“The Big Shrug”: A Combination Of Complacency And Fatalism By Fiscal Policy Makers That Nothing Need Be Done Or Can Be Done
I’ve been in this economics business for a while. In fact, I’ve been in it so long I still remember what people considered normal in those long-ago days before the financial crisis. Normal, back then, meant an economy adding a million or more jobs each year, enough to keep up with the growth in the working-age population. Normal meant an unemployment rate not much above 5 percent, except for brief recessions. And while there was always some unemployment, normal meant very few people out of work for extended periods.
So how, in those long-ago days, would we have reacted to Friday’s news that the number of Americans with jobs is still down two million from six years ago, that 7.6 percent of the work force is unemployed (with many more underemployed or forced to take low-paying jobs), and that more than four million of the unemployed have been out of work for more than six months? Well, we know how most political insiders reacted: they called it a pretty good jobs report. In fact, some are even celebrating the report as “proof” that the budget sequester isn’t doing any harm.
In other words, our policy discourse is still a long way from where it ought to be.
For more than three years some of us have fought the policy elite’s damaging obsession with budget deficits, an obsession that led governments to cut investment when they should have been raising it, to destroy jobs when job creation should have been their priority. That fight seems largely won — in fact, I don’t think I’ve ever seen anything quite like the sudden intellectual collapse of austerity economics as a policy doctrine.
But while insiders no longer seem determined to worry about the wrong things, that’s not enough; they also need to start worrying about the right things — namely, the plight of the jobless and the immense continuing waste from a depressed economy. And that’s not happening. Instead, policy makers both here and in Europe seem gripped by a combination of complacency and fatalism, a sense that nothing need be done and nothing can be done. Call it the big shrug.
Even the people I consider the good guys, policy makers who have in the past shown real concern over our economic weakness, aren’t showing much sense of urgency these days. For example, last fall some of us were greatly encouraged by the Federal Reserve’s announcement that it was instituting new measures to bolster the economy. Policy specifics aside, the Fed seemed to be signaling its willingness to do whatever it took to get unemployment down. Lately, however, what one mostly hears from the Fed is talk of “tapering,” of letting up on its efforts, even though inflation is below target, the employment situation is still terrible and the pace of improvement is glacial at best.
And Fed officials are, as I said, the good guys. Sometimes it seems as if nobody in Washington outside the Fed even considers high unemployment a problem.
Why isn’t reducing unemployment a major policy priority? One answer may be that inertia is a powerful force, and it’s hard to get policy changes absent the threat of disaster. As long as we’re adding jobs, not losing them, and unemployment is basically stable or falling, not rising, policy makers don’t feel any urgent need to act.
Another answer is that the unemployed don’t have much of a political voice. Profits are sky-high, stocks are up, so things are O.K. for the people who matter, right?
A third answer is that while we aren’t hearing so much these days from the self-styled deficit hawks, the monetary hawks — economists, politicians and officials who keep warning that low interest rates will have dire consequences — have, if anything, gotten even more vociferous. It doesn’t seem to matter that the monetary hawks, like the fiscal hawks, have an impressive record of being wrong about everything (where’s that runaway inflation they promised?). They just keep coming back; the arguments change (now they’re warning about asset bubbles), but the policy demand — tighter money and higher interest rates — is always the same. And it’s hard to escape the sense that the Fed is being intimidated into inaction.
The tragedy is that it’s all unnecessary. Yes, you hear talk about a “new normal” of much higher unemployment, but all the reasons given for this alleged new normal, such as the supposed mismatch between workers’ skills and the demands of the modern economy, fall apart when subjected to careful scrutiny. If Washington would reverse its destructive budget cuts, if the Fed would show the “Rooseveltian resolve” that Ben Bernanke demanded of Japanese officials back when he was an independent economist, we would quickly discover that there’s nothing normal or necessary about mass long-term unemployment.
So here’s my message to policy makers: Where we are is not O.K. Stop shrugging, and do your jobs.
By: Paul Krugman, Op-Ed Columnist, The New York Times, June 9, 2013
“Focus Should Be On Jobs”: Ben Bernanke Clearly Explained What’s Still Wrong With The Economy
In recent congressional testimony, Federal Reserve Chairman Ben Bernanke clearly explained what’s still wrong with the economy, outlined the Fed’s thinking on monetary policy and strongly implied that fiscal policy is still off base. His account and policy recommendations reflect mainstream economic thinking – and, thus, run counter to much of the economic doctrine that’s driving Republican budget policies.
Here’s how Bernanke sees the economy: though payroll employment has expanded by about 6 million jobs since its low point and unemployment has dropped by about 2.5 percentage points from its peak, the job market remains weak overall. I couldn’t agree more.
Bernanke points to the same indicators I would. The unemployment rate is still too high, too many of the unemployed have been looking for work for more than six months, too many people have stopped looking at all while job prospects remain dim, and nearly 8 million people are working part time even though they’d prefer full-time work. I’m glad to see him emphasize how “extraordinarily costly” this situation is:
Not only do [high levels of unemployment and underemployment] impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole by eroding workers’ skills and – particularly relevant during this commencement season – by preventing many young people from gaining workplace skills and experience in the first place. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending on income-support programs, thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.
