The reaction to the continued slog in many of the advanced economies, the French and Greek elections—widely viewed as referenda on austerity measures, and our own budget/election year politics are generating, if not a lot of useful policy, a bunch of interesting commentary.
All told, it’s a portentous moment for political economy—one that poses truly existential questions. Should policy give up on the short-term problems of demand contraction and sectoral screw-ups, like housing, and focus on the structural problems—debt bubbles, inequality, wage stagnation, deregulation—that got us all into this mess? Is our politics, or that of Europe, even capable of answering and acting on questions of such magnitude?
Ezra Klein and David Brooks both discuss the division between cyclical and structural interventions, with Brooks coming down on the side of structural. If ever there was a false choice, this is it. Of course we have to do both, and if anything, they’re complements, not substitutes. At some point, and we’re getting closer every quarter, the cyclical morphs into the structural, as when long-term unemployment—a function of the cyclical demand contraction—erodes skills or spirits to the point where people drop out of the job market for good.
That said, it’s good to see more economists and commentators recognizing the need to fix structural problems. The baseline economic assumption is still: intervene only in obvious market failures, like recessions—and even that has somehow become controversial. The view from most econ departments was the long-term will take care of itself, and the less policy nudges the free hand the better. Perhaps enough folks are starting to recognize that too often the free hand can be all thumbs.
But can our politics deliver on any of the needed policy, be it short or longer-term? Clearly not at the federal level, though some states are starting to act (more on that in a later post).
To his credit, President Obama is apparently about to go to Congress with a number of ideas from recent proposals targeted at both jobs and housing. These include onshoring bonuses, a tax credit for businesses that increase their payrolls, another credit for manufacturing clean energy equipment, and added incentives for mortgage refinancing.
Of course, Congress will block him but these are the right ideas for the moment (I’d definitely add state fiscal relief, which was another component of his Jobs Act from last year). But the President is right to elevate these differences right now. The problem is that the politics are all so topsy-turvy, it’s hard for anyone paying attention to figure out who stands for what.
In this regard, I thought Martin Bashir made an interesting point on this segment from yesterday. If you look at their budgets, as we have at CBPP, Gov Romney and Rep Paul Ryan (author of the House R’s budget) are extremely austere in the short and particularly long runs. Gov Romney, in his economic plan, for example, explicitly eschews any measures to address the near-term cyclical contraction. Whether it’s housing, autos, unemployment, his solutions are supply-side, trickle-down tax policies and deregulation, all of which are geared to longer-term growth—and none of which work, btw.
This is austerity, the very type of thinking that is roiling European politics. Yet, as Bashir emphasizes, Gov Romney accuses the President—who, as noted, is clearly trying to push the other way—as embracing European policies. Listen to what Gov Romney says in the clip: “He’s [Obama] taking America on a path toward Europe, and it’s not working there…Europe’s in real trouble…it’s not gonna work here.”
Um…is he talking about austerity?! It sure sounds like it. And if so, Bashir is right that this is all very much upside down: the President is trying to push the other way, the R’s are blocking him, and the Gov’s own agenda is drawn from the same austere deck that’s blocking recovery both here and abroad.