What’s Going On and What to Do About if You’re Barack or Ben

August 9th, 2011 at 9:09 am

Got home yesterday and told my kid I’d had a busy day because the stock market dropped a lot.  Her response: “Oh…is that bad?”

The downgrade certainly played into the massive selloff, so yet again, S&Ps fingerprints are all over a market crash.  Could somebody please downgrade them?!?

But the larger issues behind the crash are well-known at this point.  At center-stage, we have weak growth prospects that continue to lag expectations—everybody thinks things are about to get better, and when they don’t, everybody has their economic hearts broken all over again.

The typical forecaster predicts improvement in the next quarter or so, then a week later, moves that improved scenario another few quarters ahead.

Note the magical thinking here.  “Things will get better, I just know it.”  Yet, both here and in Europe, policy makers essentially fumble around, unwilling to identify and go after the real culprit: weak aggregate demand here and insolvency (or near-insolvency) there.

I’m not saying these are easy problems to diagnose or fix (well, the US demand problem is very clear—Europe’s is more complicated, because some countries (Italy) could likely resolve their debt burdens with strong liquidity injections, others (Greece), probably not).

But what was the biggest, most time and media and attention-consuming economic debate in this country in recent months?  Was it which are the best jobs measures to get America back to work?  Was it how many more rounds of easing should the Fed undertake?

No.  It was whether to raise the debt ceiling or default.

Enough already.

Yes, there are many policy makers who either don’t understand these dynamics or are purely politically motivated.  Some are cynically and solely driven to make the President look bad, with no regard for collateral damage.  Others are acting on the belief that smaller government, and thus cuts and further austerity will allow growth to flourish, despite daily evidence that this is backwards.

If you are Ben or Barack, IMHO, you need to ignore them from here on in.

Bernanke and the Fed can help, but they face two other contraints.  First, the monetary version of premature fiscal austerity is the phantom menace of inflation.  But to the contrary, one way to help both households and governments reduce the real level of their debt burdens is to print money and buy more long-term bonds—QE3, 4, etc.  There’s little threat of core inflation accelerating with so much spare capacity in the economy, so helping these sectors to lower the liabilities on their balance sheets will help.

But it might not help much.  Constraint number two for the Fed is that interest rates are already low, both at the short and long end of the yield curve.  And we know firms are highly profitable and sitting on trillions in cash reserves.  So monetary policy faces a pushing-on-a-string problem.

The real action is with the President right now.  I liked his comments yesterday—they didn’t go far enough on the jobs front in a way I’ll suggest in a moment, but I liked the setup.  He essentially said, “OK, I worked with the opposition—who recklessly used default as a bargaining chip—to do some deficit reduction.  S&P didn’t like it—so what?  They’re not exactly a beacon of light these days.  But I think I’ve bought myself some running room on jobs…so that’s where I’m headed.”

He then talked about renewing the payroll tax holiday, extending unemployment benefits, and infrastructure—specifically roads and bridges.

The first two are already in the system—they should be renewed but let’s be clear: they don’t provide new stimulus.  It’s keeping your foot on the accelerator, which is helpful, but not as helpful as pushing down further.  The third—infrastructure—is great, but I’m worried “roads and bridges” don’t get it.  They’re necessary, but a) they’ve become more capital intensive so you don’t create enough jobs (I think this is true, but need more research to be sure), and b) they don’t capture the imagination.

I like FAST! and recommend he runs with that, or some other idea that meets these criteria: it can be stood up quickly, it’s labor intensive with a decent bang-for-buck re jobs, people get it and feel good abut it right off the bat (so, as much as I like the infrastructure bank idea, I’m not sure it works here).

“But wait!,” you shout.  We’re out of bullets—there’s no more money for such things—and Congress will refuse to add any of this to the deficit.  How can you advise the President to block everything else out and call for measures Congress will refuse to consider?!?

That’s the kind of second guessing, negotiating-with-yourself that has us stuck in the mud.  The President needs to decide what this economy needs, make sure it meets the above criteria, especially the one about the solution being easy to understand and feeling good, and fight for it nonstop from here until the unemployment rate starts to steadily decline.

If the merchants of negativity and obstruction block him, then he has to tell the American people precisely who is standing between them and their jobs, their opportunities, their living standards.  Tell them that their own and their children’s well-being is actively undermined by those who refuse to work with him to get America back to work.

It’s that simple.


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21 comments in reply to "What’s Going On and What to Do About if You’re Barack or Ben"

  1. Th says:

    2008 campaign slogan: “Yes We Can.”

    2012 campaign slogan: “No We Can’t, but it’s the Republicans’ fault.”

