A colloquy on debt politics follows. Earlier today, I wrote this:
Faced with the prospect of a obliquely angeled "V" shaped recession, the president's policy planners have been trying to figure out how to create jobs in an economy that is newly conditioned to be lean. Trouble is, of course, that the range of policy options favored by Democrats -- more spending, more government transfers -- are at odds with the second fundamental reality of the economy: the deficit and mounting debt.
A good question: What in the hell do I mean? The only reason why deficits and debt are realities is because political pundits like me say they're realities. The real realty -- what's actually producing the anxiety that's being yoked to the debt and deficit -- is the inability or unwillingness of the government to spend what it needs to spend in order to resuscitate demand. Truth is that compared to the other economic problems we face, debt isn't much of a problem. But -- and this was the point I was trying to make -- it's become a problem because political elites have willed it to be a problem (and Americans seem to agree.)
Rich Yeselson, the research coordinator for the Change to Win labor federation, makes the following argument:
Reducing unemployment and increasing wages will help Obama politically. If he does that, nobody is going care about the deficit one way or the other. *The deficit is just a proxy for free floating economic dread because it's the the word at hand that American can employ from the limited stock of their economic vocabulary.*
Obviously, the Keyensians are right--more money must be spent in the short term, not less. But an irrational extra constitutional 60 vote requirement in the Senate makes that almost impossible. Obama should do one or two things, preferably both, in his best pedagogical style: explain to people how government spending props up demand when a market economy has collapsed, and how deficts can and will be dealt with later (and also how long term unemployment take a terrible toll on both the unemployed and the young -- workers in particular--in effect, popularize today's column by Krugman); and also explain to them how an extra-constitutional super majority requirement--one not found in any other democratic government in West--makes it all but impossible for him to get his programs passed as he wishes them to be passed.
To which I responded:
It's a catch 22, I think. It IS a problem..just one that you don't want to solve in the near term..can't solve, because it would, as you lay out below, make the economy worse for ordinary Americans in the short term. It will effect interest rate decisions next year at the very least. And it is already changing the agenda of Congress. So it's real. I don't think Democrats will embrace austerity, but I don't think they have the will to spend lots more money in the open. (I think they're going to do it programmatically, as part of, say, an education reform package.) Personally, I worry about what happens when the one-year stimulus for key social service programs -- billions worth -- expire and aren't renewed. Telling Democratic leaders and the White House to ignore Evan Bayh's pleas for deficit reduction just isn't going to work. In general, my sense is that the White House does not believe that Obama has the credibility to make the argument that government has to spend even more.
Yeselson has the last word:
Sure, to be clear (to use the old Times cautionary note): Yes, it's definitely a problem. Even Krugman says it's a problem. But, as an economic matter in the face of 10% unemployment with that arrow continuing to go up--it's not the first problem you look to address now. Krugman's column today was dispositive. Unemployment is problem #1--that requires more money, not less. At the current pace, Krugman estimates that unemployment won't decline to the still high figure of 7% for six years! That billions of dollars in lost output. That an economic argument to spend more money now. As for interest rates--that up to the Fed. You make an increase in interest rates sound inevitable, but, of course, it's not. Right now, inflation is barely speck on the horizon. Barnanke could keep rates at, effectively, zero for years if he wants, i.e. until unemployment is really going the other way. Again, that's an economic argument, too. Or, at least, it should be. But if the Fed does what you suggest it might...then, yes, economics is conflated with politics (meaning Chairman Ben remember that a Republican appointed him). Which will grant Evan Bayh his wish--but will screw both working Americans and a well-off, well dressed American named Barack Obama.
So, yes, I agree with you that the choices aren't good here. But just listening to Evan Bayh and Joe Lieberman is a economic and political nightmare waiting to happen. The economics won't bend to the politics. The conservatives and centrists are wrong on this. This really is 1937 redux. Christina Romer has studied this for decades. That year, the Fed tightened money supply, and FDR and Congress cut off the bonus payments they had been paying to WWI vets (and also, ironically started taking out social security payments). Unemployment skyrocketed all over again. All in the name of balancing the budget. Keynes, watching from London, went nuts.And, here's the thing: I basically have the Yglesias view of things, i.e. that the structural/procedural constraints of the Senate prevent Obama from being a more progressive president. But this is why people elected him, precisely because he was a story teller, a brilliant, thoughtful president, not a disengaged moron like the last guy. It's really his job to explain to apolitical, anxious Americans that during a massive recession, the State has to create demand until the private sector will again take risks and invest again. It's up to him to explain that the deficit looks bad now, but that unemployment poses a greater, more immediate risk to the economy. And that yes, the deficits and debt (two different things) also pose a risk to the economy, but one that the country can control over time and afterit first remedies the terrible scourge of high unemployment.
If he can't sell that, yes, he's in trouble. But if Evan Bayh is really the chief economist of the country, replacing Larry Summers, Christina Romer, and Jared Bernstein--none of whom, I can tell you, agree with him even a lick--then the country is in deep, substantive economic trouble. And that will screw Obama, too.
So listening to Evan Bayh is not really a solution to his problems. And, if he really thought that Ben Barnanke was going to raise interest rates when unemployment was at 10%--damn, he should have fired him and appt. Summers fed chair.I guess what I'm saying is--if he goes the budget hawk way, he's screwed and the economy is screwed. And that's catastrophic. And if he tries to ask for more money, he might be screwed, too, but at least he's a president who speaks with the courage and, in his case, the eloquence of his convictions. And can say: I told you so, when the failure to spend more results in continued high unemployment.Remember, unemployment increased when the Fed tightened the money supply and FDR cut spending in 1937. How do things look for Obama if unemployment is at 10.3% in the June of 2012? You think knowing that Evan Bayh, Ben Nelson, Mary Landrieu, and Joe Lieberman are happy will comfort the president, Rahm and Ax?