Paul K is of course correct regarding the timidity of the responses to the economic crisis—more specifically, the deep and persistent demand contraction. As for what’s holding policy makers back, however, I’d offer something that’s not in Paul’s piece.
As he suggests, “class interests” are in play (when are they not?). If you are a policy maker whose ultimate goal is to deliver lower taxes to your funders, discrediting government is step one, as shrinking it by cutting its revenue clearly follows. From that follows every argument you’ve heard in recent years, from unsustainable social insurance, deficit-hair-on-fire, supply-side tax cuts for the job creators, shudder the regulators, yada, yada.
But I’ve noticed something else among policy makers whose hearts and heads are in a better place than this—and there are more than a few of them up there on Cap Hill. It’s not enough to tell them: we need more fiscal stimulus. They need specifics. They need a clearly stated policy road map with directions back to full employment.
Many good, thoughtful economists correctly argue, based on the basic “IS-LM in a liquidity trap” argument that Paul has emphasized, that more fiscal stimulus will help. Others, in the name of secular stagnation (and within the same IS framework), argue that if we could only get the real interest rate down to its equilibrium level, which is still below zero (implying the need for more inflation), things macro would fall into place.
Yet, I fear there’s a pretty yawning gap between the economist’s lab and the floor of the Congress (to be clear, this is not a ding on the theorists—it’s a clarion call for those of us who would map their insights onto policies). Policy makers, and I’m talking about the ones with truly good intentions, need bills that support concrete measures with observable results. True, those bills won’t go anywhere right now, but if we ever want to change that, then we’ve got to start fighting them out.
I’m talking about ideas like FAST! (Fix America’s Schools Today), extended UI, direct job creation, reducing the trade deficit, worksharing, full employment! Progressives must be as specific as possible about the economic interventions that we think will work right now. For example, a scaled-up version of the TANF subsidized jobs program, targeted at the long-term unemployed, has the advantages of concreteness, a good track record during the Recovery Act, and even bipartisan support. As I’ve said many times, direct job creation like this is far preferable to ideas like tax cuts that depend on a chain of events—spent not saved, spent on domestic goods—to actually generate a job.
My experience is that good policy makers know we still need to do something to help both the unemployment and the working families that are struggling. And yes, that “something” falls under the rubric of precisely the fiscal and monetary stimulus suggested by IS-LM in a liquidity trap. But that’s a pretty abstract sandwich for a legislator to bite into.