I recently pledged to myself and readers that I would stop paying so much attention to crazy fiscal fights—cliff, ceiling, etc.—and more to what people actually, and appropriately, care more about: jobs, income, wages, wealth. Not that I’ll ignore the fiscal fights, of course. But here at OTE, we’re all about balance, and the post-count here has been imbalanced in this regard. I’ve got my own type of jobs deficit that I intend to address.
But first, have you ever wondered why, post-Recovery-Act at least, we’ve spent almost all of our domestic policy time on fiscal issues, despite the fact that the economy, while improving, has been doing so too slowly by everyone’s estimation?
Here are my explanations:
—People believe the Recovery Act didn’t work and have turned anti-Keynesian. We spent $800 billion on the Recovery Act and the unemployment rate remained high. Ergo, according to this reasoning, it didn’t work. But of course this just proves a) people don’t do counterfactuals (how much worse things would have gotten without the intervention)—much independent analysis shows unemployment would have been a lot higher without it, b) they haven’t read the definitive book by Mike Grunwald, The New New Deal, on how well the stimulus worked, summarized here, c) Keynesian policies are ideologically inconsistent with conservatives’ vision of small government, including ignoring market failures (though there are of course exceptions to the small government mantra when the policies benefit a prized constituent, like oil or ag subsidies).
—Deep misunderstanding of the role of deficits and debt in contemporary economies. While many policy makers use the anti-deficit argument as leverage to try to cut the programs they don’t like (this reason gets its own bullet point, next), many just believe the budget deficits are always bad, always a symbol of imbalance, irresponsibility, dysfunction, moral failure, and an unwillingness to make the “hard” and “painful” choices.
This may be psychologically reasonable, but it’s economically illiterate. Fiscal policy must be dynamic, expanding to meet demand shortfalls in market failures and moving back towards balance in expansions.
Plus, they don’t even really mean it. Recall how the deficit moralists turned Keynesian when the fiscal cliff threatened to extract north of $500 billion from this years economy.
—Faux deficit concern as a tool to shrink government. Remember how in the old show “The Music Man,” the main character had to get everyone in the town revved up about something to which he had the solution? “Trouble with a capital ‘T’ and that rhymes with ‘P’ and that stands for pool!” Well, T also rhymes with D and the stands for deficit…right here in River City! (Really—watch the video and see if you can’t imagine some faux deficit hawk in the lead role.)
Those who’ve pledged to never raise taxes—the House R’s who refused to support a tax increase even for households over $1 million—or Gov Romney who campaigned both against deficits and against the President’s Medicare cuts—are good examples of deficit “chicken” hawks.
A good thought experiment here is to think how the faux hawks would react to a plan that raised and spent 30% of GDP on the federal budget, percentages well above the historical average, but ones that represent a balanced budget. They’d run in horror because their goal isn’t balance, it’s tax cuts for rich people and a lot less social insurance and safety nets.
—Fiscal policy we can (theoretically) control, but no one really knows how to generate job creation. This one is particularly important because even some people who can see through the ideology and misunderstandings noted above get stuck on the question of what the government would actually do if it wanted to generate more jobs.
But wait—didn’t I say the Recovery Act worked? Yes, but much of it was indirect and much of the evidence is circumstantial. We know, for example, that those who got extended unemployment benefits spent the money and history shows that a) such spending has a growth multiplier and b) the added growth means more demand and thus more jobs. Same with tax cuts, though here we expect less of an impact because in terms of spending the extra income like you’d expect from the unemployed, some people surely banked their tax cuts or used them to pay off debts—a necessary move from their perspective but not something that boosts demand and jobs.
In short, some policy folks in this space would like to see the unemployment rate come down and would be willing to support policies to get you there, but aren’t sure what those policies are. On the other hand, they reason, increased taxes and lower spending will reliably reduce the deficit.
Though I believe the historical multipliers, I have some sympathy towards this view. When you recognize that a lot has to go right for a tax cut, for example, to turn into a job (here in America, of course), it seems a bit facile to plug such cuts into a Keynesian model and predict jobs outcomes with precision.
That’s why I’ve come to believe more direct jobs measures are the way to go, all else equal (sometimes—often—you have to go with what you can get given political constraints). Infrastructure projects are more reliable and strike many as highly recommended right now, with large public goods deficits, very low borrowing rates, and lots of blue-collar unemployment. In the longer term, however, achieving full employment may require more direct job creation, especially give recent impressions that the impact of “labor-saving” technology is accelerating.
Of course, this assumes that reaching full employment is an actual policy goal, as opposed to lurching from one self-induced fiscal crisis to another. All the more reason to bang the full employment drum a lot louder and the fiscal hysteria one not at all.