Two strange, revisionist pieces in this AM’s WaPo.
First, on the oped page, a confusing, ahistorical editorial riffing off of the Rogoff-Reinhart (R&R) debacle. The piece starts off spot-on, making a point I’ve been stressing in recent days: the austerity movement is not built off of this one R&R paper, and absent their paper, the austerions would find other misguided sources to motivate their actions.
The fact that one of those sources would indeed be the editorial page of the WaPo is where the editorial gets weird. All the sudden, the ed board is all “austerity?…us?…really?…why, we’ve been veritable Keynesians over here, praising the stimulus and simply calling for long-term balance.” [I’m paraphrasing.]
In fact, they’ve constantly criticized policy makers for not cutting deep enough and fast enough, and have consistently failed to blow the whistle on cuts that have us stuck in our current slog and Europe back in recession.
It’s interesting to see reactions like this to R&R’s mistakes. An optimist might think that some of those who’ve been relentlessly confident in their bad, contractionary advice might start thinking twice. I am not such an optimist.
Next, just across the broadsheet, we come across an even weirder commentary by Robert Samuelson, on how economics has just become really confusing, and no one knows what to do because nothing seems to work.
Huh?
This is like someone who’s supposed to be getting in shape for a race saying “I’ve tried eating extra snack foods, sitting around watching TV, and napping…but nothing seems to be improving my speed. It’s a mystery!”
Interestingly, on a different oped page today, Krugman writes:
The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy.
I don’t mean to imply that it’s that simple. In models, you add more stimulus at a time like this and economies grow faster. In the real world, there’s implementation, timing, etc. But the evidence, both from our own Recovery Act, and from research on the European situation (see box 1.1 here), is very strong, showing multipliers from Keynesian measures that are well above 1 right now.
To say “we just don’t get it” is to stubbornly and willfully ignore that evidence.
>>To say “we just don’t get it” is to stubbornly and willfully ignore that evidence.>>
You’re being much too kind. The WaPo editorial page and Robert Samuelson show every sign of having an agenda which includes redistributing towards the 1% and cutting benefits for the middle class and poor. They are not so much ignoring the evidence as trying to spin things to support that agenda. Their jihad against Social Security is a prime example.
At the federal level, the main purpose of tax increases and spending cuts is to cool down the economy when inflation has become a problem.
Why doesn’t President Obama submit a tax cut proposal to Congress? Does he really think Republicans would vote against a tax cut for the working poor?
They have voted against a payroll tax cut in the past, so, yes.
“Does he really think Republicans would vote against a tax cut for the working poor AGAIN?”
fixed.
And the answer: yes.
From what I recall, every Republican “tax cut” plan offered during the Republican presidential primary actually increased taxes on the poor. Bobby Jindal’s plan in Louisiana also increased taxes on the poor. Republicans have been pretty aggressive in pushing for increased taxes on the poor, whatever their rhetoric says.
President Obama should use the bully pulpit to get a FICA tax cut for the working poor. He’s the President of the United States, clothed in immense rhetorical power.
Besides government, the austerity craze has been very prevalent after takeovers of companies by financial combines of one sort or another.
I survived this twice, and each time the genius class arrived to say “cut your budget (staff), so we can get closer to our proforma”, and then again the next year, and on and on. When you hire, each new person was to be paid less than the person replaced, and in some cases it took months to get permission to hire, and then the answer was “how did you survive so long without that person? You must not really need them.”
The gist is that when government or business bean counters control a company or government, they apparently obsess that something, somewhere, somehow is being mismanaged: people are overpaid, don’t work enough hours, are generally incompetent, are not trained, etc.
In both cases I endured, the company eventually went bankrupt, which I believe was because good executives and good workers will not long endure incompetent micromanagement and constant focus on cost cutting, rather than revenue enhancement.
In government, as well, you need great leaders to make the overall enterprise grow, but any fool can yell “cut expenses” and pretend to be part of the financial brain trust.
Both cost-cutting and growth are requirements for a well-run business.
It’s just that executing on ‘cut costs’ is so much easier than ‘ drive growth’ when the rubber hits the road.
Americans companies, especially, have a deep and lasting obsession with cost-cutting, and not as much in innovation and growth.
That’s why start-ups are out-innovating large American companies by a million miles in the US. It’s a bad obsession, and it doesn’t serve anyone well.
WaPo: “What we do insist is that the United States cannot afford to neglect its long-term fiscal predicament, and that it needs a more aggressive response than even current versions of a “grand bargain” would provide. The diminution of long-term potential growth is one reason for our concern. Another is that a deeply indebted government would have less “fiscal space” for necessary stimulus during a cyclical crisis. Yet another is vulnerability to a loss of confidence in the bond markets. There’s also the risk that unreformed entitlements crowd out other priorities and transfer scarce resources from young to old.
