Tyler Cowen, a conservative economist who’s very good when it comes to finding a good restaurant, is further off base in this editorial, where he attributes the lack of expansionary fiscal policy to “broken trust.”
Since Mr. Obama took office, 780,000 private sector jobs have been created, while the number of public sector jobs has fallen by about 600,000, mostly at the state and local level. A quick look might suggest that we need only to bolster the number of public sector jobs to have a healthier economy, but there is a deeper way to think about the problem.
State and local governments are controlled by politicians and, indirectly, by voters. And for better or worse, those voters have lost faith in the social returns of these jobs and our ability to afford them. The voters have responded by looking to cut expenses, and they’ve chosen state and local government employment as a target.
You could write a book about the loss of faith in institutions and particularly the government; actually, Chris Hayes has (which allows me to plug the FDL Book Salon I’m moderating with Chris on Wednesday afternoon!). But state and local governments aren’t controlled by politicians and voters, at least not when it comes to their budget situation. They are controlled by Constitutionally-prescribed balanced budget amendments. That’s true in every state but Vermont. States cannot run budget deficits. As a result, when the economy goes into a downturn, they have to either cut spending or raise taxes. They certainly have a choice on that front, and while many states have increased taxes, many more have cut back on their public sectors. But whether or not to engage in austerity isn’t much of a choice for the states.
The federal government, on the other hand, has a choice. They could subsidize the states to smooth over their deficits. In the Recovery Act and a subsequent Education Jobs bill they did so, but to a minor degree. And I’d be willing to accept an argument that people feel ambivalent about deficit spending or higher taxes because they don’t see a genuine return on investment. But this also is a function of the options being artificially narrowed by gatekeepers. Witness for example the conceit that near-term stimulus must be paired with long-term deficit reduction. This has dominated official punditry on the budget situation since 2010, and yet it has not made it any easier to get either near-term stimulus or long-term deficit reduction. Mike Konczal, in a welcome piece, demolishes the very idea that these two must go together.
It’s never very clear why these two must move together. The more aggressive argument is that the market will panic and raise interest rates if the long-term deficit is not addressed, immediately canceling out the stimulus. The more widely used version is that stimulus now would increase the longer-term debt, hence making the longer-term challenges worse and the crises and challenges occur more quickly.
This is why something like Delong-Summers paper “Fiscal Policy in a Depressed Economy” is so important. It finds that “under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens.”
As Seth Ackerman noted, there’s something gleeful in seeing Delong-Summers, in their focus on hysteresis in Europe, dismiss the “principal alternative theory was that high unemployment in Europe in the 1980s and 1990s” as “principally a supply-side phenomenon…and rigid labor market institutions… See Krugman (1994)” in a footnote (!), as if that’s not a major reversal or anything. But the argument that, from the debt-to-GDP point of view, fiscal stimulus in a depressed economy is a smart investment by itself, is important for countering the idea that it must be linked to something else in the long term.
The truth is that what Peter Orszag calls “the barbell approach, with stimulus now and austerity later, is not a necessary condition for improving the economy today. Orszag’s arguments in favor of it are all political. He says that stimulus-only proposals cannot pass, that the debt limit looms in the background to make stimulus-only proposals impossible, and that credibility in the markets requires long-term deficit reduction. First of all, the grand bargain can’t pass either, or at least it hasn’t. And trying a stimulus-now, austerity-later plan hasn’t appeased anyone on the debt limit, either. Finally, I don’t know how much clearer the markets can make it that they want deficit spending immediately to improve the economy. They’re already willing to pay the United States to borrow.
As Konczal says, these supposedly intractable political problems are artificially rendered by elites. This is why mainstream book reviewers simply cannot understand the views of a book like Paul Krugman’s. PKrug has no use for the elite policy orthodoxy about structural unemployment and the need to “provide certainty for the markets” on the deficit. He’s arguing what you would have to do to get the economy out of what amounts to a depression. The notion of the politically possible is a function of framing by politicians. If you want answers, don’t ask the man who only raises new questions.