Paul Krugman had a good column today on how America needed to end its “learned helplessness” on the jobs crisis. He cited multiple options of things the government could do right now to create jobs, which would of course increase government revenue and over time reduce the deficit. Among them were such ideas as a WPA-type program of public works jobs, repairing roads an rebuilding infrastructure; a dedication to increasing inflation, which would reduce the debt burden; or a “serious program of mortgage modification” that would reduce private debt from homeowners and allow them to spend in a more productive capacity (not to mention the effect on home prices from reducing foreclosures).

Instead, Washington is consumed with reducing the deficit, finding “common ground” on the budget cuts that would theoretically make those reductions, and committed to messing around with Medicare and slashing other vital safety-net programs. Krugman’s point was that another world is possible, and that it’s important for those on the outside of government to explain what that world could look like, even given the opposition from the Republican Party to these measures

Jared Bernstein had a very interesting response. As you know, Bernstein used to be Joe Biden ‘s chief economist, and was involved in most of the economic policymaking of the first Obama term. He’s moved out of government and back to the Center for Budget and Policy Priorities, where among other things he’s become a dirty hippie blogger. And while he praised Krugman’s column today, he sought to reframe the discussion, splitting what we “should” do with what we “could” do. And his reasons for that desired split were very revealing.

I totally agree that we mustn’t let “political realism” shut down our thinking on the best way out of this mess. And while that kind of writing sometimes feels academic to me, if done well (as Paul does it), it can slowly but persistently set the stage for actually doing the right thing when the political landscape shifts [...]

But then there’s this: There will be no WPA-type programs in our near future. There was no appetite for them in the Obama admin in the midst of the worst recession since the Great Depression and there’s a lot less now. The reasons for that are interesting and I’ll speak to them another day. But it ain’t happening.

And please don’t accuse me of “negotiating with myself” here. I stressed above the importance of making those arguments, and I frequently made them myself as a member of the President’s economics team.

It’s also congenitally hard for politicians to get behind “a serious program of mortgage modification.” Those who advocate for this (the NYT editorial page, e.g.) are right, but they’re also downplaying a very binding constraint. The politics of this idea are deeply wound up in moral hazard. People forget, but it was precisely this action—giving mortgage relief to someone at risk of default and not to someone who was struggling to keep up their payments—that birthed the Tea Party. (boldface mine)

Bernstein doesn’t address the inflation issue, which is more a monetary policy directed at the Fed and not policymakers in the White House. But let’s break down what he said on the other two issues:

1) on a WPA program, Bernstein explicitly says it was the White House, not Republicans, who had no appetite for direct, public job creation during the first term. Bernstein says he made the arguments about public works jobs inside the White House, but he was clearly outvoted. He doesn’t give the arguments made in response, tantalizingly alluding to “interesting” reasons that he will “speak to another day.” But he says very clearly that the reason we did all of this hoops-jumping and nudging in the stimulus package rather than just paying people to work at jobs that needed to be done was a philosophical decision inside the White House. In a sense we already knew this, but it’s important that a former White House insider re-emphasized it.

2) on mortgage modification, Bernstein agrees that this would be a wise course of action. But he adds that there’s a restraint on politicians, presumably also at the White House, about moral hazard, about the “wrong kind of people” getting a mod. He references the Rick Santelli rant, which happened over two years ago, as proof for this difficulty.

Now, the most interesting thing about this is that the Obama Administration, through federal regulators, are RIGHT NOW attempting to negotiate a program of mortgage modification with the country’s major banks, as part of the foreclosure fraud settlement. This raises very troubling issues about what the eligibility would look like on that deal. Clearly, the White House is preoccupied with the “right” type of person getting help; Obama has mentioned this on several occasions. Yet who is that “right” type of person when the banks have engaged in systematic fraud? They didn’t just defraud those deserving of aid, whatever “deserving” means; they defrauded everyone, with their fake documents and breaking of the chain of title and fee pyramiding and the like. There’s no way to slice the salami at this point, and divy up the “deserving” from the “undeserving” of a mortgage modification. That simply doesn’t make sense in this case.

However, it is driving the thinking inside Washington, and will almost certainly be a preoccupation with any settlement (if there even is one at this point). That makes a settlement even less valuable.

Bernstein adds that “there are ways outside of federal legislation to encourage principal write-downs” and that he will write about them later. Maybe he’s talking about federal and state enforcement actions. But the same artificial constraints of Tea Party rhetoric about deadbeat borrowers applies there as well. And instead of attacking that ludicrous constraint, Bernstein accepts it. Or rather, he reports that his former bosses in Washington and policymakers on the Hill have accepted it.

Good to know.