Barack Hoover Obama? (updated Dec. 4)

The administration has apparently ditched Keynesian economics in favor of Philistine economics, calling for a domestic spending freeze or even spending cuts in the midst of double-digit unemployment.

The Associated Press has the story here.

Focusing on deficit reduction during a depression did not work for Herbert Hoover in 1932, and I’m at a loss to see why Obama’s economists are embracing spending cuts now.  The article does quote budget director Peter Orszag as saying cutting spending too fast could undermine the recovery, so I can only hope that they do not mean to make these cuts until recovery is well underway.  (Then again, the article implies that Obama’s budget next February will ask every agency for spending freezes or 5 percent cuts.)  Given the dim prospects for a rapid recovery, the economy may not be ready to absorb any deep spending cuts for many years to come.

Perhaps a better analogy than Hoover in 1932 is Franklin D. Roosevelt in 1936-37.  At that time the U.S. economy had been recovering for about four years (after bottoming out in early 1933) but was still in depression, with unemployment above 9%.  But FDR, deciding it was time to focus on the budget deficit instead of the economy, cut spending and raised taxes (as the Fed doubled bank reserve requirements to soak up the vast excess reserves out there — which also sounds like a recent conversation), and the economy nosedived.  Had FDR and the Fed been less leery of deficits and excess reserves, the depression might not have lasted until World War II.

UPDATE, 18 November 2009:  Edward Harrison of Credit Writedowns, writing on the Naked Capitalism site, makes a similar argument with a lot more detail.

UPDATE, 21 November 2009: Krugman has an excellent piece on the matter here, and a “wonkier” one on deficits and interest rates here.

By the way, I changed the heading from “Barack Hoover Roosevelt?” to the current one, because FDR is so widely associated with pro-active steps like the Works Progress Administration and other jobs programs, fixing and reforming the banking and financial system, and ending the early-’30s deflation by going off the gold standard.  While his budget-balancing disaster of 1936-37 and his too-small budget deficits in other years show that he was no Keynesian when it came to fiscal policy, I’d be delighted to see Obama commit to policies that created three million relief jobs per year, as FDR did.  The stimulus is creating a fraction of that number, which seems unsurprising considering that the job creation is indirect:  rather than create new agencies to directly employ workers in various projects, the government is handing out money to lucky companies in the hope that they’ll hire people.  The fear of creating new federal government employees seems even stronger than the fear of deficits.

UPDATE, 4 December 2009:  Obama may have talking out of school when he said that last month.  In an interview yesterday just prior to the jobs summit, he said the following:

He ruled out an immediate effort to reduce the $1.4 trillion budget deficit until the economy rebounds further and the 10.2% unemployment rate begins to decline. Focusing on the deficit too soon, he said, could risk a “double-dip recession.”

“If we move too abruptly in that direction and we’re not thinking about all the people out there who aren’t working and businesses who aren’t making money, then we’re going to be in a negative spiral that I think would be very destructive,” the president said.

Instead, Obama said, any additional spending and tax cuts intended to spur job growth should be balanced later with deficit-reduction efforts. “The most important thing we could do for our deficits is to have robust economic growth and have people working and businesses selling products and they’re paying taxes,” he said. “That’s a hole that we can fill.”

On the other hand, he also said, “It is not going to be possible for us to have a huge second stimulus, because frankly, we just don’t have the money.”  Apparently the government jobs initiatives that the article mentions will somehow not involve government money.  Nice free lunch if you can get it.

So what we have is a mixed bag, but I’d say the bag is more empty than full.  While it is a relief to hear the president say that he’s aware that sudden deficit-reduction measures could trigger a double-dip recession, he has yet to retract his earlier remark, i.e, this one to Fox News:

“It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” he said.

Yes, if in a spontaneous shower of sparks, holders of U.S. Treasury bonds suddenly decided that mid-1990s debt/GDP ratios (like we have now) were completely unacceptable and decided to dump their T-bonds, interest rates would go up and the economy would go south.  Except the economy has already gone south.  And the debt-doomsday scenario (which some people have been predicting for decades) just ain’t very plausible.  What is plausible, and seems to be the consensus forecast of economists, is that unemployment stays in double digits well into next year and even rises (despite the good news for November).  By ruling out any more stimulus spending to counter that unemployment, Obama seems to be ruling in a depression.

