"Profoundly uneconomic"
by digby
It isn't just the dirty hippies blathering on anymore. Here's Ryan Avent in The Economist pointing out that even the most deficit hawkish of all the original economic advisors who've left the White House are arguing against fetishizing the deficit --- and expressing a lot of worry that the president has inexplicably boxed himself into a corner in which further stimulus is nearly impossible. He writes:
What's their former boss saying?
Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.
That's a wow statement. It's profoundly uneconomic. Government doesn't face the same borrowing constraints as a household. It seems clear that the government can afford current levels of spending. It wasn't that long ago that government revenues were far higher than they currently are. And there is precious little evidence that the confidence-creating impact of deficit reduction, if there's one at all, will compensate for the contractionary impact of budget cuts. It seems quite clear that cutting government will be a net negative for the current economy.
I don't know why Barack Obama is making these claims. The most straightforward explanation is that he believes it. At this point, it hardly matters. The president has adopted this framing of the current economic situation, and his policy choices will be constrained by it going forth; whether the choice was made out of heartfelt belief or a sense of political necessity is irrelevant.
Economically speaking, however, I think Mr Summers line is one that ought to inspire a lot of reflection:
It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible.
I've been trying to think of a situation in which a country like America—rich, with good institutions and able to borrow in its own currency—has dangerously overstimulated its economy. When has a country like America and in America's position opted to do too much fiscally or monetarily, such that it found itself in a dangerous and irreversibly inflationary situation?
There aren't that many data points, but I don't believe there's been such a case. Mr Summers is right; the risk to doing too much was minimal, while the risk to doing too little was significant. There was a strong case for policymakers to say, look, we'll continue to act until we've solved the problem or markets demand that we stop. Would there be the potential for waste and inefficiency in this approach? Absolutely. There is no question that more government involvement in the economy would have generated some misallocation of resources. At the same time, America has come nowhere close to making all of the positive return public investments available. And the real economic cost of the presdent sustained, long-term employment is frightfully high. Stimulus sceptics have not demonstrated, haven't come close really, that stimulus can't raise employment or that increased employment wouldn't be preferable to the status quo.
It goes on. Summers says that the policy people believed that there couldn't have been "too much stimulus" but that the political shop insisted on keeping it to a minimum. I don't know the truth of that --- it's pretty self-serving. But it's irrelevant. When you are dealing with a crisis, the only thing that matters is that you get the policy right -- or sheer luck bails you out. In this case, the policy has clearly been a failure. But the president has apparently decided that he's going to try to ride the GOP deficit zeitgeist to victory and just hope to God the confidence fairy does its magic on the economy.
Avent concludes:
There's a lot that economists can't say with great certainty where stimulus is concerned. The profession will be wrestling with questions about macroeconomic stability policy for years to come. But I hope some academics will also focus their attention on the institutional shortcomings that contributed to such incautious timidity in America's government and elsewhere. All throughout this crisis, American officials played it safe, and in doing so they almost certainly made the economic situation more painful than it needed to be. Four years since the recession began and two years into recovery, they still haven't learned their lessons.
I think that characterizing this as cautious is wrong. This is heedless, bordering on reckless. The president will likely win re-election --- after all, it's not as if the Republicans are offering anything more rational or appealing. But the consequences of these "profoundly uneconomic" policies are inestimable.
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