The Intermission: An Economic Agenda

The Transition.

Here we stand between acts in the political theater, but this Intermission demands close scrutiny. While the press is itself transitioning from its Sporting Perspective, discussion of the Big Game, to its Revenge Tragedy Perspective, critiquing the Puppet Theater.

Remember, Depression 2.0 is upon us, the vultures of deflation circling overhead, and there really is no time to delay in addressing the rough economic road ahead.

Martin Feldstein, linked above, argues that countercyclical spending (that is, spending to counter the dip in the business cycle) is necessary now:

Another round of one-time tax rebates won't do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.

The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

While Keynes once implied that simply burying a wad of cash and paying the unemployed to dig it up was an acceptable way to provide a stimulus, we should probably be a bit more focused and efficient in directing our spending.

Robert Reich writes:

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future.

Remember that infrastructure spending gets a great deal of "bang for the buck."

In short, "Go big or go home."

Krugman urges the President-Elect to forget small for what we need is Franklin Delano Obama:

But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.

E.J. Djionne urges Obama to ignore the crowd waving the "center-right nation" canard around in our faces:

Their gimmick is to insist that the United States is still a "center-right" country because more Americans call themselves conservative than liberal. What this analysis ignores is that Americans have clearly moved to the left of where they were four, eight or ten years ago.

The public's desire for more government action to heal the economy and guarantee health insurance coverage, along with its new skepticism about the deregulation of business, suggests that we are a moderate country that now leans slightly and warily left.

Djionne notes that Going Big may prove most effective in these times, and he, too, invokes FDR:

In fact, timidity is a far greater danger than overreaching, simply because it's quite easy to be cautious. And anyone who thinks House Speaker Nancy Pelosi and her followers are ultra-leftist ideologues has been asleep for the past two years. As Pelosi noted in an interview in her office this week, her moves have been shaped by a Democratic House caucus that includes both staunch liberals and resolute moderates. She knows where election victories come from.

"We have some fairly sophisticated people here who understand that you win seats in the middle," she said, noting that Democrats did not win their majority in 2006 and then expand it this year "by espousing far left views." The priorities of congressional Democrats, she added, are close to those of the new president.

That's true, and it underscores the fact that you don't have to be "far left" to be bold. This is something that Rahm Emanuel, the new White House chief of staff and no ideologue, understands. In interviews yesterday on both ABC and CBS, Emanuel made clear that Obama's overarching priority is to right the economy and that his other objectives fit snugly into that framework.

He sees Obama acting in four areas of concern to a middle class that "is working harder, earning less and paying more." The list: health care, energy, tax reform and education. All are issues on which Obama should not be afraid to be audacious.

The economic crisis, Emanuel said, provides "an opportunity to finally do what Washington has for years postponed." Here, the model is Franklin Roosevelt, who in the 1930s saw the objectives of economic recovery and greater social justice as closely linked.

My take on the whole "Center-Right Nation" thing is incredulity: The center-right candidate lost, meaning the electorate favored the center-left candidate. Is it credible to believe that the winning candidate would then do nothing, nothing at all, upon obtaining the White House? If it is not credible, then the electorate is expecting a center-left policy agenda from the new administration.

After all, the center-right candidate did everything possible to label the election's winner a socialist and far leftist, yet the winner still won. I simply read this as an indication that the electorate at least tacitly approved of a non-center-right flavor of governance. (I suppose: "flavor of governance" = "style of puppet theater.")

As for the size of the necessary stimulus, Professor Krugman points out (like Feldstein above): around $600 billion.

Unfortunately, I don't see the new stimulus package being quite that large. And I fear that politically popular, but economically suboptimal, tax cuts will be used rather than simply applying the juice to stimulate aggregate demand.

I know, I know, deficit/fiscal hawks will hyperventilate and lose sleep, but it's the actions they will advocate--spending freezes or cuts, not letting the Bush tax cuts lapse, that will strangle any sort of recovery.