To some, such arguments amount to fetishizing “austerity” while the jobless suffer. Actually, the problems of the U.S. and global economies are not only cyclical but also structural, and pummeling an “austerity” straw man can be a way to avoid addressing the latter.”
Is this so crazy?
Pablo, cries for fiscal responsibility are akin in kind, if not in degree, to explicit cries for austerity, in that they prioritize future deficits over present unemployment — by analogy, putting the patient on a diet while he’s dying from blood loss.
Productively employed citizens are the lifeblood of a nation, and we are at risk of creating and maintaining a class of perpetually unemployed/underemployed workers who will act as a drain on both our finances and our moral character well into the future. Imagine the potential GDP that we are losing right now from full employment, and the amount of future tax revenue that represents. It’s more than enough to justify almost any amount of present stimulus.
The comment specifically refers to LONG-TERM fiscal predicament. Under all forecasts, deficits come down and then rise dramatically due to the structure of entitlements and an aging population. The comment seems to be referring to Obama’s offer of changing the CPI index as being inadequate to address the problem. Obama has pointed out that the average person puts into Medicare only 1/3 of what they take out. None of this has to do with short term “Austerity”.
Most people — and most policy makers — fail to distinguish those subtleties. It is incomprehensible to them that reducing deficits in the long term is best achieved by raising them now. Moreover, many policy makers use this lack of understanding to push their personal agenda.
In the end, it only means that any talk about dangers of deficits are counterproductive at this time. It only leads to short term austerity that postpones the economic recovery and worsens the long term fiscal outlook.
Is it so crazy? Well, it seems to be saying that we can’t have stimulus because it would reduce our capacity for future stimulus — and we can’t borrow, because that would risk a loss of confidence in the bond markets, which would make it harder for us to borrow. Is it crazy to avoid some hypothetical problem in the future by causing that very problem, in reality, right now? It’s not particularly sane.
Right now… yes it is crazy. Down the road when we have full employment … THEN it won’t be crazy. Get it? Stimulate now. Cut later.
Like it or not, government seems to be the only entity that can stimulate at this moment. If we don’t get people back to work soon, this country’s ability to reduce its debt will be impaired even more.
This is not your family’s checking account.
In return for your short term stimulus what are you prepared to cut? Congress’s structure makes cutting specific programs almost impossible.
Yes, it is. Cutting government spending in slow economic times slows the economy down more, and the deficit gets BIGGER, not SMALLER. And the past week’s news about so-called “studies” showing that above the 90% of GDP debt level slows the economy down is totally wrong.
Yes these fears are crazy, in the sense that they are fears of outcomes that are not possible.
They would not be crazy (a colorable case could be made for them) if the U.S. were on a gold standard, or part of a monetary union like the E.U., or had a fixed exchange rate it wanted to defend at all costs, or held a great deal of foreign denominated debt.
Because none of this is the case, there can be no causal relationship between the size of U.S. public debt and real outcomes such as: potential growth, future deficit spending capacity, future interest rates, or the amount of resources available for use by retirees.
U.S. dollars are not scarce resources for the government of the U.S., nor are they tied to any scarce resource, and thus there is no dependency on any external agency for accessing however much nominal spending capacity that government wishes to mobilize at any given time.
Look, this is basically a ruling class perspective. My ‘entitlement’…that is Social Security…is considered to be overly generous and unsustainable while some hedge fund manager’s low taxes on his ‘carried interest’ goes unquestioned. Our crumbling infrastructure must be endured while companies like GE pay no corporate income taxes and offshore as many jobs as possible. The issue is that the government and the press in this country is of, by and for the wealthiest Americans and biggest corporations.
One side sees it through the government’s eyes and calls it “austerity”, and assumes a government with more money in its pockets will buy things, and that will give people more money to spend.
The other side sees it through the taxpayers eyes and calls it “responsibility”, and assumes people with more money in their pockets will buy things, and therefore give the government more money to spend.
I spent six years in the Federal govt. system and 32 years in the private sector. I’ve seen stupefying, regular, ongoing waste in the Fed Govt. that was rewarded with bigger budgets the next year. I’ve seen stupefying, regular, ongoing waste in the private sector that resulted in companies going out of business, if only eventually.
They’ve both proven they can be stupid, and you can’t trust either one as far as you can drop kick them. But I believe stupidity shouldn’t be rewarded with a bigger budget next year, so I’m going to have to go with the one that can be put out of business for being stupid.
The very serious problem with this notion is that the macroeconomy is not like a business. It doesn’t get more efficient when you cut it during a zero interest rate recession, it gets LESS. When we cut budgets now, we increase unemployment, we increase the rate people lose skills and drop out of the labor force, and we decrease private investment.
