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Ezra on “Worst of Both Worlds” (Neither Walking Nor Chewing Gum)

June 14th, 2010 . by economistmom

On his Washington Post blog today, Ezra Klein basically says the same thing I did a few days ago.  The deficit hawks and stimulus lovers are so busy arguing that the other party is completely insane that they’re unable to recognize that they actually are working for the same cause (the economy, stupid)–and should be instead coming together symbiotically:

It seems we’re getting the worst of both worlds: The argument over deficits is keeping us from doing what we need to do to help the economy grow right now, but it isn’t going to be enough to get us to do what we need to do to help the economy grow later, either. And the outcome of that could be ugly: If growth is anemic when the eventual fiscal crisis does come, that’s going to make a response much, much harder.

I think policymakers need to be reminded that in keeping with the desirable “symbiotic” relationship, not all deficit-financed policies for short-term stimulus, and not all deficit-reducing policies for longer-term fiscal sustainability, are created equal.  Deficit financing a policy doesn’t automatically make that policy an effective stimulus, especially if it’s really a way of funding a longer-term entitlement or more permanent tax cut “on the cheap” (…not).  (Do you remember the “three Ts” of effective stimulus?  Timely, (well-)Targeted, and Temporary?…)  And refusing to pass extensions of unemployment compensation or other low-income support programs in the name of “fiscal responsibility” is just an excuse to shun the short-term stimulus mission altogether, because as Ezra explains, these are not the kind of policies we have to worry about as the big contributors to the long-term fiscal gap.  Unemployment compensation subsides when unemployment subsides.  But a “doc fix” and relief from the alternative minimum tax are (at least seemingly) forever.

9 Responses to “Ezra on “Worst of Both Worlds” (Neither Walking Nor Chewing Gum)”

  1. comment number 1 by: VAT Brat

    Economist Mom:

    You’ve confused cause and effect with your formulation that Unemployment Insurance (UI) benefits should decrease after unemployment rates decrease.

    The extension of UI causes the persistence of high unemployment. Microeconomic theory posits that UI raises the reservation wage at which an unemployed worker will accept a new job offer, and therefore obstructs the operation of an efficient labor market.

    90 or 180 days of UI to assist people making adjustments to an unforseen layoff is one thing. But 1 year or more? That has only increased rigidity in labor markets and decreased the incentives for the private sector to invest and expand production.

    I know that you think that it’s all about Aggregate Demand stimulation and macroeconomics, but you ignore the supply side at the peril of a strong private sector recovery.

  2. comment number 2 by: B Davis

    VAT Brat wrote:

    The extension of UI causes the persistence of high unemployment.

    I’ve long had a somewhat moderate view on this. I have a known a few people who were in a position such that they waited until their unemployment benefits were about to run out before seriously looking for a job. However, I’ve also known many people who were very motivated to find a job but could not, especially in a job market like the current one. I would favor a system whereby beneficiaries have to jump through more and more hoops, so to speak, to show that they are truly looking for a job.

    The first time that I was unemployed many years ago, I recall having to send in a form that listed the companies that I had applied to during the prior week or two. I have gotten the impression that this is currently required much less often, if at all. I’ve heard some say that this requires to much effort to check up on beneficiaries. If we have high unemployment, however, there is certainly the extra labor available to do the checking. Even if they can only do spot checks, it would seem far better than doing no checks at all. It might even be possible to require some sort of community service of beneficiaries at some point.

    Simply cutting off benefits, however, is a bit like throwing a child into the deep end of a pool to teach them to swim. In a decent job market, the great majority of them will likely find some way to reach the edge of the pool. In a job market such as the current one, however, that may not be the case.

  3. comment number 3 by: SteveinCH

    I must admit this entire debate has, to me at least, gotten silly.

    The projected 2010 budget deficit is somewhere between 1.5 and 1.6 trillion dollars. By the Keynsian theory that I understand, that’s 1.5 to 1.6 trillion of stimulus to the economy. The way I was taught it, it doesn’t matter what the government spends money on as long as it spends money. Now the multiplier will be different for different sorts of stimulus I understand.

    For the sake of argument, let’s do a simple thought experiment. Let’s say the average multiplier on the 1.5 trillion of stimulus is 0.5. And let’s further say that the multiplier for the extension of UI is 2. I’m not sure what Diane means by “other low income support programs”. So right now we are getting an impact of 750 billion for our 1.5 trillion. If we “pay for” our UI with other funding that has a lower multiplier, we get a benefit of 1 instead of 1.5 and the net reduction in stimulative effect is 0.5 times the UI extension which, last time I looked, is less than 20 billion.

