Is That A Faint Breeze or is the Wind Changing?

June 13th, 2011 at 8:55 am

Are those of us urging a pivot getting somewhere?

I couldn’t turn around this AM without reading or hearing someone talk about the need to both walk and chew gum: target job growth in the short term; move to a sustainable budget once the economy finds its footing.

The politics remain extremely tough, and it’s still a reach that we’ll do the right thing, but if the Mavericks can beat the Heat, then surely anything is possible.

My old colleague Larry Summers was in the WaPo, urging infrastructure investment and an extension of the current payroll tax cut.  Right next door, EJ Dionne has a nice column which mentions an important tax credit I’ve mentioned in these parts before (from “The Pivot” link above):

“The other idea is a great manufacturing tax credit—the 48C Advanced Energy Manufacturing Tax Credit (man, we really got work on these names!)—that was really effective during the Recovery Act—and it’s green!”

Then, while innocently doing my morning crunches, I heard a segment on jobs ideas on Marketplace radio, reminding me that the Pres himself is going down to Cree Industries today, a very cool LED lighting manufacturer (I visited the factory with the VP back in the day) that was a beneficiary of 48C, and according to the segment, is adding jobs.

For years, we’ve subsidized the production of clean energy, without much thought as to where those producers got their equipment.  The 48C credit fixes that, by incentivizing the building of clean energy equipment here in the US, and it leverages about $2 of private capital for every $1 of the credit.  A number of members of Congress want to renew it, and the administration has been supportive in the past.

Meanwhile, back in EJ’s column, he cites a couple of members of Congress talking another key theme job targeters have been stressing: Do No Harm.  We need a balanced plan of spending cuts and new revenues to reign in deficits, but we don’t need to “let it reign” yet.

To the contrary, Summers makes an important point in passing that I’ve tried to repeatedly stress (ever since I heard it from Brad DeLong).

Deficit-financed fiscal stimulus can be ill-advised in a healthy economy, much like to pouring water in a glass that’s already full.  Since industry and employment are by definition already at or near full capacity, adding excess demand is likely to crowd out private borrowing and generate inflation, leading the Federal Reserve to “mop up the spill,” i.e., raise interest rates to ward off the extra inflation.

But when there’s a lot of slack in the economy and borrowing costs are low, that glass is half full, and the arithmetic tilts sharply the other way (if the gov’t financed this borrowing at the 30-year TIPS rates, we’d be looking at an interest rate of 1.79% as of last Friday!).

This isn’t Laffer-curve Keynesianism—I’m not saying a borrowed dollar spent on job creation would pay for itself.  But according to Brad’s calculations, a temporary $100 billion stimulus at today’s rates would add well under $1 billion to the annual deficit (he gets down to $70 million (with an ‘m’!)/year, assuming productivity effects, but you don’t need to believe that to get behind this idea).  And the benefits of this spending could mean jobs, greater income, and a better safety net for millions of people suffering at the hands of the weak economy.

I don’t know if this is a breeze that fades if the next jobs report is just OK instead of lousy.  But things can turn quickly in this town—ideas that led partisans to reach for their vapors on Monday can become law on Wednesday.  So stay tuned.

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6 comments in reply to "Is That A Faint Breeze or is the Wind Changing?"

  1. comma1 says:

    Larry Summers: “Recent presidential directives regarding relaxation of inappropriate regulatory burdens should be rigorously implemented to boost confidence.” I may not have gone to Harvard, but I can tell you that relaxation of regulatory burdens seems like a bone-headed lesson to take from the past decade.

    I have an idea, why don’t we listen to people who didn’t have a direct hand in creating this mess? Why don’t we listen to people running schools that don’t send their students directly to Wall St and K St upon graduation? Oh yeah, and the White House… to implement health care reform in the middle of a depression. Who thinks that the creator of facebook, the most productivity killing invention in the world, is going to lead us out of this 30 year war on the middle class.

  2. Jeff H says:

    I will believe the wind is changing when I see a Republican leader in the House say those things. Unfortunately I don’t see any scenario where that can happen.

    Do you?

    After all, we have Leader Cantor wanting off sets to do support for tornado and flood damage.

    I think it would be easier for a camel to pass through the eye of a needle, than a Republican in the House to support the change… 😉

  3. bmk says:

    Does Obama have the spine to introduce another meaningful fiscal stimulus plan? Is it even plausible to think, this close to 2012, that the GOP & Dems would work together to push something through? Suppose the Dems were willing to go along w/ another tax cut, would the GOP even help pass it? It sounds silly, but neither side really acts like they want to work w/ one another. The economy needs an innovative idea that increases worker confidence, the answer isnt something we have already see so during this recovery, its something bold & new that takes b@lls to support.

  4. David R says:

    It does sound as if their is at least some recognition that Economics need to address the current problems instead of arguing about policy to fix 1933.

    This post explains what might need to be done,

    and one thing that must be decided is whether or not the US will fight the deficit or unemployment.

  5. AMM says:

    “the need to both walk and chew gum” Haha, I love that quote especially because it points out what shouldn’t be something that is that hard to grasp (jobs now are one issue, deficit later is another one) and appropriately mocks those that pretend it is too difficult to think about both and so we should just ignore one of them…

  6. Fred Donaldson says:

    CREE industries: more than half its employees are in China.

    We give credits here, which allows money to move from one pot to another in a company, and ends up subsidizing our competitors overseas and reducing jobs here.

    American taxpayers fund foreign factories and lose their jobs at the same time.