Advertisements

Tags: , , , , , , , ,

5 Responses to “Barack Hoover Obama? (updated Dec. 4)”

  1. democommie Says:

    Ranjit:

    Everything’s cool, dude. I was listening to the NPR station in Syracuse (they are so much better informed than the provincials at WRVO) just this afternoon and the newsreader said that the DowJones was over 10K and that things were hunky dory. Who are we to argue with such sagacity?

  2. Mark E. Says:

    I think it is the nature of the deficit spending that needs to be considered. The government needs to spend, but wisely. Poor financial management by all parties is what got us into this mess.

    For example, I’d like to see more money going to state and local governments, not just private companies that the Feds have little control over what they do with their money. Many, such as Maryland, are required to balance their budget and thus have been forced to add to unemployment rates. I’ve lost a lot of colleagues and some close friends to job cuts. Additionally, furloughs aren’t helping to pump money into the economy either.

    On a somewhat related topic, our trade deficit can also be seen as problematic, especially when it comes to China. I’m not really comfortable with our seemingly close relationship with China. I don’t see them as an ally and I can foresee them taking full advantage of this imbalance when the opportunity arises. If this happens, would it be considered a triple-dip recession?

  3. democommie Says:

    Mark E.:

    Speaking as a guy with no training in economics or foreign policy I don’t see China trying to turn the screws too tight. We still are the world’s foremost economy and, if nothing else, we still make the best nuclear weapons and delivery systems. Pushing us into a collapse would be to China’s detriment as well as ours. It ‘s not unlikely, however, that they will hold us up for ridicule when we tell them how to run their own country–or stay out of Taiwan.

  4. Jeff W. Says:

    The 1937 comparison is what really worries me about Obama taking a deficit reduction tack in 2010. I realize that, politically, many independents and moderates list the high deficits as their biggest concern, but I’m not sure that they actually care that much about deficits, or if concern about deficits is just a proxy for being dissatisfied with Obama’s policies and the economy in general. I think for political purposes, Obama is better off going all-out to improve the unemployment rate, because historically, if unemployment is low, people tend to vote for the incumbents. Nobody worried too much about deficits when re-electing Bush in 2004.

    As another option, and I don’t know enough about the economics of it to know if it would work, would it be possible for the government to pursue a deficit reduction fiscal policy while the Fed kept a loose, growth-oriented monetary policy? If they were able to get the balancing act right, wouldn’t the deficit reduction policy offset any fears of inflation that would be brought on by low interest rates?

  5. Ranjit Says:

    Jeff,

    Krugman had a great piece on the politics of deficits, or rather the public’s astounding ignorance on the matter:

    http://krugman.blogs.nytimes.com/2009/10/30/if-a-deficit-falls-in-the-forest/

    Quick recap: In 1996, after three years of remarkably rapid deficit reduction under Bill Clinton’s watch, people were asked if the deficit had gone up a lot, gone up a little, stayed about the same, gone down a little, or gone down a lot. Only 7% picked the correct answer, “Decreased a lot.” Twice as many said, “Increased a lot.” 40% said increased. Two-thirds said increased or stayed about the same. Even among Democrats, only 7% said the deficit had decreased a lot.

    So the political reward to reducing the deficit appears to be . .. nil.

    I think when most people hear “deficit” they think either “national debt” (i.e., all deficits ever, combined) or, more likely, “general problems in the economy.” Remember the 1992 town-hall style presidential debate where a young woman in the audience asked Bush 41 how the deficit affected him personally? He froze, apparently taken aback by an ill-posed question, and then Clinton came in and linked her question to the general economic malaise of that time and knocked it out of the park. Maybe Obama could do more to show he feels the public’s pain, as opposed to the bond market’s pain?

    On a tight-fiscal-loose-monetary policy: Down the road I think that’s what most economists, including myself, would like to see. (And it worked well enough in the Clinton years.) Right now I don’t think the Fed is capable of stimulating the economy any further through monetary policy, so any new stimulus would have to come from fiscal policy.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: