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We Can Walk and Chew Gum at the Same Time

June 8th, 2010 . by economistmom

Today the Obama Administration is announcing a very small effort to reduce (only “unnecessary and wasteful”) deficit spending, and yet liberal groups will attack them for promoting a policy that will kill the economy–or at least prolong the recession.  And conservatives will continue to argue that any spending done in the name of “stimulus” is by definition “wasteful”–especially if they don’t get how a less-idle economy might at all benefit themselves personally.

But it’s possible to argue for more and better stimulus at the same time that you call for greater fiscal responsibility.  Two prime examples, from two of my favorite “fiscal hawks” who can walk and chew gum at the same time…

First, my boss Bob Bixby says it so well that the President himself copies it (from a CQ Weekly story by Clea Benson (accessible by subscription only)):

Robert Bixby, the executive director of the Concord Coalition, is at the forefront of the effort to publicize the dangers of uncontrolled federal spending. But even he worries that the economy is not yet at a point where it makes sense to forgo extending unemployment benefits and certain other federal supports, as long as they are carefully targeted at preventing layoffs that would exacerbate the economic downturn.

“Right now, I think that there’s still a case to be made for some aid to the states if it is a pretty direct form of injecting stimulus,” Bixby said last week.

The need to rein in deficits and the national debt should not be confused with near-term problems such as the current unemployment rate, Bixby said: “There’s no question that we do have to turn our attention to fiscal consolidation, because we’re on an unsustainable track. That unsustainable track has nothing to do with the short-term economy.”

President Obama echoed Bixby in a speech last week on the economy at Carnegie Mellon University in Pittsburgh. “Now, the economy is still fragile, so we can’t put on the brakes too quickly,” he said. “We have to do what it takes to ensure a strong recovery. A growing economy will unquestionably improve our fiscal health, as will the steps we take in the short-term to put Americans back to work.”

…and the Brookings Institution’s Bill Gale explains in an interview with the Atlantic’s Derek Thompson:

So we want the economy to recover today. But we can’t run a deficit equal to 50 percent of government spending forever. How do you balance these goals: short-term stimulus and long-term balance?

What I like to say is that right now, the economy is more important than the budget. We need to stimulate in the short term and get order in the long term. Those aren’t tradeoffs. If you just stimulate now, then you create worries about the long-term situation and it creates investor uncertainty [which puts upward pressure on interest rates]. If you just do fiscal discipline now, you help the budget but hurt the economy, and then that hurts the budget again [lower production means lost tax revenue]. But, if you stimulate now, coupled with medium to long-term deficit plan, you cap that potential increase in interest rates.

Critics from both extremes basically believe that achieving both goals (short-term stimulus and longer-term fiscal responsibility) isn’t possible, or that greater success at one means failure with the other.  So they only push for their favored goal, and with their hyperpartisan rhetoric they dismiss the other goal as stupid and evil.  And the rhetoric works with many Americans–and as a result, we risk screwing up on both goals.  We neither walk nor chew gum.

9 Responses to “We Can Walk and Chew Gum at the Same Time”

  1. comment number 1 by: SteveinCH

    When the administration lacks anything approaching a credible response to the medium-term/long-term problem, it is hard to interpret their short-term actions as anything other than fiscally irresponsible.

  2. comment number 2 by: Jason Seligman

    Great Post, great quotes.

    I’d add that a lot of states right now really do not know how to project revenues related to intergovernmental grants, so clear and certain messages are of tremendous value.

    Finally in case readers think that the local public sector has expanded it’s employment over the recession, let me say here that the evidence appears mixed. Relative to an August 2007 baseline Ohio and Michigan more or less look as follows as of BLS May numbers:

    MI: down 3.1 percent
    OH: down 0.9 percent

    Ohio public sector employment has recovered from after hitting a nadir of -2 percent in February of 2010. Michigan’s declines were within 2 percent of the pre-recession benchmark as late as December of last year, but have really fallen a good deal in 2010, hitting that 3.1 number in just the first four months of this year.

    So it appears reasonable to still be quite concerned.

