short-term deficits “are both inevitable and highly appropriate at a time when the economy is weak.”

It should also be noted that, according to a recent NBC News/Wall Street Journal Poll, Americans do not prioritize deficit reduction over job creation. Only 5 percent of respondents to the poll cited it as their top concern, while 35 percent said job creation is the most important policy priority of theirs.

Brad DeLong:

We need bigger deficits.

As the disappointing May job numbers confirm, this is still an exceptional time—a time in which many of the normal rules of the Dismal Science are changed and transformed. It is a time for not normal economics but rather "depression economics." The terms on which the U.S. government can borrow now are exceptionally advantageous. And because of high unemployment the benefits of boosting government purchases and cutting taxes right now are exceptionally large.

Krugman: The Seductiveness Of Demands For Pain

Mark Thoma is astonished at Raghuram Rajan’s obviously intense desire to find some argument, any argument, for raising interest rates even though unemployment is near 10 percent. As he points out, Rajan is reduced to arguing that the Fed should raise rates because unemployment is low in Brazil.

But I realized, as I read this, that I’d seen something like this before. Back in the summer of 2008, as the world was sliding into recession, Ken Rogoff demanded that the Fed and the ECB raise rates because of rising commodity prices and inflationary pressure in developing countries. Again, it was very hard to understand what model lay behind the demand.

And let me throw Jeff Sachs into the mix. Brad DeLong is astonished by the recent Sachs op-ed calling for fiscal austerity now now now, in which he claims that fiscal expansion has had all sorts of negative effects that are, in fact, completely absent from the data.

What’s going on here? I don’t think you can resort to class-warfare arguments. What I think is happening is that we’re seeing the deep seductiveness, for many economists (and others), of taking what sounds like a tough-minded position in favor of inflicting pain on the economy — and the people who make up that economy.

Keynes knew all about this. Writing about the peculiar appeal of classical economics even in a world in which it had manifestly failed, he argued

That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue.

Something like that, I believe, is going on here. Calling for austerity and tight money feels courageous, tough-minded, and virtuous; it allows the economist making such calls to take the pose of a Serious Person standing firm against the easy-money guys.

Yes, I know that’s insulting. But what’s so striking is that in all three cases I’ve cited you had highly trained economists — that is, people who have spent their whole lives arguing in terms of carefully laid out models — making arguments that aren’t backed by any model I can see.

And may I say, I think that by giving in to the seductiveness of calls for pain, some of my colleagues are doing a lot of damage; at a time when we really need clarity of thought, they’re adding to the intellectual murk instead.

Booman: Stupid Punditry
You gotta love Fred Barnes:

In Washington these days, President Obama is rumored to be hoping Republicans capture the House of Representatives in the midterm election in November. There's no evidence for this speculation, so far as I know, but it's hardly far-fetched. If Mr. Obama wants to avert a fiscal crisis and win re-election in 2012, he needs House Speaker Nancy Pelosi to be removed from her powerful post. A GOP takeover may be the only way.

To say there is no evidence for this speculation is an understatement. The president has had no success in working with House Republicans on any measure over the last year and a half and his agenda would be completely blocked if he had to deal with a Speaker Boehner and a bunch of Republican committee chairs.

As it is, he is finding Congress unwilling to add sufficient stimulus or even pass a budget. What the president needs above all is for the voters to defy expectations and return huge Democratic majorities to Congress. That is the only way he can break the logjam in Washington and take on big issues.

Krugman: Madmen in Authority

Rereading my post on the folly of the G20, it seems to me that I didn’t fully convey just how crazy the demand for fiscal austerity now now now really is.

The key thing you need to realize is that eliminating stimulus spending, while it would inflict severe economic harm, would do almost nothing to reduce future debt problems. Here’s the IMF’s estimate of sources of the growth in debt over the next few years:


And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

The answer is, to reassure the markets — because the markets supposedly won’t believe in the willingness of governments to engage in long-run fiscal reform unless they inflict pointless pain right now. To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

And the basis for this belief that this is what markets demand is … well, actually there’s no sign that markets are demanding any such thing. There’s Greece — but the Greek situation is very different from that of the US or the UK. And at the moment everyone except the overvalued euro-periphery nations is able to borrow at very low interest rates.

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.


Yglesias The No-Stimulus Economy

If fiscal stimulus is so great, then why hasn’t the Obama administration’s massive stimulus program helped improve the economy? Well, via Mark Thoma, the answer is that there hasn’t been any net fiscal stimulus, all the Obama administration’s efforts plus the automatic stabilizers have done is mitigate the contractionary impact of state and local policy:

But it’s important to remember that the proper measure for fiscal stimulus is not spending by the federal government; it is spending by all levels of government. And when you look at the contributions to US GDP growth (Table 1.1.2 at the BEA site), total government spending has been a drag on growth over the past two quarters. The increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels.

And with another hat tip to Thoma, here’s a look at cuts in state and local payrolls:

State-local 1

Looked at comprehensively, what the country has been implementing is a mild version of the conservative policy prescription for boosting growth—fire bureaucrats and trim spending. And it’s not working very well. And with continuing economic weakness, state and local governments are set for further trimming even as federal stimulus winds down. This is going to be a disaster. Nothing about having economically pressed jurisdictions lay off huge quantities of teachers is going to improve the situation.

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