It’s one thing to be up the creek without a paddle. It’s quite another to be stuck up the creek with a paddle that you can’t use.
The latter describes where we are in terms of economic policy. The Federal Reserve is trying to do their part with more easing of interest rates, but absent more action on the fiscal side, like the measures in the President’s jobs plan, I don’t expect anyone much to take advantage of lower rates. What’s missing is demand, customers, orders, projects that inspire investors to come in off the sidelines.
In other words, I think that at a time like this, sequencing matters when it comes to monetary and fiscal stimulus, and fiscal needs to go first…without more demand, I fear we’re unlikely to see the incentive of lower rates gain more traction.
So what’s blocking the fiscal push, as in the jobs plan?
A friend of mine (hat-tip JB) reminded me of this interesting albeit disheartening analysis by James Surowiecki (btw, imho this dude writes a consistently excellent weekly economics column for the New Yorker). His answer to the above question is, of course, Republicans (though I must say, I haven’t seen nearly enough push from the D’s either on the jobs plan), but that begs another question: why is it politically costless for R’s to go to the do-nothing, or worse (austerity!), place on jobs?
Again, the obvious answer is that what hurts the President helps his opponents, but doesn’t that tactic put them in the position I started with: stuck up a creek but not using your paddle to get out?
In order to seal that part of the deal, the R’s have to argue that the paddle doesn’t work—worse, it’s an wasteful, expensive paddle that we should put through the wood-chipper. And that argument has been made much easier for them by the fact that nobody does “counterfactuals”—what would likely have occurred absent the stimulus.
The Recovery Act passed and unemployment got higher. It would have gone higher still without the Recovery Act—that’s a consensus among non-partisan experts—but that’s an awfully hard hand to play. It’s true that the administration (of which I was a member) made our hand even tougher by underestimating how high unemployment would go, by talking about “green shoots” too soon, and by not taking out enough “Rogoff/Koo insurance”—extra stimulus in the pipeline in light of the long, hard slog characterized by financially driven, balance-sheet recessions.
No matter what we did, however, the President faced a timing problem that was in this regard even tougher than FDRs in the Great Depression: President Obama got there as the storm was breaking (GDP contracted by 9% the quarter before he took office); FDR took the stage when the storm had been upon the land for years already.
The unemployment rate was 8.5% in January 2009; 10.6% a year later…In 1933, it was already above 20%. As Surowiecki puts it:
“…voters are more likely to hold politicians accountable for economic conditions when there’s “clarity of responsibility”—and responsibility for the economy now belongs to Obama and the Democrats. The recession started long before Obama took office. But, from a voter’s perspective, he had two years with sizable majorities in Congress to do something about it. While the 2009 stimulus plan succeeded in making the recession less awful than it might have been, you rarely get credit in politics for what didn’t happen…If you try to fix it, it’s yours.”
For the opposition, this dynamic means sitting on your hands is the optimal strategy:
“Coöperating on a bill would make it harder for them to disclaim responsibility for a weak economy at election time. They need to do enough to seem as if they cared about unemployment but not so much that they get blamed for it.”
Unless, of course, you actually want to help people–to help them get back to work, to stay in their homes, to begin to build the incomes back up.
Silly, I know. Being stuck up a creek just looks a whole lot better to one side right now, and it’s hard to see what would make them use the paddle for anything other than whacking everybody around.