Why Is Our Policy Agenda So Biased Toward Fiscal Policy? (As Opposed to Jobs…)

January 6th, 2013 at 9:49 pm

I recently pledged to myself and readers that I would stop paying so much attention to crazy fiscal fights—cliff, ceiling, etc.—and more to what people actually, and appropriately, care more about: jobs, income, wages, wealth.  Not that I’ll ignore the fiscal fights, of course.  But here at OTE, we’re all about balance, and the post-count here has been imbalanced in this regard.  I’ve got my own type of jobs deficit that I intend to address.

But first, have you ever wondered why, post-Recovery-Act at least, we’ve spent almost all of our domestic policy time on fiscal issues, despite the fact that the economy, while improving, has been doing so too slowly by everyone’s estimation?

Here are my explanations:

People believe the Recovery Act didn’t work and have turned anti-Keynesian.  We spent $800 billion on the Recovery Act and the unemployment rate remained high.  Ergo, according to this reasoning, it didn’t work.  But of course this just proves a) people don’t do counterfactuals (how much worse things would have gotten without the intervention)—much independent analysis shows unemployment would have been a lot higher without it, b) they haven’t read the definitive book by Mike Grunwald, The New New Deal, on how well the stimulus worked, summarized here, c) Keynesian policies are ideologically inconsistent with conservatives’ vision of small government, including ignoring market failures (though there are of course exceptions to the small government mantra when the policies benefit a prized constituent, like oil or ag subsidies).

Deep misunderstanding of the role of deficits and debt in contemporary economies. While many policy makers use the anti-deficit argument as leverage to try to cut the programs they don’t like (this reason gets its own bullet point, next), many just believe the budget deficits are always bad, always a symbol of imbalance, irresponsibility, dysfunction, moral failure, and an unwillingness to make the “hard” and “painful” choices.

This may be psychologically reasonable, but it’s economically illiterate.  Fiscal policy must be dynamic, expanding to meet demand shortfalls in market failures and moving back towards balance in expansions.

Plus, they don’t even really mean it.  Recall how the deficit moralists turned Keynesian when the fiscal cliff threatened to extract north of $500 billion from this years economy.

Faux deficit concern as a tool to shrink government.  Remember how in the old show “The Music Man,” the main character had to get everyone in the town revved up about something to which he had the solution?  “Trouble with a capital ‘T’ and that rhymes with ‘P’ and that stands for pool!”  Well, T also rhymes with D and the stands for deficit…right here in River City!  (Really—watch the video and see if you can’t imagine some faux deficit hawk in the lead role.)  

Those who’ve pledged to never raise taxes—the House R’s who refused to support a tax increase even for households over $1 million—or Gov Romney who campaigned both against deficits and against the President’s Medicare cuts—are good examples of deficit “chicken” hawks.

A good thought experiment here is to think how the faux hawks would react to a plan that raised and spent 30% of GDP on the federal budget, percentages well above the historical average, but ones that represent a balanced budget.  They’d run in horror because their goal isn’t balance, it’s tax cuts for rich people and a lot less social insurance and safety nets.

Fiscal policy we can (theoretically) control, but no one really knows how to generate job creation.  This one is particularly important because even some people who can see through the ideology and misunderstandings noted above get stuck on the question of what the government would actually do if it wanted to generate more jobs.

But wait—didn’t I say the Recovery Act worked?  Yes, but much of it was indirect and much of the evidence is circumstantial.  We know, for example, that those who got extended unemployment benefits spent the money and history shows that a) such spending has a growth multiplier and b) the added growth means more demand and thus more jobs.   Same with tax cuts, though here we expect less of an impact because in terms of spending the extra income like you’d expect from the unemployed, some people surely banked their tax cuts or used them to pay off debts—a necessary move from their perspective but not something that boosts demand and jobs.

In short, some policy folks in this space would like to see the unemployment rate come down and would be willing to support policies to get you there, but aren’t sure what those policies are.  On the other hand, they reason, increased taxes and lower spending will reliably reduce the deficit.

Though I believe the historical multipliers, I have some sympathy towards this view.  When you recognize that a lot has to go right for a tax cut, for example, to turn into a job (here in America, of course), it seems a bit facile to plug such cuts into a Keynesian model and predict jobs outcomes with precision.

That’s why I’ve come to believe more direct jobs measures are the way to go, all else equal (sometimes—often—you have to go with what you can get given political constraints).  Infrastructure projects are more reliable and strike many as highly recommended right now, with large public goods deficits, very low borrowing rates, and lots of blue-collar unemployment.  In the longer term, however, achieving full employment may require more direct job creation, especially give recent impressions that the impact of “labor-saving” technology is accelerating.


