There’s been a lot of interesting political commentary going on this past week (just check out the industrious writers on my blogroll), but I admit that I haven’t felt inspired to chime in on it. Sometimes the weight of public affairs just seems overwhelming, and it helps to step back and focus on personal matters. However, there is one political meme that keeps recurring lately, in the public discourse and thus, also, in the back of my mind. It’s ubiquitous in the establishment press and on the internet; it came up repeatedly last week in Obama’s second press conference, and again today on NPR’s Talk of the Nation. And it’s certainly prominent in Congress.
Here’s the meme: that Obama’s budget is too ambitious, since it dramatically increases the national debt (by what the CBO projects to be $9.3 trillion over ten years, as has been widely reported). That we’re all “fiscal conservatives” who naturally agree that deficit spending is A Bad Thing, and therefore that Congress clearly needs to scale spending back from what Obama has proposed.
There’s a simple question going unasked here: why? Nothing about this meme is as self-evident as those who echo it seem to assume.
Obviously, pissing public money away on things like, oh, unnecessary foreign wars with no exit strategy, or sweetheart contracts for private-sector cronies, or tax cuts for the rich, builds up public debt in a way that is destructive in both the short term and the long term. But (hard as it may be to remember) this isn’t the only way government can operate. There’s such a thing as long-term public investment, and that’s what the new administration is pushing.
Everyone (supposedly) understands the truism that in business, “you have to spend money to make money,” but for some reason hardly anyone extends that same logic to the public sector. In the face of all these huge issues demanding our attention, from climate change to health-care reform, all people seem to want to focus on is the degree of deficit spending. (As if budget projections five or ten years out are ever anything but guesses anyway. When was the last time our economy looked like anyone predicted a decade earlier?)
There are at least a few contrarian voices of reason out there, though. Congressman Barney Frank on TOTN did a good job of arguing against the groupthink, for one. And of particular note is James K. Galbraith’s recent piece in Washington Monthly, “No Return To Normal.” Galbraith isn’t afraid to criticize Obama… but it’s not for being too ambitious, rather for being too cautious. Key takeaways (emph. mine):
The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. … The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama’s economists lean left. Hence the priority they gave, in their first days, to the stimulus package.
The key thing Galbraith does here, however, is not merely to point out how the liberals’ answer to that question is correct. He goes beyond to examine and question the underlying shared assumption, the same one that underlies the current obsessive preoccupation with deficits:
Consider the baseline economic forecast of the Congressional Budget Office, the nonpartisan agency lawmakers rely on to evaluate the economy and their budget plans. … On depth, CBO’s model is based on the postwar experience, and such models cannot predict outcomes more serious than anything already seen. If we are facing a downturn worse than 1982, our computers won’t tell us; we will be surprised. … Baked into the CBO model we find a “natural rate of unemployment” of 4.8 percent; the model moves the economy back toward that value no matter what. In the real world, however, there is no reason to believe this will happen. Some alternative forecasts, freed of the mystical return to “normal,” now project a GDP gap twice as large as the CBO model predicts, and with no near-term recovery at all.
Considerations of timing also influenced the [stimulus bill]. The bill tilted toward “shovel-ready” projects like refurbishing schools and fixing roads, and away from projects requiring planning and long construction lead times, like urban mass transit. The push for speed also influenced the bill in another way. Drafting new legislative authority takes time. In an emergency, it was sensible for Chairman David Obey of the House Appropriations Committee to mine the legislative docket for ideas already commanding broad support … In this way he produced a bill that was a triumph of fast drafting, practical politics, and progressive principle—a good bill which the Republicans hated. But the scale of action possible by such means is unrelated, except by coincidence, to what the economy needs.
…the [Obama] team also sought consensus of another type. Christina Romer polled a bipartisan group of professional economists, and Larry Summers told Meet the Press that the final package reflected a “balance” of their views. This procedure guarantees a result near the middle of the professional mind-set. The method would be useful if the errors of economists were unsystematic. But they are not. Economists are a cautious group, and in any extreme situation the midpoint of professional opinion is bound to be wrong.