    So are we really arguing about the difference between 750 billion and 740 billion (using the numbers I made up)? It’s hard to imagine that’s make or break for the economy.

    As to the people in question, it’s definitely make or break for them (at least some of them). But of course that brings me back to my question. In the entirety of our 3.5 trillion budget, we cannot find 20 billion (or 0.6%) to cut to keep it from raising the deficit?

    Finally, Diane is right that not all policies are equally stimulative although I rather doubt we can conclusively demonstrate how stimulative each policy is. And yet, why isn’t the best short term solution (that also increases credibility for the long term) to cut nonstimulative policies in favor of stimulative ones. In fact, following this line of logic, we could have shifted government spending to more stimulative policies rather than increasing it for an on average less stimulative bundle of policies. Surely, this would have increased the “stimulus” without spending a lot more money.

    Of course, the alternative hypothesis is that all this is bunk and we’re just spending money because that’s what politicians like to do.

  4. comment number 4 by: SteveinCH

    Sorry, I messed up my math. Start with UI multiplier of 1.5 instead of 2. And the delta should be 1 times the UI extension or 20 billion. so it would be 750 billion today and 770 billion with the UI extension.

  5. comment number 5 by: VAT Brat

    SteveinCH

    After 18 months since the beginning of the recession, we see high persistence of underemployment and unemployment rates compared to past recessions. For the Keynesians, there can be only one explanation — inadequate aggregate demand policies. If a hammer is your only tool, every problem looks like a nail.

    This is just nonsense. The structure of the US economy today compared to 1973-1975, 1982, 1991 and even the 2000-2002 recessions is quite different. The sectors most hard hit (financial services, construction, ) are different than the past recessions that affected industrial sectors more strongly. Today we have people whose jobs will never come back. Yet the Keynesian policies are premised on expanding aggregate demand so that the slack in these damaged industries will be eliminated and the jobs refilled after an expansion. The economy changes yet Keynesian prescriptions remain constant.

    What’s required is a massive elimination of job categories and wholesale creation of new ones. There’s nothing in the Keynesian toolbox for dealing with this kind of recession.

    Government policy makers only know the past, and the politicians only care about protecting those constitutiencies wedded to the past. Keynesian policies will only prolong the inevitable adjustment. It’s like using resources to resucitate a dying 80 yr old instead of spending them on food for the children who are the future resources.

  6. comment number 6 by: SteveinCH

    VB,

    I’m agnostic about demand stimulation as a strategy. I agree with your argument about a need for retooling of the economy but I don’t think that makes all stimulative Federal policies ineffective.

    Having said that, I think it’s often more effective as a debating tool to accept the premise of your sparring partner for the sake of argument since debates on fundamental premises are rarely resolved.

    Thus, my argument…even if you accept the Keynsian formulation, the sound and fury over “aid to the states” really doesn’t make any sense. $50 billion in the context of $1.5 trillion in “stimulus” can hardly be the difference between a successful recovery and a double dip

  7. comment number 7 by: VAT Brat

    SteveinCH:

    Well the premise is the problem. The loose monetary policies and tax cuts enacted in response to the 2000 recession were justified as needed stimulus to get out of that recession. Those policies planted the seeds that sprouted the over-built housing sector throughout the decade. The easy money policies of the Fed fueled the expansion of the CMO markets and loose credit standards, all aided by Chinese investments in our asset markets.

    Keynesian policies created this mess and now we’re going to repeat the cycle. Oh sure, we should have pulled back on stimulus once we reached “full employment.” But at some point an economist has to be realistic about human nature and political incentives and realize that, even conceding some truth in the Keynesian model, in the real world, it just doesn’t work. And the debt just keeps growing.

  8. comment number 8 by: BillSmith

    I wouldn’t say it was Keynesian polices that created the mess.

    My opinion is it was much more our elected politicians / other government officials that couldn’t say no to anyone who wanted some program or other financed when times were good.

    If they ‘clean up’ the balance sheet in the good times it would be easier to run big unemployment programs when they are really needed.

    Likely the programs would also be more effective (diminishing marginal returns).

  9. comment number 9 by: VAT Brat

    BillSmith:

    That’s like saying Communism would have worked if only nicer people were in charge. Paraphrasing Don Rumsfeld, “You implement Keynesian policies with the government that you have, not with the government you wish you had.”