Of course, this assumes that reaching full employment is an actual policy goal, as opposed to lurching from one self-induced fiscal crisis to another.  All the more reason to bang the full employment drum a lot louder and the fiscal hysteria one not at all.

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7 comments in reply to "Why Is Our Policy Agenda So Biased Toward Fiscal Policy? (As Opposed to Jobs…)"

  1. foosion says:

    It’s biased because the Republicans (party of “deficits don’t matter” Cheney) have decided that focusing on deficits advances their policy agendas and our Democratic president (“the Federal government must tighten its belt”) has no apparent interest in counter-cyclical policy. He appears more interested in cutting Social Security and Medicare benefits than growing the economy.

    “no one really knows how to generate job creation”?? As you say, create jobs by (drum roll please) creating jobs. Hire teachers and police and firefights (directly or through the states). Build roads and bridges and libraries.

    “this assumes that reaching full employment is an actual policy goal” It does not seem to be one. We seem to be lurching towards premature austerity, despite its failure to do anything useful, unless you consider needless suffering useful.

    Without a strong voice among national politicians pushing for job creation and economic growth, we are not likely to adopt the right policies.

    • Andi says:

      “this assumes that reaching full employment is an actual policy goal”

      Yet the USA is a signed up member of the United Nations. Under the UN charter, the US is pledged to take action to achieve Full Employment. (Articles 55 & 56, http://www.un.org/en/documents/charter/chapter9.shtml) Unfortunately, the US is not alone in ignoring its pledge.

      Jared, totally agree with your ideas for direct job creation. The state must step in where the market can’t provide. Here is a great video presentation made to the European Commission by Prof Bill Mitchell, discussing how a general job guarantee could be implemented.

  2. Dan Froomkin says:

    But Jared, you seem to forget the role played by the president. Hasn’t he consistently fanned the flames of deficit-obsession with his own rhetoric? Progressives have been despairing about his lack of focus on jobs (and his austerity talk) for ages, as you well know. See, e.g.: http://www.huffingtonpost.com/2011/08/03/austerity-priority-economy-deficit-hawks_n_917138.html

    Far from using his bully pulpit to do some myth-busting, he’s made the deficit the top policy priority more than any other single person.

    I would blame Rahm — and in fact, I do — but Rahm’s long gone and it still seems Obama talks a lot more about debt and deficit than he does about jobs. Consider his victory speech in November: http://www.huffingtonpost.com/2012/11/07/obama-election-speech_n_2086418.html

    Obama and his political team clearly made a calculation that they couldn’t run under the banner of spending (for the reasons you so well outline above); but isn’t he now just sleeping in the bed he made?

    You were there, you tell us.

  3. Peter K. says:

    I believe the biggest bang for the buck is aid to state and local governments so they can avoid layoffs. Grunwald’s excellent book goes into the political problems with this. Of course the Republicans’ goal is to shrink government (the kind of government that helps most people) while Democrats don’t like giving money to Republican governors to help them get re-elected. But compare the public job creation records of the Reagan recovery and the one we’re in now.

    And we’ll soon see if Japan can create inflation.

  4. Peter K. says:

    Also my guess is that TARP discredited ARRA in the confused public’s mind. We spent all of this money bailing out the banks and they didn’t give us a good recovery as Geithner insisted it would.

  5. Kathleen Wright says:

    The absence of a strategic plan for industrial redevelopment of the US in the private sector may be our largest problem. The nearly $2 trillion in corporate reserves you have mentioned in the past suggests considerable hesitation in private investment in our nation’s productive assets. Gone (I hope) is our enthusiasm for vaporware and social network bubbles on Wall Street, but conservatives have only been able to suggest new jobs through privatization of existing government jobs – a self-limiting strategy if you consider their position on budget cuts.

    How and where we will find real economic growth is a mystery to our “job creators.” The obsession with fiscal policy is a smokescreen. Someone has to take a risk as an investor in the future of industry and start creating shareholder value. Government grants and subsidies can encourage such activity, but a sound vision for the where and how must come first.

  6. Kathleen Wright says:

    Oh, wait. I forgot that the middle class has not yet capitulated and accepted Dickensian conditions for labor…a prerequisite for the Ayn Rand followers to rebuild from the ashes. Presumably, public sector unions must be killed first. Never mind the nagging detail of world financial collapse that has not yet been recognized as a game changer to these one-eyed visionaries.