A Quick Plug for Specificity When It Comes to Needed Economic Policy

March 21st, 2014 at 9:39 am

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.

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6 comments in reply to "A Quick Plug for Specificity When It Comes to Needed Economic Policy"

  1. tyler says:

    In the spirit of boldness, how about a full payroll tax holiday for the working poor that would expire when the national unemployment rate reaches two percent?


  2. smith says:

    I would favor ideas like FAST! (Fix America’s Schools Today), extended UI, direct job creation, reducing the trade deficit.

    I don’t favor worksharing now since that is a program best implemented to keep people in jobs at the start of a downturn. In the current phase of the business cycle the government wage subsidy would just be corporate welfare.

    Likewise, a scaled-up version of the TANF subsidized jobs program, targeted at the long-term unemployed, is off target in providing wage subsidies instead of creating demand. Analogous to this way of thinking, when addressing discrimination, I can’t recall a program which gave government subsidies to employers hiring minorities and women vs targeting the actual discrimination and assisting disadvantaged classes. Instead of wage subsidies, the other aspects of TANF like assistance to long term unemployed should be expanded, and augmented by new incentives and assistance to employers hiring long term unemployed (but not wage subsidies).

    Again, wagesharing and wage subsidies are corporate welfare, just like EITC, depress everyone’s wage, aggravating inequality, hurt businesses that offer a fair wage, and give the illusion of addressing the fundamental problem, lack of demand. In the followup study supporting TANF, only 2/3 of employers even claimed to be creating new jobs.

    What is clear is the long term unemployed is now a special aspect of the Great Recession that needs a new program (short term unemployment is back to normal). Go back to the back of the envelope calculation, 2 million long term unemployed x $100,000/government job or government contract = $200 billion, lowering unemployment from 6.5% to 4.5% give or take those reentering workforce. This increases the deficit/GDP by 7% but could be entirely funded by raising the tax on top 1% to cut their share of national income from 20% to 18%. They would average $1.2 million/year instead of $1.5 million/year in income, but the tax would have to fall more heavily on the top .1 and .01 percent. They got only 11% in 1979, and 15% not too long ago 90s or 2000s.

    Wage subsidies in any form often get bipartisan support for a reason, in the long run, they hurt labor and aid business (the rich get richer, the poor get poorer) In my humble opinion.


  3. wendy beck says:

    Thank you for adding something valuable to Paul K’s op-ed today.

    Re: “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.”

    As a reader and observer of the political scene and a non-economist, I can tell you that NOT being specific gives Democratic (and possibly other) voters the feeling that there is no fire in the belly, indeed no real conviction amongst the Democratic or liberal representatives. And that, more than not being able to get something passed, is perhaps even more damaging to the Democratic Party brand. Let the ideas flow and may voices be raised, please!


  4. Larry Signor says:

    My take away from this post is that we need to be real. Real people are suffering while we diddle away our time here. I don’t make a difference expressing an opinion, so I think I will try to make a difference and occasionally comment. Luddites rule!


  5. Michael says:

    I have a problem with the idea that if someone would only jump through one more hoop, make one more explanation, give one more reason, then everything would fall into place.

    That’s because when the reason for not doing, not implementing, not acting changes depending on the circumstance being given, its not actually the real point. Lets say your boss has two proposals in front of him: one of them says they will buy 50,000 widgets at $5 each and save $20 million doing so. The other proposal says they will buy 20,000 widgets at $20 each and save $40 million (a study authored by his favorite co-worker.) It doesn’t matter if the numbers in the second study don’t add up or don’t make sense, the economical (his co-worker is cutting him in on the profits) and social rewards of going with the second proposal are already determining which outcome is being chosen. However, because there are, say, three weeks left before the actual decision is made, the first proposal keeps getting sent back for a variety of reasons: not enough data, too much data, not enough graphs, too many graphs, always some reason why the presentation is never ‘just right.’

    There are only so many ways you can say 2+2=4 before you have to accept the fact that the person asking you to clarify your answer isn’t looking for clarification, its looking to keep you busy trying to please someone you can’t please. All the data and graphs and papers in the world won’t convince someone of something they don’t want to believe in (or act on) in the first place. “Nothing to see here folks, move it along.”


  6. Robert Buttons says:

    “Generous unemployment benefits can increase both structural and frictional unemployment. So government policies intended to help workers can have the undesirable side effect of raising the natural rate of unemployment.”
    Paul Krugman, “Economics”.2009.


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