Hey…did you hear that?? It sounded like something just snapped.
It’s the sound of America finally getting fed up with the high-stakes craziness going on here in the nation’s capital. I could be wrong, but my read of the national mood is changing and that enough people are both paying attention to the debt ceiling debate and are “taking names” such that we might see Congress shamed into some action.
I’ll continue to track this of course, and I’ll weigh in on parts that I believe are of interest, but frankly, it’s not worth it to follow every wiggle. So let’s put aside “the-gang-of-six-and-their-bag-of-tricks” for a moment and assess where we are and where we might be headed, political-economy wise.
[Note: Read in the NYT this AM re the gang’s plan: “…Representative Eric Cantor, the No. 2 Republican, and others like Representative Paul D. Ryan of Wisconsin, the Budget Committee chairman, warned that the most specific proposal to be made public so far — and the one that has done the most to reopen the possibility of a bipartisan accord — relied far too much for them on higher revenues to cut projected deficits.” Like I said, don’t get too attached to this or any other plan right now…I still think we’ll lurch and muddle our way to avoiding default, but it’s one ugly process.]
The Present: The US economy’s stuck in something like neutral, with both consumption and investment in weakened states. The former remains 70% of the show, so if consumers are retrenching, absent policy help, we’re stuck.
Conventional monetary policy is bound by zero (the Fed can’t lower interest rates below zero) and less conventional stuff, like quantitative easing, might not even help much. The cost of capital is not a constraint right now, at least for larger firms, and corporate cash reserves are flush.
That leaves fiscal stimulus, which are two naughty words.
So the present is wracked with real problems—the fallout from the housing bubble, financial collapse, deleverage cycle, weak demand, high joblessness—strongly reinforced by self-inflicted handcuffs on policy relief and an invented debt ceiling crisis.
That’s here—in Europe, they’ve got their own version of dithering, refusing to rip the band aid off and restructure Greek debt, amplifying the threat of contagion and deeper sovereign debt crises in much larger economies.
The upside of the present: deleveraging is winding down in the household sector (debt service ratios are back to pre-recession levels), corporations have high levels of cash reserves and could create economic activity if they saw profitable opportunities, the housing correction is largely over (it ain’t helping but it’s not hurting as much), and the private sector has been adding jobs, though far too few.
The forecast is for slow improvement. We need a V-shaped recovery; we’re getting an L.
The Future: As is the case by definition, this is where hope lies so it’s where I’d like to focus for a while. It’s not just that the present is depressing; it’s that policy analysts like myself need to envision and articulate a better plan forward. It’s of course entirely possible that any such path will be blocked by the same destructive politics on one side and hyper-cautious response on the other. But if there are no positive alternative paths out there, we’re that much less likely to follow them.
Therefore, in coming days, I hope to post on post-debt-ceiling-debacle ideas for moving the economy forward, both “coulds” and “shoulds.”
A number of us are continuing to develop the FAST! idea (Fix America’s Schools Today), avoiding air-pockets (continuing some version of the payroll tax break and unemployment benefits), nudging the GSEs toward loan mods and putting their foreclosed housing stock on the rental market, pushing back on international currency managers to boost our exports, and other ideas in this space, including President Obama’s forward-looking investment agenda, which has the potential to help our manufactures move from contracting (eg, autos) into expanding sectors (eg, clean energy).
It’s also important to get back to bigger, structural job creation questions. Once the economy recovers, we’ll need to be mindful of not just the quantity of job creation, but the quality. This means wage policies like the Earned Income Credit (which is interestingly protected in the gang of six plan), minimum wages, and union organizing (remember this—it’s still alive), will need attention.
And then there’s the productivity challenge. This is the structural shift toward capital versus labor intensivity in sectoral job creation that I was fretting about a few weeks ago.
Labor saving technology has gone on forever, and I’m not at all a Luddite alarmist—I always remind myself that there’s no long term negative correlation productivity and job growth. Demand is the intervening variable and that makes all the difference, offsetting and absorbing higher output per hour.
But this warrants close analysis so more to come on all of the above.