Cliff note

Recently I was asked to write a blurb about the omnipresent “fiscal cliff,” and here it is:

“Fiscal cliff” is a good metaphor. Like a real cliff, it’s something you shouldn’t jump off and really shouldn’t even be standing near. Austerity policies like big tax increases and spending cuts would only make a weak economy worse. While we do need to reduce our deficit and debt relative to the size of the economy, this is a long-term problem that needs to be tackled when the economy is back to normal.* In the short term, the goal should be to avoid pushing the economy back into recession. Similarly, we should avoid needlessly rattling financial markets by threatening to jump off fiscal cliffs, shut down the government, or not raise the debt ceiling. Some say the fiscal-cliff threat is needed to prod Congress into reaching a long-term, balanced deficit-reduction deal; but it’s a dangerous game, especially if the deficit cutting starts too soon, like now.

* OK, I’d amend that to say that it’s fine and dandy for Congress to tackle our long-term fiscal shortfall now, as long as they can agree that to start chopping after, not during, the long slump we’re in now. It would be lovely if the House, Senate, and President could agree on a Grand Bargain of sensible tax increases, meaningful reductions in medical costs (the biggest driver of spending increases), and various spending cuts, to take effect once the unemployment rate is back down to 6% or so, but it just ain’t gonna happen, not with a Congress that just came off its most unproductive session in decades.

The logic of the fiscal-cliff threat was that Congress won’t act on the deficit unless the alternative is calamity. While I tend to agree with that, it’s not logical when Congress is threatening itself with calamity. It’s an empty threat, like saying that if I can’t lose thirty pounds by diet and exercise then I’ll amputate my own limbs. When the time comes, we’ll both realize it was just a stupid bluff. I’ll put down my axe and Congress will punt the decision into a later month or year. Remember, that’s how we got to the current fiscal-cliff deadline, after the debt-ceiling debacle of summer 2011.

I honestly don’t expect Congress to take serious action on the debt until and unless the bond market’s longtime love for US Treasury bonds turns to hate, a la Greece. I could be wrong — it looked pretty hopeless in the early 1990s, too, and yet we ended the decade with the budget in surplus. But both the budget and the economy are in bigger holes now.

Keynes pulls a Lazarus

MSNBC.com:  “Obama outlines bailout for Main Street”

President Barack Obama outlined new multibillion-dollar stimulus and jobs proposals Tuesday, saying the nation must continue to “spend our way out of this recession” until more Americans are back at work.Without giving a price tag, Obama proposed a package of new spending for highway, bridge and other infrastructure projects, deeper tax breaks for small businesses and tax incentives to encourage people to make their homes more energy efficient….

A major part of his package is new incentives for small businesses, which account for two-thirds of the nation’s work force. He proposed a new tax cut for small businesses that hire in 2010 and an elimination for one year of the capital gains tax on profits from small-business investments.

Obama also proposed an elimination of fees on loans to small businesses, coupled with federal guarantees of those loans through the end of next year. He called for more government spending on infrastructure projects such as roads, bridges and water projects and for new tax breaks for consumers who invest in energy-efficient retrofits in their homes.

Works for me.  While I’d prefer to see more direct job creation in the form of federal jobs programs a la the Works Progress Administration or other New Deal agencies, my main reaction is what a difference a couple of weeks makes.

Heckuva job, Brownie (UK edition)

Paul Krugman has mixed feelings about the Labour Party’s shellacking in this week’s elections.   Me too.  It’s hard to feel sorry for Prime Minister Gordon Brown, who as Tony Blair’s Chancellor of the Exchequer was a Big Swinging Deregulator to rival the Greenspan-Rubin-Summers axis in the U.S.  Krugman:

‘Do Mr. Brown and his party really deserve blame for the crisis here? Yes and no.

‘Mr. Brown bought fully into the dogma that the market knows best, that less regulation is more. In 2005 he called for “trust in the responsible company, the engaged employee and the educated consumer” and insisted that regulation should have “not just a light touch but a limited touch.” It might as well have been Alan Greenspan speaking.

‘There’s no question that this zeal for deregulation set Britain up for a fall. Consider the counterexample of Canada — a mostly English-speaking country, every bit as much in the American cultural orbit as Britain, but one where Reagan/Thatcher-type financial deregulation never took hold. Sure enough, Canadian banks have been a pillar of stability in the crisis.’

The rubbers hit the road

Yesterday (28 Jan. 2009) the House of Representatives passed an $825 billion stimulus bill on an almost-perfect party line vote (about 95% of Democrats voting yes, 100% of Republicans voting no).  For a breakdown of the $825 billion, which is about two-thirds new spending and one-third tax cuts, go here.  Absent from the new spending was an originally proposed plan to make contraceptive services reimbursable by the federal Medicaid program.  (President Obama asked House Democrats to remove it after Republican leaders singled it out for ridicule.)  My understanding is that the proposal did not have a specific price tag but was estimated to cost about $200 – $300 million.

House Minority Leader John Boehner (R-Ohio) was widely quoted as asking, “How can you spend hundreds of millions of dollars on contraceptives?  How does that stimulate the economy?”

