Thursday, February 18, 2010

Krugman, on Fiscal Scare Tactics, and What Didn't Happen

Hi. Here are two valid analyses in understandable language from a
reasonable guy who won a Nobel, and actually earned it. -Ed

Fiscal Scare Tactics

NY Times Op-Ed: February 4, 2010

These days it's hard to pick up a newspaper or turn on a news program
without encountering stern warnings about the federal budget deficit. The
deficit threatens economic recovery, we're told; it puts American economic
stability at risk; it will undermine our influence in the world. These
claims generally aren't stated as opinions, as views held by some analysts
but disputed by others. Instead, they're reported as if they were facts,
plain and simple.

Yet they aren't facts. Many economists take a much calmer view of budget
deficits than anything you'll see on TV. Nor do investors seem unduly
concerned: U.S. government bonds continue to find ready buyers, even at
historically low interest rates. The long-run budget outlook is problematic,
but short-term deficits aren't - and even the long-term outlook is much less
frightening than the public is being led to believe.

So why the sudden ubiquity of deficit scare stories? It isn't being driven
by any actual news. It has been obvious for at least a year that the U.S.
government would face an extended period of large deficits, and projections
of those deficits haven't changed much since last summer. Yet the drumbeat
of dire fiscal warnings has grown vastly louder.

To me - and I'm not alone in this - the sudden outbreak of deficit hysteria
brings back memories of the groupthink that took hold during the run-up to
the Iraq war. Now, as then, dubious allegations, not backed by hard
evidence, are being reported as if they have been established beyond a
shadow of a doubt. Now, as then, much of the political and media
establishments have bought into the notion that we must take drastic action
quickly, even though there hasn't been any new information to justify this
sudden urgency. Now, as then, those who challenge the prevailing narrative,
no matter how strong their case and no matter how solid their background,
are being marginalized.

And fear-mongering on the deficit may end up doing as much harm as the
fear-mongering on weapons of mass destruction.

Let's talk for a moment about budget reality. Contrary to what you often
hear, the large deficit the federal government is running right now isn't
the result of runaway spending growth. Instead, well more than half of the
deficit was caused by the ongoing economic crisis, which has led to a plunge
in tax receipts, required federal bailouts of financial institutions, and
been met - appropriately - with temporary measures to stimulate growth and
support employment.

The point is that running big deficits in the face of the worst economic
slump since the 1930s is actually the right thing to do. If anything,
deficits should be bigger than they are because the government should be
doing more than it is to create jobs.

True, there is a longer-term budget problem. Even a full economic recovery
wouldn't balance the budget, and it probably wouldn't even reduce the
deficit to a permanently sustainable level. So once the economic crisis is
past, the U.S. government will have to increase its revenue and control its
costs. And in the long run there's no way to make the budget math work
unless something is done about health care costs.

But there's no reason to panic about budget prospects for the next few
years, or even for the next decade. Consider, for example, what the latest
budget proposal from the Obama administration says about interest payments
on federal debt; according to the projections, a decade from now they'll
have risen to 3.5 percent of G.D.P. How scary is that? It's about the same
as interest costs under the first President Bush.

Why, then, all the hysteria? The answer is politics.

The main difference between last summer, when we were mostly (and
appropriately) taking deficits in stride, and the current sense of panic is
that deficit fear-mongering has become a key part of Republican political
strategy, doing double duty: it damages President Obama's image even as it
cripples his policy agenda. And if the hypocrisy is breathtaking -
politicians who voted for budget-busting tax cuts posing as apostles of
fiscal rectitude, politicians demonizing attempts to rein in Medicare costs
one day (death panels!), then denouncing excessive government spending the
next - well, what else is new?

The trouble, however, is that it's apparently hard for many people to tell
the difference between cynical posturing and serious economic argument. And
that is having tragic consequences.

For the fact is that thanks to deficit hysteria, Washington now has its
priorities all wrong: all the talk is about how to shave a few billion
dollars off government spending, while there's hardly any willingness to
tackle mass unemployment. Policy is headed in the wrong direction - and
millions of Americans will pay the price.


