Friday, July 16, 2010

High ... yawn ... Unemployment

-- Posted by Neil H. Buchanan

In my FindLaw column this week (available here), I continue to explore our crazy new world in which deficit-financed stimulative policies are deemed unacceptable, even in the weakest economy in over 70 years. I use a Washington Post editorial from a few weeks ago (here) as an especially noxious example of two things: (1) the seething disdain, among adherents to the inside-the-Beltway consensus, toward those who propose further stimulus, and (2) the claim that those who propose stimulus today must prove their seriousness about cutting future deficits by also proposing a long-term deficit reduction plan.

The latter argument is an especially odd form of ad hominem attack. The issue, say the Post's editors, is one of credibility. Why should we listen to someone who has a proposal to solve today's problems, if they have not already come out with a proposal to solve tomorrow's possible problem, too? The silliness of that argument is obscured by the fact that the word "deficit" is in play; but there really is no connection between possible changes in today's deficits and the possible problem of exploding annual deficits stretching decades into the future. (I continue to be skeptical about those long-term forecasts, but we can accept them arguendo for the time being.) If we face exploding deficits in the future, the difference made by today's possible stimulus spending will not matter in the least. In the meantime, the economy can better handle the deficits going forward if the economy recovers quickly.

The Post's editors (and others who make similar arguments) never quite say that stimulus is out of the picture. This is important, because otherwise they would have to argue that an economy with 10% unemployment cannot possibly be helped by further spending. This would require them to adopt something like the baseless argument that I discussed in my Dorf on Law post last week (here), saying that deficits are actually contractionary because they scare businesses into a catatonic state. Paul Krugman's column from last Friday (here) did a particularly good job of destroying that argument, using evidence from surveys of businesses. As Krugman points out, you can always (no matter the state of the economy) get businesspeople to say that they hate deficits; but there is no evidence that they would not hire more people in a stronger economy, notwithstanding the level of the deficit or debt.

Therefore, those (like the editors at the Post) who hold themselves out as sober realists have to come up with a way to change the subject: "But as analysts ponder the mystery of weak private-sector hiring despite signs of economic growth, it's worth asking what role is played by government-induced uncertainty. With the federal government promoting major changes in health care, financial regulation and energy law, it wouldn't be surprising if some companies are more inclined to wait and see than they might otherwise be. And that's especially true when they look at looming American indebtedness and the effect that could have on long-term interest rates." This is a very clever move. It is not that deficits themselves are now anti-stimulative -- or at least, it is not exactly that. It is that the government is doing so much that it has undermined its own ability to encourage economic expansion. If only we had not decided to deal with the health care crisis, the financial crisis, or the energy/environmental crisis, then we would be able to deal with the economic crisis. (Why do I suspect that, if we had not dealt with those other issues, the Post's editors would be saying: "Until the federal government deals with the looming crises in health care, financial regulation, and energy, businesses will take a wait-and-see attitude no matter how much stimulus is provided"?)

Again, however, all of the evidence suggests otherwise. These attempts to read the minds of America's businesses, looking for reasons why they are not hiring, are ultimately a search for excuses to do nothing. Businesses do not begin to hire workers in large numbers immediately upon a change in the economy's direction; but they certainly will not begin to hire workers until the economy definitively changes direction. And as I argued again in my FindLaw column, there is nothing available right now other than federal spending (financed by deficits) to push the economy in the right direction.

What makes all of this especially depressing is that it validates the perception in the rest of the country that the crowd in Washington does not really care about the most serious problems facing people's lives. When important voices like the supposedly-liberal Washington Post engage in nasty attacks on those who support the only available solutions to the current economic crisis, the message is that nothing can be done. Perversely, this then feeds the public's conviction that deficits are bad, because too many people have become convinced that deficits are the selfish creation of the very politicians who seem not to care about regular people's economic pain.

All of which brings us back to the question of credibility. The Post's editors and others say that we cannot listen to those who want another round (or more, as necessary) of stimulus, because the pro-stimulus crowd is not sufficiently vehement in opposing long-term deficits. On the other hand, we have yet to hear any of those critics enthusiastically embrace additional short-term stimulus. (The most we can get from the Post is this: "Maybe a case can be made for another round of unemployment benefits and other spending that reaches the economy quickly." Be still my beating heart.) Until they show that they really care about solving the problems immediately facing the economy (and destroying the lives of millions of Americans every day that we delay), then there is no reason to take their calls for "hard choices" seriously.

If the choice is between someone with a solution today and (maybe) no solution tomorrow, or a person who denies the problem today and focuses on a possible problem tomorrow, the choice of whom to listen to today should be easy. Except, apparently, in the U.S. in 2010.

4 comments:

egarber said...

And "conservatives" have another conflict to sort out:

Alan Greenspan said this week that the Bush tax cuts should expire, specifically to deal with that long-term deficit problem. Whether one agrees that the deficit is a sufficiently large problem or not, it's hard to doubt Greenspan's credentials on the issue. He essentially ghost-wrote the Clinton reduction plan in 93.

One of the blatant weaknesses on the Right when it comes to deficits is the inability to even consider the revenue side of the equation. So in the end, you end up with nothing but calls for draconian cuts; however, when conservatives actually had power under W, they went the other way -- sending overall spending skyward (which reflects that they never meant what they said). And since raising taxes is tantamount to making a pact with the devil, they unavoidably "programmed" huge deficits into our long-term outlook. The fallback is that tax cuts are always the solution for everything, so it'll all work out in the end. But even the economists who originated the Laffer curve acknowledge that it's an equilibrium model (i.e., at some point tax cuts cause a reduction in revenues). Republicans think it's just a one way edict: always cut taxes.

Regardless of what people think about his monetary policy during the run-up, Greenspan understands that you have to address the revenue side as well on this stuff.

Neil H. Buchanan said...

Nicely put (as always), egarber. Today's Krugman column is particularly strong on the Republicans' "starve the beast" strategy and their hypocrisy about deficits. The Republicans are even talking in explicit Laffer Curve terms once again: the Bush tax cuts increased revenue!!

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