Methinks Rep. Boehner has a problem with contraception (or that some of his constituents and benefactors do), but just in case this was a serious question, here’s a serious answer:

New York to self: Drop dead

President-elect Obama and Congress are talking about a federal stimulus package that includes a substantial though as-yet-undetermined amount of aid to states and, possibly, localities.  Earlier this month Ohio Gov. Ted Strickland made an eloquent case for still more federal aid, to make up for more of the huge shortfall in revenues that normally go to education:

“It doesn’t make a lot of sense … to put huge resources into creating jobs with these infrastructure projects, while at the same time the states are having to lay off teachers, and to underfund education and to allow college tuition to explode.”

According to the Associated Press, Strickland and four other Democratic governors, including David Paterson of New York, presented Obama’s transition team and Congressional leaders with a request for $1 trillion in state aid, including $250 billion for education, $250 billion for social services such as Medicaid, and $150 billion in middle-class tax cuts.   The article mentions that Paterson said New York has a $15.4 billion deficit, but that’s it from him.  New York, as possibly the hardest-hit state in the union in this financial and economic crisis, has a compelling case for why the states have recession-related revenue shortfalls and could use federal aid.  Maybe Paterson made that case, but if so it didn’t make the article.

Fiscal policy in the oughts

Everyone’s expecting some fairly big fiscal stimulus bill to emerge early next year from Congress and to be signed by President Obama, but let’s not forget about what’s happening right now at the state level.  Most states are constitutionally required either to pass a balanced budget or to have their governor submit one, so right now the talk in the statehouses, notably here in New York State where I live, is all austerity all the time.

Austerity budgets — draconian spending cuts, tax increases, or some combination thereof — are the last thing any economy needs during a recession.  The backfiring “Hoover” tax increase of 1932 is forever held up as one of the Lessons From the Great Depression.  Another lesson, familiar to economic historians though not so much the general public, is that the overall fiscal stimulus during the 1930s was actually quite small, as the New Deal deficits (which were actually not that huge in relation to the economy, as Paul Krugman reminds us) were largely offset by budget-balancing efforts at the state and local level.  (The classic reference is E. Cary Brown’s “Fiscal Policy in the Thirties,” American Economic Review, 1956.)

This point about the government’s overall fiscal thrust might be even more important now than in the 1930s, when much if not most of the (partial) recovery of 1933-41 came from monetary expansion, mostly in the form of gold inflows from Europe.  (Christina Romer, the incoming Chair of the Council of Economic Advisers, has an article about this, “What Ended the Great Depression?”, in The Journal of Economic History.)  Right now, by contrast, the Fed is trying everything and then some, and doesn’t seem to be able to get the economy going again.  So it may be up to fiscal policy.

Right now it seems to be mostly talk at the federal and state levels.  The White House and Congress are in lame-duck mode, so nothing very concrete is being proposed.  State legislatures are home for the holidays, and in states like mine where the governor has to submit a balanced budget but the state doesn’t have to pass one, there’s even less certainty.  My take is that the federal stimulus package should not skimp on aid to state and local governments.  For all the dysfunction of some state governments (like my own), their budgets reflect the needs and priorities of their people to at least some degree, and ignoring them just seems like bad policy.  (I remember, when Clinton was getting started in 1993 and talking about an economic stimulus plan, hearing David Gergen deride the new president’s planned aid to state and local governments as “walking-around money for mayors.”  I’m sure those kinds of dismissals will be common in the halls of Congress in 2009.)

My nightmare is that Congress passes a “Washington Knows Best” stimulus package that mostly stiffs the states and instead puts the funds into projects of its own choosing.  Thousands of Bridges to Nowhere, and fifty state governments in distress.  If that happens, the recession could be a long one, and could feel like a depression for anyone who works for a state or municipal government.

Please tell me that this was just a slip of the tongue

As President-elect Barack Obama and Congress shape a stimulus package, the president-elect made a strange departure from his prepared remarks to a governors conference, telling them that despite his support of a fiscal stimulus, “We are not, as a nation, going to be able to just keep on printing money” (Washington Post, 2 Dec. 2008.  Not surprisingly, conspiracy-minded commenters on a Ron Paul bulletin board were all over this one).

Hello?  Does Obama believe we currently finance our deficits by printing money, as opposed to selling Treasury bonds?  I sincerely hope that this was just a garbled version of his usual, and reasonable, point that although we need a big fiscal stimulus now, we need to bring the national debt under control in the long term.   (Some, like David Stockman back in the 1980s, have sketched a worst-case scenario in which our national debt gets so out of control that eventually the government has to print money to pay its bills, thereby causing a hyperinflation.  Possibly Obama was alluding to those fears, but since they’ve been basically groundless all along in the U.S. case, he’d be better off not feeding those fears.)

My larger concern is that when President Obama’s brilliant economic advisers disagree with each other, as economists are known to do, will he be knowledgeable enough to make the right call for the right reason?

(modified from a 2 Dec. 2008 post)

UPDATE, 17 DEC.:  Listening to NPR’s Marketplace this morning, it occurred to me that Obama just might have been referring to the dramatic steps taken by the Federal Reserve this year, which are basically equivalent to creating money.   But his next sentence — “So at some point, we’re also going to have to make some long-term decisions in terms of fiscal responsibility” — implies he was talking not about monetary policy but fiscal policy.  The concern still stands.