    See the problem? Bush wasn’t really the “Decider” and Obama isn’t really the “Succeeder.” To really succeed he needs to give up the idea that everything he has done was just right and regain some credibility. Has he ever admitted in public that the stimulus was too small or poorly designed or designed to solve a much smaller problem? No, he says – as do Romer, Summers etc. – doing better was too hard. What happened to “Yes We Can?”

  2. Phillip Wynn says:

    It’s simple, it makes sense, and for precisely those reasons it has no chance of happening in the foreseeable future. We have the worst of all possible worlds: an intransigent Congress bent on sabotaging a Democratic president at any cost, and a president who more and more is acting stunned like, as Lincoln famously once said of one of his generals, a duck who just got hit on the head with a plank. This isn’t negotiating with ourselves, it’s facing reality.

    The “reality-based community” at this point needs to hunker down and plan for when the political conditions are right for implementing radical surgery on the American economy. Since one political party is hell-bent on insuring that our economy doesn’t improve before fall 2012, that time is clearly not now. Sorry.

    • D. C. Sessions says:

      The “reality-based community” at this point needs to hunker down and plan for when the political conditions are right for implementing radical surgery on the American economy. Since one political party is hell-bent on insuring that our economy doesn’t improve before fall 2012, that time is clearly not now. Sorry.

      More specifically, that time is at the earliest 2016.

      The chances of a Democrat being elected then after BHO and the economic devastation over the next five years is in the “snowball’s chance” range. Which means that, perversely, the best economic prospect for the country would be for President Romney to take office in 2013. The economic outcome over the next four years would be about the same but the Republicans would get the blame.

      The counter to that is that we’d have a President who would continue to appoint Alitos and Scalias to the USSC because it’s a cheap pander to the extreme right that he would need to keep in his corner. The alternative, though, would be someone like President Perry in 2017 appointing the judges with a filibuster-proof majority in Congress and the power to trash both the law and the economy.

  3. markg8 says:

    “he has to tell the American people precisely who is standing between them and their jobs, their opportunities, their living standards.”

    If the market continues to tank he and we have to make it abundantly clear that it’s because Boehner got 98% of what he wanted and the downgrade market flop is the ransom price McConnell demanded.

  4. Jason says:

    Seems to me that there is a potential to combine monetary stimulus with an infrastructure bank?

    For instance: The Fed buys the 30-50 year infrastructure bonds and the money is used to build infrastructure with a long payback period, like high speed rail, grid capacity in wind power areas, rail/rail grade separations, energy retrofits for public buildings.

    The question is there anyway this can be meaningfully done without busting through the most recently set debt ceiling? Is there any way that the fed can directly issue bonds? Maybe the fed could buy state- or private-issued bonds that fit a particular criteria?

  5. Chris says:

    If only there were very obvious and significant failures of our infrastructure in the past few years that the President could point to justify a significant investment. Things like bridges collapsing or large scale blackouts due to the energy grid failing creating blackouts for 50 million people should provide a nice justification for the infrastructure spending.

  6. Jeff H says:

    Let’s do FAST without Congress.

    I’ve seen you on TV talk about FAST, and I think it’s a great idea, very stimulative, and little to no waste. I’ve also heard a lot about QEx, the fed buying up securities.

    Why not combine the two? Why not have the Fed set up the infrastructure bank, and offer low to no interest loans to states and other municipalities for FAST projects?

    As has been stated over and over, S&P’s downgrade will effect states most deeply, and with the Fed’s capacity (balance sheet…), why is it that banks can borrow at near zero, then lend it back to the treasury? Why not just lend straight to the states?

    I’m sure I’m missing something, but hope you, or someone else can straighten out my thinking 😉

    • readerOfTea Leaves says:

      Like Jeff, I don’t understand why the fed can’t simply lend straight to states and cut the banks out of it. I’d buy FAST bonds.

      But as an economist, Dr Bernstein can’t be expected to realize that there is some data, IIRC, supporting better learning outcomes with updated school design.

      Most schools were built before the computer era, and also before good research on the neurology of learning. Levels of noise, lighting, group size (and room size), and many other factors related to environment and sense of safety and comfort affect learning. In other words, FAST dovetails with improving learning outcomes.

      • Jeff H says:

        Do you know what’s even worse? In Riverside Ca, near where I live, the spent $105 million on a new state of the art high school.

        It won’t open because there is no money to operate it.

        This is insanity!

  7. foosion says:

    Many Americans are worried about how they are going to afford to survive in their old age. Therefore, they spend less today. All the talk about cutting Social Security and Medicare furthers this anxiety and puts more of a drag on current spending. Obama putting SS and Medicare on the table just makes the situation worse.

    Here’s a simple way to increase consumer confidence – promise to veto anything which cuts these programs. The fact that these programs are overwhelmingly popular makes this both good policy and good politics.

