Posts Tagged ‘spending’

Yes, kick the can down the road

20 July 2011

I don’t say this often, but Eric Cantor is half right. The Republican House Majority Leader’s mantra in the current debate over a long-term budget fix has been “You don’t raise taxes in a recession.” That is good policy advice, and any Keynesian economist would tell you the same. Tax increases lower GDP, indirectly, by lowering people’s disposable income — if they have less money, most people will spend less money, so consumption drops. But any Keynesian economist would also tell you, “Don’t cut spending in a recession.” Cuts in government spending directly lower GDP and indirectly lower it by lowering the consumption of laid-off government workers and government contractors. So neither tax increases nor spending cuts are a good idea in this time of 9.2% unemployment.

(It’s a pity that Cantor doesn’t understand the second part, or pretends not to. But not a surprise. Misrepresenting Keynes is a cottage industry among Republican politicians and pundits. Ezra Klein notes that Cantor wrote in his campaign manifesto of last year that Keynesianism is the theory that “government can be counted on to spend more wisely than the people.” But I digress . . .)

Right now, we’re told August 2 is the deadline for an agreement by Congress to raise the national debt ceiling or face a partial government shutdown in which some Treasury bondholders, government employers, government contractors and/or other government creditors won’t get paid. I’ve written again and again that the whole concept of a debt ceiling is self-destructive and a waste of time — and, as usual, The Onion says it better than I ever could — but the “grand bargain” that the president seeks could easily be self-destructive as well. Both Democrats and Republicans say they want to pass a long-term deficit reduction plan that reduces the national debt by several trillion dollars over the next decade. That’s fine in a broad sense, as health care costs continue to jump by leaps and bounds, two wars continue to drain our resources, and federal taxes as a share of GDP are at their lowest level in a half-century. But if the tax increases and spending cuts kick in while the economy is still in this Little Depression, with unemployment well above its normal range of 5-7%, then the grand bargain becomes a starvation diet.

If we could just fine all politicians and pundits a dollar each time they say “we can’t afford to kick the can down the road any more,” we could pay off the national debt. Barring that, we can at least question that bit of conventional wisdom, telling them, no, it’s not a good idea to raise taxes or cut spending while the economy is still in the tank, and any plan to do either or both that kicks in while unemployment is still above 7% is a bad one. Worse than defaulting on the government’s obligations? Probably not. But a lot worse than doing nothing on both fronts.

Advertisements

Barack Hoover Obama? (updated Dec. 4)

13 November 2009

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.