While unemployment is still a major concern, inflation isn’t. Therefore, the Fed is appropriately interpreting its “dual mandate” to foster both “maximum employment” and “price stability” as requiring “a highly accommodative monetary policy.” That means keeping its short-term interest rate target as low as possible until unemployment falls closer to normal long-term levels and monitoring its program of purchasing longer-term assets – as long as inflationary expectations remain low. As the Fed notes, this policy carries some risks, but the risks and costs of continuing high unemployment are far greater.
Republicans, in contrast, want to remove “maximum employment” from the Fed’s policy concerns. They seem to see our most pressing problem as the possibility of future inflation, not the reality of current high unemployment. The Republican chairman of the Joint Economic Committee, where Bernanke testified, wants to replace the dual mandate with a single mandate for long-term price stability. Even some conservatives recognize that, during major recessions, that’s a recipe for disaster. An even more extreme policy – a return to a gold standard – made it into the 2012 Republican platform.
On fiscal policy, Bernanke recognizes that recent policy decisions have tilted too far toward short-term budget austerity, while largely ignoring longer-term budget challenges. He neither shared Republicans’ disdain for stimulus policies nor endorsed their flirtation with “expansionary austerity” arguments.
Federal fiscal policy, taking into account both discretionary actions and so-called automatic stabilizers, was, on net, quite expansionary [emphasis added] during the recession and early in the recovery. However, a substantial part of this impetus was offset by spending cuts and tax increases by state and local governments, most of which are subject to balanced-budget requirements, and by subsequent fiscal tightening at the federal level.
While too much fiscal restraint has hampered the economic recovery, policymakers have done little to address longer run fiscal challenges that will begin to reappear later in the decade. Bernanke’s counsel:
Importantly, the objectives of effectively addressing longer-term fiscal imbalances and of minimizing the near-term fiscal headwinds facing the economic recovery are not incompatible. To achieve both goals simultaneously, the Congress and the Administration could consider replacing some of the near-term fiscal restraint now in law with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run.
By contrast, the House Republican budget goes full bore on deficit reduction, starting immediately – jobs be damned.
By: Chad Stone, U. S. News and World Report, May 24, 2013
“It’s All Your Fault”: Federal Reserve Chair Calls Out Congress For Being The Drag On The Economy
The stock market is testing new highs, the unemployment rate is declining and consumer confidence is at a six-year peak, but the Federal Reserve chairman Ben Bernanke wants Congress to know that things could be a lot better.
Testifying Wednesday in front of the Joint Economic Committee of Congress, Bernake pointed out that the economy has been improving, but one obstacle is keeping a real recovery from sparking — them:
“Most recently, the strengthening economy has improved the budgetary outlooks of most state and local governments, leading them to reduce their pace of fiscal tightening. At the same time, though, fiscal policy at the federal level has become significantly more restrictive. In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”
President Obama was able to delay serious austerity — tax increases paired with budget cuts — from coming into effect until this year. This delay has given housing a chance to recover, as evidenced by strong recent earnings from The Home Depot.
However, there’s no doubt that the payroll tax holiday, which Republicans never considered extending, is affecting every America who lives paycheck to paycheck. The sequester will take $85 billion and 750,000 jobs out of the economy this year. Even the ending of the Bush tax cuts on income over $400,000 will take some steam out of the economy, though tax breaks for the rich have the least stimulative benefit for the economy.
Bernanke points out that the biggest problem with the sequester is that it has no real effect on the actual problem this country faces — the long-term deficit.
“Although near-term fiscal restraint has increased, much less has been done to address the federal government’s longer-term fiscal imbalances,” he said. “Indeed, the [Congressional Budget Office] projects that, under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter.”
Basically, Bernanke is echoing what New York Times‘ columnist Paul Krugman has been saying for years: Get the economy going, then worry about long-term fixes.
By: Jason Sattler, The National Memo, May 22, 2013
“Joe Scarborough Is A Total Hack”: But Don’t Take My Word For It
In his latest salvo in his back-and-forth with Paul Krugman over the significance of the national debt, Joe Scarborough, writing in POLITICO today, displayed such a foul misunderstanding about economics, Krugman must have choked on his oatmeal laughing as he read it.
In “Paul Krugman is wrong – but don’t take my word for it,” the MSNBC host made the following point:
Investors may be growing skittish about U.S. government debt levels and the disordered state of U.S. fiscal policymaking.
From the beginning of 2002, when U.S. government debt was at its most recent minimum as a share of GDP, to the end of 2012, the dollar lost 25 percent of its value, in price-adjusted terms, against a basket of the currencies of major trading partners. This may have been because investors fear that the only way out of the current debt problems will be future inflation.
It also may have been because space aliens raided the Treasury in the dead of night because Nicholas Cage and Chuck Norris were off duty, having been contracted by the Navy to fight a flotilla of krakens in the Caribbean the week before. Scarborough may as well have argued that, because it would have displayed a better understanding of how foreign exchange markets actually work. The value of the dollar is determined by foreign countries’ demand for it and our supply of foreign exchange. And while foreign investors in 2002 may have begun to fear widening debt that was eventually caused by a recession in 2008 — despite the fact that the housing bubble was far from inflated in 2002 and that these investors eventually failed to foresee the crash itself — it’s more likely that the value of the dollar fell because our current account deficit essentially doubled between 2002 and 2006 (but don’t take my word for it).