    Instead, yesterday Obama yet again suggested he’d cut retirement security.

    Aid to state and local governments would prevent contraction at those levels and therefore provide immediate help to the economy. It would be popular, at least with governors and other officials. Given our low cost of borrowing (negative 0.75% real for 5 years), it’s cheap for the country.

    Even if stimulus measures won’t pass, it’s worth fighting for them. It moves the public conversation in the right direction and helps set up a sharp contrast that may result in a better congress after 2012.

  8. Jim In Panama says:

    Going to the “American People” is no longer an effective strategy. There is no “American people” anymore. The country is just as polarized as the government. He can go to about 1/2 the American people (the other half just wish he was white)

    • foosion says:

      Jim, there’s at least 2/3 support for maintaining Social Security, Medicare and Medicaid and for raising taxes on incomes over $250,000. There’s majority support for lots more.

      The problem current is Washington not listening to the people, not that the people are split 50/50.

  9. alex says:

    we have entered bizzaro world where republican david frum argues for keynesian stimulus to move the economy forward while democrat barack obama wants to cut the social safety net while protecting the pentagon.

  10. Kevin Rica says:

    This will not get better until the people in the White House and Congress understand why all the stimulus and Bush tax cuts did not have the intended effects — the current account deficit. We have a current account deficit which is a drag on aggregate demand (basic Keynesian economics).

    We have a current account deficit because other nations are using their current account surpluses to divert aggregate demand to their economies from ours. By the same token, they export their surplus savings to our economy and with it comes their recession. Keynesians (Joan Robinson) called that “Beggar-My-Neighbor.”

    The WH needs to try reading Michael Pettis’ blog:




    Just applying the right Keynesian remedies to the wrong situations won’t do it.

  11. D. C. Sessions says:

    If the merchants of negativity and obstruction block him, then he has to tell the American people precisely who is standing between them and their jobs, their opportunities, their living standards.

    That would be partisan finger-pointing, and if there’s anything that President Obama is not, it’s a partisan finger-pointer.

    Face it: this Administration’s domestic theme song is I’d Like to Make it with You. (Foreign policy is “… with Yoo.”)

  12. Tom says:

    Jared, what do you think about the argument that the payroll tax holiday plays into the hands of the right by giving them a lever to weaken SS finances? Would you prefer restoring the Making Work Pay credit?

  13. Dennis Doubleday says:

    You forgot constraint #3 for the Fed: it is currently loaded with Austerians who will resist any significant attempts at a money drop by Bernanke.

    President Obama also has some blame here for failure to fill empty seats.

  14. marc sobel says:

    A President with the will of Bush/Cheney/Rove would just have the Fed stop loaning money to the TBTF banks until they tell the GOP to mind. Simple.

  15. Eric Titus says:

    It does seem like there’s a real problem with the government being unable to offer a clear vision for the economy because it is stuck between a rock and a hard place.

    If it wants to improve the economy in the short term, it needs to talk up America’s economy and whatever growth is happening.
    If it wants to improve the economy in the long term, it needs to target long term issues.
    The Republicans are clearly on a long term perspective. They believe that the economy will be better off with less government, and are willing to jettison short-term growth to make it happen (and they also hate Obama’s guts).
    Obama seems worried about tackling structural issues (inequality, banks, etc) while the economy is on uneven footing. But hindsight is 20/20, and it is pretty clear now that some rocking of the boat should have been done to clear up issues (foreclosures, college tuition, consumer demand) that continue to be unresolved.

  16. perplexed says:

    Well said Dr. Bernstein! Its way past time to start dealing with the actual problem. But, unless we figure out how to fund it, there is no way make progress. The reality is that, if a shortfall of demand is the problem, only additional spending will resolve it. Furthermore, the magnitude of the spending must be up to the depth of the problem. FAST & infrastructure banks (a lot of the capital is small & medium idle business capital & the spending will work its way through) will add some stimulus and should be pursued, but we shouldn’t fool ourselves into thinking that this is anywhere near adequate; your own estimate for employment from FAST was 500,000 jobs, helpful, but a little like the effect of urinating in the ocean – pretty hard to detect the increase in water level at the beech.

    If we don’t stop talking about “creating” jobs, people will continue to believe in the myth that the wealthy & their corporations are actually out there “creating” jobs; conjuring up the image of an artist staring at his canvass and imagining what his next masterpiece will look like. It only follows “logically” then, that government’s main job is to make sure that this master of creativity is comfortable, well fed, and has enough paint & the best brushes. If we don’t expose this myth for what it is, how do we ever get to be able to deal with the reality that JOBS ARE DEMANDED, NOT “CREATED.” Once we get past the myth, and past contributing to its legitimacy, we can start talking about what it is we need to do get jobs to be DEMANDED! Words matter & we do have control over which ones we use, not even right wing republicans can stop us!