What Didn't Happen

NY Times Op-Ed: January 17, 2010

Lately many people have been second-guessing the Obama administration's
political strategy. The conventional wisdom seems to be that President Obama
tried to do too much - in particular, that he should have put health care on
one side and focused on the economy.

I disagree. The Obama administration's troubles are the result not of
excessive ambition, but of policy and political misjudgments. The stimulus
was too small; policy toward the banks wasn't tough enough; and Mr. Obama
didn't do what Ronald Reagan, who also faced a poor economy early in his
administration, did - namely, shelter himself from criticism with a
narrative that placed the blame on previous administrations.

About the stimulus: it has surely helped. Without it, unemployment would be
much higher than it is. But the administration's program clearly wasn't big
enough to produce job gains in 2009.

Why was the stimulus underpowered? A number of economists (myself included)
called for a stimulus substantially bigger than the one the administration
ended up proposing. According to The New Yorker's Ryan Lizza, however, in
December 2008 Mr. Obama's top economic and political advisers concluded that
a bigger stimulus was neither economically necessary nor politically

Their political judgment may or may not have been correct; their economic
judgment obviously wasn't. Whatever led to this misjudgment, however, it
wasn't failure to focus on the issue: in late 2008 and early 2009 the Obama
team was focused on little else. The administration wasn't distracted; it
was just wrong.

The same can be said about policy toward the banks. Some economists defend
the administration's decision not to take a harder line on banks, arguing
that the banks are earning their way back to financial health. But the
light-touch approach to the financial industry further entrenched the power
of the very institutions that caused the crisis, even as it failed to revive
lending: bailed-out banks have been reducing, not increasing, their loan
balances. And it has had disastrous political consequences: the
administration has placed itself on the wrong side of popular rage over
bailouts and bonuses.

Finally, about that narrative: It's instructive to compare Mr. Obama's
rhetorical stance on the economy with that of Ronald Reagan. It's often
forgotten now, but unemployment actually soared after Reagan's 1981 tax cut.
Reagan, however, had a ready answer for critics: everything going wrong was
the result of the failed policies of the past. In effect, Reagan spent his
first few years in office continuing to run against Jimmy Carter.

Mr. Obama could have done the same - with, I'd argue, considerably more
justice. He could have pointed out, repeatedly, that the continuing troubles
of America's economy are the result of a financial crisis that developed
under the Bush administration, and was at least in part the result of the
Bush administration's refusal to regulate the banks.

But he didn't. Maybe he still dreams of bridging the partisan divide; maybe
he fears the ire of pundits who consider blaming your predecessor for
current problems uncouth - if you're a Democrat. (It's O.K. if you're a
Republican.) Whatever the reason, Mr. Obama has allowed the public to
forget, with remarkable speed, that the economy's troubles didn't start on
his watch.

So where do complaints of an excessively broad agenda fit into all this?
Could the administration have made a midcourse correction on economic policy
if it hadn't been fighting battles on health care? Probably not. One key
argument of those pushing for a bigger stimulus plan was that there would be
no second chance: if unemployment remained high, they warned, people would
conclude that stimulus doesn't work rather than that we needed a bigger
dose. And so it has proved.

It's important to remember, also, how important health care reform is to the
Democratic base. Some activists have been left disillusioned by the
compromises made to get legislation through the Senate - but they would have
been even more disillusioned if Democrats had simply punted on the issue.

And politics should be about more than winning elections. Even if health
care reform loses Democrats votes (which is questionable), it's the right
thing to do.

So what comes next?

At this point Mr. Obama probably can't do much about job creation. He can,
however, push hard on financial reform, and seek to put himself back on the
right side of public anger by portraying Republicans as the enemies of
reform - which they are.

And meanwhile, Democrats have to do whatever it takes to enact a health care
bill. Passing such a bill won't be their political salvation - but not
passing a bill would surely be their political doom.

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