Scarborough continued to make arguments that could be debunked by a remedial high school economics teacher shortly after:
More troubling for the future is that private domestic investment—the fuel for future economic growth—shows a strong negative correlation with government debt levels over several business cycles dating back to the late 1950s. Continuing high debt does not bode well in this regard.
While it’s true that government borrowing can “crowd out” private investment by bidding up interest rates, it isn’t currently happening — interest rates remain low. Furthermore, investors seem to have more confidence in U.S. Treasuries than they do in the market (but don’t take my word for it, “investors continue to buy U.S. government debt as a refuge against a renewal of turmoil in global financial markets and concern the U.S. recovery may falter”). The real reason that private investment and government debt appear to have an inverse relationship, both now and during any recession, is that economic contraction causes both tax revenue and private investment to fall.
So whose word should we take?
If you believe that I am wrong and Paul Krugman is right…then take it up with the RAND Corporation whose senior economist wrote everything you have read here other than this concluding paragraph. The debt crisis is real and waiting another decade to fix it is not an option. Anyone who suggests it is operates well outside the mainstream of where serious economists reside.
If the recent financial crash has taught us anything, it’s that “the mainstream of where serious economists reside” is less credible than a bootleg DVD salesman convention. But what’s even more troubling about Scarborough’s column — and POLITICO’s decision to publish it — is that he doesn’t even say whose words we should take or what those words actually are. Scarborough names neither the “senior economist” nor the study or studies that he is citing. Nor does the RAND Corporation even have a single “senior economist” — a search for “senior economist” on RAND’s website indicates that the think tank has at least a dozen “senior economists” on staff. So we can’t even debunk the man inspiring Scarborough to spew such noxious filth. At least we can debunk him.
By: Samuel Knight, Washington Monthly Political Animal, February 16, 2013
“Willfull Ignorance”: Short-term Memory Loss Grips Republicans In Washington
ABC News’ George Stephanopoulos devoted a good chuck of “This Week” to discussed automatic sequestration cuts yesterday, and asked Rep. Tom Cole (R-Okla.) for his prediction. The Republican congressman said President Obama came up with the sequester — a claim that simply isn’t true — before saying his caucus is “prepared to negotiate on redistributing the cuts.”
It led to this exchange:
STEPHANOPOULOS: And you’re saying all cuts. Republicans are accepting absolutely no revenues?
COLE: No. Look, absolutely none. The president’s accepted no spending cuts back in the fiscal cliff deal 45 days ago, so you get all — no spending cuts back then. Then you’re going to get no revenue now.
Around the same time, Sen. John McCain (R-Ariz.), who appears to spend more time on Sunday shows than in the Senate, said he’s open to some revenues as a way to replace the sequester, but added, “[W]e have raised taxes. Why do we have to raise taxes again?”
Of course, by that logic, there’s no reason not to ask, “We have cut spending. Why do we have to cut spending again?”
It’s troubling that Republican policymakers have such short memories, and seem to have no idea what policies they voted for as recently as 2011. It’s one of the more breathtaking examples of willful ignorance in recent memory.
But if we assume that lawmakers like Cole and McCain are sincere, and they literally can’t remember the basics of recent budget policy, then it’s probably worthwhile to set the record straight.
In 2011, Democrats and Republicans agreed to between $1.2 trillion and $1.5 trillion in spending cuts, depending on how one tallies the numbers. The cuts included no new revenue.
In 2012, Democrats and Republicans agreed to a deal that raised revenue by about $650 billion. The new revenue included no new cuts.
In 2013, Republicans are saying they remember what happened in 2012, but the 2011 policy has been blocked from memory.
This is crazy. Folks like Cole and McCain keep saying the 2012 deal didn’t include spending cuts, so the sequester has to be 100% in the GOP’s favor now, without exception. Why? Because Republicans haven’t gotten spending cuts.
Except they already did get spending cuts. Indeed, the cuts from 2011 were twice as big as the revenue from 2012.
Even if the parties agreed to an entirely balanced agreement this month to replace the sequester — roughly $600 billion in revenue and $600 billion in cuts — Republicans would still be getting the much better end of the deal. The total for the entire package, negotiated in parts over the course of two years, would be over $4 trillion in debt reduction — with a cuts-to-revenue ration of about six to one.
For that matter, Obama isn’t calling for “tax increases”; he’s calling for new revenue through closed tax loopholes and ending certain tax deductions. As recently as last month, Republican leaders said such a policy doesn’t count as a “tax increase,” though it’s suddenly become outrageous now that the president agrees.
This really isn’t that complicated. Either Republicans have a child’s understanding of fiscal policy, the memory capacity of a goldfish, or they think Americans are fools. At this point, I’m no longer sure which, though I’m open to suggestion.
By: Steve Benen, The Maddow Blog, February 11, 2013
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