UPDATE--Robert Pollin, argues that green infrastructure investment will solve the economic crisis. After noting--and remember our chart of "bang for the buck" measures, linked above--that we should extend food stamps and unemployment benefits, Pollin says:

Beyond this, the stimulus program should be designed to meet three additional criteria. First, we have to generate the largest possible employment boost for a given level of new government spending. Second, the spending targets should be in areas that strengthen the economy in the long run, not just through a short-term money injection. And finally, despite the recession, we do not have the luxury of delaying the fight against global warming.

To further all these goals we need a green public-investment stimulus. It would defend state-level health and education projects against budget cuts; finance long-delayed upgrades for our roads, bridges, railroads and water management systems; and underwrite investments in energy efficiency--including building retrofits and public transportation--as well as new wind, solar, geothermal and biomass technologies.

This kind of stimulus would generate many more jobs--eighteen per $1 million in spending--than would programs to increase spending on the military and the oil industry (i.e., new military surges in Iraq or Afghanistan combined with "Drill, baby, drill"), which would generate only about 7.5 jobs for every $1 million spent. There are two reasons for the green program's advantage. The first factor is higher "labor intensity" of spending--that is, more money is being spent on hiring people and less on machines, supplies and consuming energy. This becomes obvious if we imagine hiring teachers, nurses and bus drivers versus drilling for oil off the coasts of Florida, California and Alaska. The second factor is the "domestic content" of spending--how much money is staying within the US economy, as opposed to buying imports or spending abroad. When we build a bridge in Minneapolis, upgrade the levee system in New Orleans or retrofit public buildings and private homes to raise their energy efficiency, virtually every dollar is spent within our economy. By contrast, only 80 cents of every dollar spent in the oil industry remains in the United States. The figure is still lower with the military budget.

Despite the risks of feeding the deficit, Pollin insists this sort of spending will be net beneficial:

When the economy began slowing this year, the fiscal deficit more than doubled, from $162 billion to $389 billion. We cannot know for certain how much the deficit will expand. It could rise to $800 billion, $1 trillion or even somewhat higher, depending on how the bailout operations are managed. Of course, it would be utterly self-defeating for the United States to run a reckless fiscal policy, no matter how pressing the need to fight the financial crisis and recession. But in the current crisis conditions, even a $1 trillion deficit need not be reckless.

Let's return to the Reagan experience for perspective. In 1983 the Reagan deficits peaked at 6 percent of the economy's GDP. With GDP now around $14.4 trillion, a $1 trillion deficit would represent about 7 percent of GDP, one percentage point higher than the 1983 figure.

Of course, the global financial system has undergone dramatic changes since the 1980s, so direct comparisons with the Reagan deficits are not entirely valid. One change is that government debt is increasingly owned by foreign governments and private investors. This means that interest payments on that debt flow increasingly from the coffers of the Treasury to foreign owners of Treasury bonds.

At the same time, as one feature of the crisis, Treasury bonds are, and will remain for some time, the safest and most desirable financial instrument in the global financial system. US and foreign investors are clamoring to purchase Treasuries as opposed to buying stocks, bonds issued by private companies or derivatives. This is pushing down the interest rates on Treasuries. For example, on October 15, 2007, a three-year Treasury bond paid out 4.25 percent in interest, whereas this past October 15, the interest payment had fallen to 1.9 percent. By contrast, a BAA corporate bond paid 6.6 percent in interest one year ago but has risen this year to 9 percent. As long as the private financial markets remain gripped by instability and fear, the Treasury will be able to borrow at negligible interest rates. Because of this, allowing the deficit to rise even as high as 7 percent of GDP does not represent a burden on the Treasury greater than what accompanied the Reagan deficits.

There is, then, no reason to tread lightly in fighting the recession, with all its attendant dangers and misery. Indeed, severe misery and danger will certainly rise as long as timidity--the path of least resistance--establishes the boundaries of acceptable action. The incoming Obama administration can take decisive steps now to defend people's livelihoods and to reconstruct a viable financial system, productive infrastructure and job market on the foundation of a clean-energy economy.