Three worthy pieces in the Sunday papes on themes I’ve raised here at OTE.
OTE’ers who’ve been with me from the beginning will recall that one of my very first posts stressed this same point made by Robert Shiller today and one of the most dangerous analogies in political economy: “families have to tighten their belts in tough times, so the government should too.”
“Dangerous” not just because it’s so very wrong—the opposite is true—but because it sounds so right. When families, hit by recession and deleveraging, are hunkered down, we need gov’t spending to pick up the slack, and importantly, visa versa.
If anything, we’ve devolved to the point where we’ve got both sides of this wrong. We’re austere when we need larger budget deficits (like now) and we’re generating structural budget deficits—ones that get larger even as the economy is in bona fide expansion—when they should be getting smaller.
Shiller touts the “balanced-budget multiplier” where you raise taxes and expenditures by similar amounts, which he argues, adds growth and jobs but doesn’t exacerbate the debt.
I think he’s right and, in fact, this maps onto a strain of the current policy debate where we a) allow the sunset of the high-end Bush tax cuts and b) build public infrastructure and help states and cities, which have to balance their budgets, avoid layoffs.
Second, Steve Pearlstein writes about JPM’s big loss and ends up in a similar place to my take here. The key takeaways: a) hedges that increase risk and threaten large losses are not really hedges, and should be disallowed when they invoke bailout risk, and b) too many of these financial innovations are “allocative inefficient,”—they divert capital, both human and physical, from more optimal activities from the perspective of the broader society.
Finally, Gretchen Morgenson looks at the same Treasury Department evaluation of the TARP that I review here. She’s less convinced than I that TARP “worked” in terms of avoiding far worse outcomes, but we both stress that a true evaluation must net out a lot of huge costs before settling on a legitimate count of TARP’s benefits.
That is, the fact that TARP will cost taxpayers far less than was widely expected is unequivocally good news, but before getting too excited, we’ve got to a) recognize the regulatory failure that helped inflate the housing bubble, and b) consider the costs—still mounting—of the Great Recession.
As I wrote in the oped linked above: “This is all strangely circuitous. Government regulation of financial markets failed miserably, but government actions helped put out the fire, albeit after badly burning the economy. It’s hard to applaud the fire department when it abetted the arsonists.”
That said, I think Gretchen focuses on the wrong part of this cost/benefit story. She’s pumped up about the opportunity costs of other programs the bailout funds could have supported. I’m always for thinking through the counterfactual, but in this case, it’s hard to imagine a bunch of spending on other useful stimulus, especially originating with the Bush administration. Such counterfactuals make more sense in the context of things like dollars on training programs and components of a stimulus (e.g., we should have done more infrastructure and less tax cuts). The counterfactual to the TARP is almost certainly no-TARP, not some better bailout.
Moreover, as noted, the costs you really want to net out here are less “the next best use of the TARP funds” and more the millions of hours of lost work, lost output, foreclosed homes, and damaged careers that are the ongoing legacy of the Great Recession.