Got home yesterday and told my kid I’d had a busy day because the stock market dropped a lot. Her response: “Oh…is that bad?”
The downgrade certainly played into the massive selloff, so yet again, S&Ps fingerprints are all over a market crash. Could somebody please downgrade them?!?
But the larger issues behind the crash are well-known at this point. At center-stage, we have weak growth prospects that continue to lag expectations—everybody thinks things are about to get better, and when they don’t, everybody has their economic hearts broken all over again.
The typical forecaster predicts improvement in the next quarter or so, then a week later, moves that improved scenario another few quarters ahead.
Note the magical thinking here. “Things will get better, I just know it.” Yet, both here and in Europe, policy makers essentially fumble around, unwilling to identify and go after the real culprit: weak aggregate demand here and insolvency (or near-insolvency) there.
I’m not saying these are easy problems to diagnose or fix (well, the US demand problem is very clear—Europe’s is more complicated, because some countries (Italy) could likely resolve their debt burdens with strong liquidity injections, others (Greece), probably not).
But what was the biggest, most time and media and attention-consuming economic debate in this country in recent months? Was it which are the best jobs measures to get America back to work? Was it how many more rounds of easing should the Fed undertake?
No. It was whether to raise the debt ceiling or default.
Yes, there are many policy makers who either don’t understand these dynamics or are purely politically motivated. Some are cynically and solely driven to make the President look bad, with no regard for collateral damage. Others are acting on the belief that smaller government, and thus cuts and further austerity will allow growth to flourish, despite daily evidence that this is backwards.
If you are Ben or Barack, IMHO, you need to ignore them from here on in.
Bernanke and the Fed can help, but they face two other contraints. First, the monetary version of premature fiscal austerity is the phantom menace of inflation. But to the contrary, one way to help both households and governments reduce the real level of their debt burdens is to print money and buy more long-term bonds—QE3, 4, etc. There’s little threat of core inflation accelerating with so much spare capacity in the economy, so helping these sectors to lower the liabilities on their balance sheets will help.
But it might not help much. Constraint number two for the Fed is that interest rates are already low, both at the short and long end of the yield curve. And we know firms are highly profitable and sitting on trillions in cash reserves. So monetary policy faces a pushing-on-a-string problem.
The real action is with the President right now. I liked his comments yesterday—they didn’t go far enough on the jobs front in a way I’ll suggest in a moment, but I liked the setup. He essentially said, “OK, I worked with the opposition—who recklessly used default as a bargaining chip—to do some deficit reduction. S&P didn’t like it—so what? They’re not exactly a beacon of light these days. But I think I’ve bought myself some running room on jobs…so that’s where I’m headed.”
He then talked about renewing the payroll tax holiday, extending unemployment benefits, and infrastructure—specifically roads and bridges.
The first two are already in the system—they should be renewed but let’s be clear: they don’t provide new stimulus. It’s keeping your foot on the accelerator, which is helpful, but not as helpful as pushing down further. The third—infrastructure—is great, but I’m worried “roads and bridges” don’t get it. They’re necessary, but a) they’ve become more capital intensive so you don’t create enough jobs (I think this is true, but need more research to be sure), and b) they don’t capture the imagination.
I like FAST! and recommend he runs with that, or some other idea that meets these criteria: it can be stood up quickly, it’s labor intensive with a decent bang-for-buck re jobs, people get it and feel good abut it right off the bat (so, as much as I like the infrastructure bank idea, I’m not sure it works here).
“But wait!,” you shout. We’re out of bullets—there’s no more money for such things—and Congress will refuse to add any of this to the deficit. How can you advise the President to block everything else out and call for measures Congress will refuse to consider?!?
That’s the kind of second guessing, negotiating-with-yourself that has us stuck in the mud. The President needs to decide what this economy needs, make sure it meets the above criteria, especially the one about the solution being easy to understand and feeling good, and fight for it nonstop from here until the unemployment rate starts to steadily decline.
If the merchants of negativity and obstruction block him, then he has to tell the American people precisely who is standing between them and their jobs, their opportunities, their living standards. Tell them that their own and their children’s well-being is actively undermined by those who refuse to work with him to get America back to work.
It’s that simple.