To Obama’s economists a “normal” economy is led and guided by private banks. When domestic credit booms are under way, they tend to generate high employment and low inflation; this makes the public budget look good, and spares the president and Congress many hard decisions.
…The Bush-era disasters guarantee that… happy [postwar recovery] patterns will not be repeated. For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash—protected by deposit insurance and now desperately being conserved—the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare—illiquid and intangible but real and inalienable in a way that home and equity values are not.
…The oddest thing about the Geithner program is its failure to act as though the financial crisis is a true crisis—an integrated, long-term economic threat—rather than merely a couple of related but temporary problems, one in banking and the other in jobs. In banking, the dominant metaphor is of plumbing: there is a blockage to be cleared. Take a plunger to the toxic assets, it is said, and credit conditions will return to normal. This, then, will make the recession essentially normal, validating the stimulus package. Solve these two problems, and the crisis will end. That’s the thinking.
…In short, if we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression. And this can only be done by qualitative and historical analysis. Our modern numerical models just don’t capture the key feature of that crisis—which is, precisely, the collapse of the financial system. …
If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work? Recent months have seen much debate over the economic effects of the New Deal, and much repetition of the commonplace that the effort was too small to end the Great Depression, something achieved, it is said, only by World War II. A new paper by the economist Marshall Auerback has usefully corrected this record. Auerback plainly illustrates by how much Roosevelt’s ambition exceeded anything yet seen in this crisis:
[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.
…A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around. That being so, what must now be done? The first thing we need, in the wake of the recovery bill, is more recovery bills. The next efforts should be larger, reflecting the true scale of the emergency. There should be open-ended support for state and local governments, public utilities, transit authorities, public hospitals, schools, and universities for the duration, and generous support for public capital investment in the short and long term. To the extent possible, all the resources being released from the private residential and commercial construction industries should be absorbed into public building projects.
…There is a health care problem [with Medicare costs], but that can be dealt with only by deciding what health services to provide, and how to pay for them, for the whole population.
…The chorus of deficit hawks and entitlement reformers are certain to regard this program with horror. What about the deficit? What about the debt? These questions are unavoidable, so let’s answer them. First, the deficit and the public debt of the U.S. government can, should, must, and will increase in this crisis. They will increase whether the government acts or not. The choice is between an active program, running up debt while creating jobs and rebuilding America, or a passive program, running up debt because revenues collapse, because the population has to be maintained on the dole, and because the Treasury wishes, for no constructive reason, to rescue the big bankers and make them whole.
Second, so long as the economy is placed on a path to recovery, even a massive increase in public debt poses no risk that the U.S. government will find itself in the sort of situation known to Argentines and Indonesians. Why not? Because the rest of the world recognizes that the United States performs certain indispensable functions, including acting as the lynchpin of collective security and a principal source of new science and technology.
…Today the largest problems we face are energy security and climate change—massive issues because energy underpins everything we do, and because climate change threatens the survival of civilization. And here, obviously, we need a comprehensive national effort. Such a thing, if done right, combining planning and markets, could add 5 or even 10 percent of GDP to net investment… it probably could return the country to full employment and keep it there, for years.
…What is required are careful, sustained planning, consistent policy, and the recognition now that there are no quick fixes, no easy return to “normal,” no going back to a world run by bankers—and no alternative to taking the long view.
Short version? There’s no downside to more public spending, right now. In ordinary times, yes, it’s prudent to be cautious about deficit spending. (The right time for that would have been, oh, eight years ago.) But this crisis is going to put us in a world of debt, one way or the other.
So the pressing questions aren’t about higher debt versus lower, or spending versus saving, or even left versus right; the real questions are about reality versus delusion. They’re about whether we, collectively, invest enough to get out of this sooner rather than later… and whether we come out of it having constructed a new infrastructure (both political and economic) on which to build, or find ourselves still facing a whole host of old problems we’ve avoided dealing with, out of “fiscal conservatism.”Tags: conservatism, Depression, economy, FDR, federal budget, financial crisis, Galbraith, history, Obama