The irony is, every dollar we cut from spending is in large part offset by these factors, as the short and medium term economic weakness diminishes productivity and revenues. It’s a race to the bottom, and if you believe Delong and Summers, it’s actually ENTIRELY fruitless.
With this in mind, we see that austerity is not the “responsible” thing. The responsible thing is to cut deficits when we don’t have a zero interest rate recession, and when we do have one, to take that opportunity to spend and make needed investments while capital is cheap and the macroeconomy desperately needs it.
The responsible thing is NOT to fail at this intertemporal maximization by attempting to cut budgets at the worst time in three generations to cut budgets.
You missed one: One side has data on its side and the other doesn’t.
Do we really want to put out of business a provider of essential services? If Hostess goes out of business, I can go get crap from some other producer/business, but who will fill the vacuum should we allow government to ‘go out of business’?
I have to believe that people like Samuelson have been misdirected by what the people they do listen to say about the people and arguments they don’t listen to.
They think they’re listening to you because they hear what you say from the people they do listen to. They might paraphrase or use out of context statements to make a point to diminish what is said here, and it works with those people who never understood the arguments in the first place.
They’re pretenders. They don’t understand a word that is spoken on this subject. They just listen to the people they like to listen to. All it takes to get them to ignore you is to say, yea, well Jared called the Superbowl wrong! That shows you what he knows!
Yea! Now who won?
It is puzzling that Samuelson talks about the failure of macroeconomics and acts as if Keynes, and his followers, Krugman, Stiglitz and others never existed.
It is hard to figure this out. Is he really that unaware of their existence and the predictions that they have made, or is this simply cynical political propaganda. Either way it makes Samuelson look ridiculous to anyone who has followed the economic policy debates about how to deal with the great recession and the chronic unemployment that has resulted.
Samuelson’s editorial ends with: “The larger lesson is: We have moved into an era of less economic understanding and control.”
My question: how is it possible for him to have less understanding of economics?
Because recovery has been much weaker than virtually everyone predicted. Models failed, including the Administration’s.
I am sick to death of people claiming that increasing government spending will increase the debt. With all the discussion about the deficit and government spending, I thought a little history might be helpful in clarifying the problem we face today and perhaps indicate the best solution to our long term debt problem. The Republicans say we must cut spending to reduce the debt; the Democrats say we must spend more to stimulate the economy so the debt will be a smaller percentage of our GDP, and that cutting government spending will make the economy even weaker, as in Europe right now. Is there any history to help us decide what to do?
As a matter of fact, there is. In 1950 the US Federal debt was 89% of our GDP; by 1980, it was only 34% of our GDP. And yet during those thirty years, we only had five years that the Federal government had a surplus; the rest had deficit spending. How could such a seemingly magical thing happen?
Easy. The government spent tons of money on infrastructure (built the Interstate Highway System), education, defense, and social programs. All of this spending stimulated the economy so that it grew much faster than the government debt did, therefore by 1980 the debt was a much smaller percentage of our GDP (that’s a good thing). Any questions?
“I don’t mean to imply that it’s that simple.”
Can you explain exactly what part of the passage you quote is too simple? I fail to see anything in it even faintly at odds with your litany of complicating factors. If I didn’t know better, I might imagine that you were simply looking to maintain beltway credibility…
I would have replaced the cave man like grunt “Huh?” with the actual English word “What?”.
Otherwise, nice column.
I read the editorial and drew a long out *siiiiiighhhhhhhh* over this sentence.
“Actually, the problems of the U.S. and global economies are not only cyclical but also structural,”
Yes, some of our problems are structural. In fact, we always have structural problems that need correction. However, many of our current problems, including high and persistent unemployment stem from our cyclical downturn and Aggregate Demand deficiency.
As for Samuelson, he shows that he is confused (once again) and provokes the idea of a confidence fairy to rescue us, deserving another *sigh*.
Krugman is right. This is macro 101 and *it is really that simple*. The difficult part is the politics and the implementation, not the economics.
We have lost around 700,000 public employees since this crisis, including over 300,000 teachers. Providing aid to restore public employment and investing into our two trillion dollar infrastructure deficit would go a long way. Of course, lower and middle tax cuts combined with mortgage relief would also help.
We could be at (or near) full employment right now with proper government spending and tax relief. Then would could be attacking our structural issues and debt. However, we made the mistake to abandon basic macro and allow our political system to be hijacked by austerian and fake fiscal hawks.
p.s. (on Bill Maher) Thanks for pointing out that the progressive budget bill was the only budget bill that addressed our jobs deficit.
That was a very important point.