  3. comment number 3 by: AMTbuff

    I would agree with the arguments for stimulus if the stimulus were primarily flowing to the private sector, rather than to public sector employees and recipients of government benefits. Those latter categories are where major cuts are needed, and where adding money now only makes it harder to impose the necessary cuts. We are stimulating consumption of tax revenues rather than production of tax revenues.

    The correct stimulus would boost the private sector while at the same time cutting the public sector. Layoffs and benefit cuts in the public sector could be a big net benefit if the government spent the savings to promote additional production of goods and services by the private sector.

  4. comment number 4 by: VAT Brat

    Bob Bixby is an embarassment to the notion of an independent voice of fiscal restraint. But then, I guess his first priority is maintaining the revenue stream of the Concord Coalition from the liberal donor base. Can’t have any deficits at the office!

    Any economist worth a dime knows that extending unemployment benefits delays the inevitable labor market adjustments that must occur to form the basis of a long-term recovery. Unemployment compensation that goes on for over a year merely encourages people to delay reducing their earnings expectations and engaging in job training for a new job in a different industry. But hey, if Obama wants to keep the unemployment rate high through the November election cycle, then he’s doing the right thing.

    $8,000 subsidies for first time home buyers? Relaxing FHA guidelines? Bailing out Fannie and Freddie? WTF!!! Shouldn’t we be doing the exact opposite of this nonsense to avoid repeating past mistakes?

    The root of this nonsense is the Keynesian notion of a free lunch. You see, according to the Keynesians, in a recession there is “slack” in the economy. We need government spending (G) to pull the string taut. In the world of Keynesian macroeconomic equations, it doesn’t really matter what G is spent on, just as long as G is spending it.

    To believe this fairy tale, you have to suspend your belief that economic actors are rational and anticipate the future. Deficit spending today will require paying down the debt in the future. In physics, there is a conservation of energy and mass.
    In economics borrowing for consumption today is paid with by less consumption tomorrow. To believe all this Keynesian claptrap about government stimulus , you have to think that the future doesn’t matter in the calculation of the efficacy of a policy. It’s all about living in the present! How Zen.

  5. comment number 5 by: economistmom

    AMTbuff: But the point is that when the economy is slack and contains a lot of idle capacity (unemployed workers, shuttered factories, vacant office/store space, unsold inventories), we need to create demand for goods and services, and often that means that increased transfer payments to households most constrained (such as the unemployed) is the most powerful way to get those idle resources back to work. Why would private sector businesses just “produce” more if no one is buying/demanding? (Or if we can’t stimulate households to buy, government can purchase goods and services directly.) There’s a big difference between optimal fiscal policy designed to stimulate economic activity during a downturn, and that designed to increase productive capacity via the supply side in a full-employment economy.

    VATBrat: It is amusing to me to read your reference to Concord’s “liberal donor base,” because more often (especially lately) people accuse us of catering to our “conservative donor base.” We seem to make people at either extreme unhappy, and you sort of prove my point that the polarization leads us to point fingers and dismiss the other side’s views and thus achieve neither the most effective stimulus for the short-term economy nor a sustainable path for the longer-term.

    And by the way, Fed Chairman Bernanke’s testimony before the House Budget Committee this morning is consistent with this message that we can, and should, walk and chew gum at the same time–that the short-term deficit spending has been helpful to stabilize the economy but that we are still on an unsustainable longer-term path for which we need a better plan in place soon.

  6. comment number 6 by: AngryMobVoter

    The Congress and current Administration have put the country on a course of reckless government spending that has mortgaged the future of all Americans especially future generations. The only way to fix this long term structural problem is to create a pro-growth atmosphere for business. To do this we must reduce taxes NOW. How many different taxes does a business or individual pay on a regular basis? We must eliminate number and complexity of all these taxes and reduce the tax burden.

    We also need to end the micro-management of business and the economy. Until we GREATLY reduce the tax burden on business and consumers and remove the senseless regulations that accomplish little in relation to the cost they impose, our future is bleak.

    REMEMBER IN November…VOTE THEM OUT!!!