    So let’s cut through the obfuscation and start discussing what’s really needed: additional spending, by government if no one else chooses to do so (even when the government has gone to great lengths, expense, and assumption of risk to make sure liquidity can’t be used as an excuse). So where’s the discussion about how much spending we need; what are the best estimates that our economics profession can come up with as to what level of spending increase do we need to solve this problem? Not the minimum level that might, or could possibly solve the problem if everything else goes just so, the level that we are very confident would solve the problem. My guess (using the SWAG method) is that this amount is far short of what our actual needs are as a country (education, infrastructure, energy, transportation, etc, etc.). I don’t think there’s a lot of disagreement about the fact that investments in any, or all, of these areas will have long run benefits to a generation that will be struggling with the health care & retirement costs of the baby boomers.

    What we could (and should) be doing really isn’t as difficult as its made out to be. The “tough” question then becomes: how do we fund it? The Republicans (& Tea Partiers) have their answer: since it can’t be done without a decline in wealth & income of the top 5%, we don’t do it, its that simple. But, since it can’t happen that a very small minority can impose their will on the majority in a one person, one vote, democratic republic, this shouldn’t be an issue right? WRONG! But, how can this be? Unless of course this minority has much greater representation in government than the one person, one vote concept would allow. Otherwise, the numbers just don’t work. How is it possible that a government, with representatives of the interests of all of its constituents (or even just half in a really close, divided election), could put through a tax break that provides enormous benefits to the wealthiest 5% of the country at tremendous cost (and no benefit) to the other 95%? What better evidence do we need that we no longer have a one person, one vote democratic republic? There is however, another possibility, Thomas Jefferson referred to it as “the duperies of the people” and the framers were indeed concerned about its possibilities:

    In the words of Thomas Jefferson:

    ” … we may say with truth and meaning, that governments are more or less republican as they have more or less of the element of popular election and control in their composition; and believing, as I do, that the mass of the citizens is the safest depository of their own rights, and especially, that the evils flowing from the duperies of the people, are less injurious than those from the egoism of their agents, I am a friend to that composition of government which has in it the most of this ingredient.”

    It appears that Mr. Jefferson may have seriously underestimated the abilities of the Scaife’s, Koch’s, Ryan’s, McConnel’s, Paul’s, Walker’s, etc. He certainly couldn’t have anticipated the persuasive power of the modern media shows. Mr. Jefferson may also have seriously underestimated the number (actually proportion) of people that had to be “duped” to cause serious (possibly fatal?) injury to the republic. If the wealthy pre-screen the candidates, the candidates will indeed serve those that actually get them elected disproportionately to those that cast the votes. If voters are given only choices that have been vetted by wealthy supporters, their rights are no longer in the depository of the “mass of citizens” as was thought to be the case.

    Without campaign finance reform, “popular election and control” are a thing of the past and the rights of citizens are no longer in the “depository” of the mass of citizens as Jefferson imagined. Too bad this was the only protection as it has been very successfully circumvented and will now take a herculean effort against a well financed and powerful minority to recover! Even more discouraging is that the effort can’t even begin until the problem is recognized, a problem that is continuously being obfuscated by the symptoms it produces.

    What’s best for the country as whole is to eliminate the output gap as quickly as possible & to spend what we need to to achieve that. We can simultaneously solve our enormous and disasterous wealth and income distribution problems by doing this largely through wealth, income, and value added taxes. When most Americans hear the words “tax increase” they shudder at the impact that it would have on their extremely stretched budgets. They don’t realize, largely because the media has mis-represented it, that we are in a position to have enormous revenue increases without any impact on their tax bill other than the increase in taxes that results from their increased income. They don’t realize it because they haven’t been told. We are not discussing these alternatives because of the vested interests that have circumvented the controls thought to be entrenched in our political process. Its a bitter irony that the over-represented Tea Party has cloaked itself in the name of those who took tremendous risks because they had no representation in government at all. What are those who have been disenfranchised by what we’ve allowed to happen to do now?

    If we start now, we’ll have plenty of time to discuss the issues as part of what appears to be a very critical set of up-coming elections. With the Fed. “pushing on a string” and the Koch’s choke-hold on our ability raise revenues, the reality is that the government has been effectively neutered at a time of tremendous need. Without the appearance of some currently unforeseen “miracle” of the marketplace the likely scenario is that this malaise will continue, and continue to worsen, through the election and well after. If this minority wins the presidential election and increases its power in government, what many are going through now will seem like a proverbial “walk in the park.”