  7. comment number 7 by: VAT Brat

    Economist Mom;

    I’d be more impressed by the Concord Coalition if I knew that it defended the Bush tax cuts as a means of countering the 2001-2003 recession the same way it defends the Obama stimulus plan as necessary for countering the current recession. No doubt the Coalition was taking hits from both the right and the left back in 2001, correct?

    BTW, I opposed the Bush tax cuts because they weren’t accompanied by spending cuts. I’m consistent in my fight against deficit spending, right or left.

    You may not believe this, but economies pulled themselves out of recessions in the past without aggregate demand stimulus spending by the government. Check out pre-Keynesian economic history. And yes, they even did it with the added burden of operating under a gold standard without the advantages of today’s fiat money regime with a modern banking system.

    You asked, “Why would private sector businesses just “produce” more if no one is buying/demanding?” It’s done all the time by real estate developers, entrepreneurs, and others who plan for the future. These are people with imagination, like chess players, thinking several moves ahead. They never assume the future will be just like today. There are plenty of investors that I work with who are very optimistic and are salivating at the great opportunities available in this market.

    Idle capacity and shuttered factories are a signal given by the market that “Guys and dolls, you’ve been misallocating capital and building the wrong stuff or too much of it. Redeploy and do something different”

    Unfortunately, they didn’t have recessions in the Soviet Union to provide signals that someone made mistakes in a 5-year plan. They have full-employment and little slack in the Cuban economy, but so what?

    The economics profession is rife with mathematicians running regressions on statistics and inventing models with “potential GDP,” “slack” and other notions that are divorced from the reality of how actors in an economy behave that you forget what markets really do and how they work.

  8. comment number 8 by: SteveinCH

    Diane,

    I don’t understand your response to AMT. He (I think) is making a very reasonable point, namely that public sector jobs are less valuable to a short- and medium-term solution than private sector jobs. The reasons for this are multiple.

    1. Private sector jobs are sustained by voluntary contribution (purchases) rather than by legislative fiat and involuntary takings.

    2. Private sector jobs actually provide more tax revenue per dollar of compensation (since many public sector jobs are exempt from SS and Medicare taxes).

    3. Private sector jobs are more effectively tested for ROI (on average). Thus, there is greater likelihood that whatever funding was provided to “create or save” the job will be funding that has a positive ROI.

    The argument here isn’t about whether some stimulus was (or is) appropriate. The argument (at least for me) is about whether we need to continue to send money to profligate states in order to “save jobs” that either could be saved in other ways (ever hear of a pay cut) or maybe shouldn’t have existed in the first place.

    A private sector job has just as much impact on “aggregate demand” as a public sector job and is better on other dimensions. I would have no issue with goosing public employment if someone could convince me the ROI of this type of action was higher than doing the same thing in the private sector but nobody does that.

    If you watched Bernanke’s testimony (I was lucky enough to have him as a Prof at Princeton a long time ago), you would have heard the noise about lending to small businesses and startups. Why not take the $23 billion that we were going to use to fund teacher salaries and give it to the SBA to make loans instead? Would this be a better solution? I have no idea. What about a payroll tax holiday for $23 billion. Would that create more jobs than giving it to the states? I have no idea. But I’m pretty sure that the options to focus primarily on private sector job creation have not been exhausted and I’m equally sure that the administration’s contention before ARRA was passed that the “vast majority” of jobs created would be private sector jobs has not proven to be true.

  9. comment number 9 by: VAT Brat

    SteveCH

    I’ll anticipate the answer why we shouldn’t be increasing SBA Loan funding for startups. It’s the stock Keynesian answer. The reason is that you first have to stimulate aggregate demand and reduce the slack in the economy before businesses want to invest. Lowering interest rates and increasing the amount of capital available for loans is like “pushing on a string” in a liquidity trap.

    In the Keynesian world, during a recession it doesn’t matter what the government spends money on. All that matters is taking money away from people who aren’t spending it and giving it to people (or government agency) that will.

    Teachers tend to vote Democrat. SBA borrowers tend to vote Republican. Maybe that’s even more important. But I digress…..

    Aggregate Demand! Live for the present! It’s the Zen way.