Some times being Right doesn’t always make you Feel Good

wayne-stayskal-30-septemberYou may remember back in January that I was not happy and very outspoken about the size of the Obama Stimulus plan. I was not impressed by the content or with the mix between tax cuts and direct government spending. You may recall that the Blue Dogs interminable resistance to do anything that might wake their sleeping Republican voters and the desire on the part of POTUS to appease the unappeasable remnants of the Republican party led to a very watered down plan. At the time, all that I could hope was that it might be enough to get the ball rolling. However, I felt that the historical multiplier –especially for taxes– was not going to kick in the way it had in the past.

The release of the miserable unemployment data yesterday (not all that unexpected as you’ll recall) as well as an estimate of our output gap now clearly squares with my earlier view as well as the earlier views of Brad deLong, Paul Krugman, Mark Thoma and Joseph Stiglitz among others. The stimulus was clearly not the blue pill the economy needed. (That last link is from me saying this same thing in July.)

The Washington Monthly says the decision to appease centrists and Republicans looks even worse in retrospect. Now, the media gets it. Color me completely unsurprised because I told you so back then that it wasn’t going to be enough. I even mentioned it recently when it appeared the stimulus plans of German, France, and Japan had already lifted those economies from the worst of it last spring. These countries emphasized direct government spending. We mostly shuffled a few funds as stop gaps and the created a bunch of tax cuts that no one really needs right now.

In February, when the debate over the economic stimulus package was at its height, a handful of “centrist” Senate Republicans said they’d block a vote on recovery efforts unless the majority agreed to slash over $100 billion from the bill.

The group, which didn’t have any specific policy goals in mind and simply liked the idea of a small bill, specifically targeted $40 billion in proposed aid to states. Helping rescue states, Sen. Collins & Co. said, does not stimulate the economy, and as such doesn’t belong in the legislation. Democratic leaders reluctantly went along — they weren’t given a choice since Republicans refused to give the bill an up-or-down vote — and the $40 billion in state aid was eliminated.

At the time, it seemed like a very bad idea. That’s because it was a very bad idea.

In the past, government hiring had managed to somewhat offset losses in the private sector, but government jobs declined by 53,000, with the biggest number of cuts on the local and state levels. Even the Postal Service, which is included in the public-sector job statistics, dropped 5,300 jobs.

“The major surprise came from the public sector, where every level of government cut back,” Naroff said. “The budget crises at the state and local levels have caused an awful lot of belt-tightening.”

Atrios of Eschaton reminds every one that the first thing that the centrists eliminated was state aid. The majority of medium_squashed-blue-doggovernment spending is spending by state and local governments. They provide essential services like teachers, police, road maintenance, firefighters, and then of course, unemployment insurance and aid to families suffering health care problems, hunger, and other job loss related issues. Atrios links to an article in the Philadelphia Inquirer which brings the state budget problems down to the Pennsylvania level but you can go to any state and see the same situation. California is perhaps the most hamstrung of all the states in the union.

States–because they completely hogtied themselves with balanced budget amendments as part of the post Reagan idiocy– no longer can pass bond issues or borrow to cover cyclic shortfalls. They passed these insane laws that encourage them to run wild during times when revenues are flush and states LEAST need to be spending. Then, when the states are experiencing downturns, they must do everything in their powers to make things worse. That would be raise taxes or cut benefits and spending to every one including the newly unemployed and struggling businesses. They basically force their citizens over the edge while making them pay for it. It’s some of the most irresponsible policy I’ve seen in the last several decades.

So, most of the economists that I mentioned above along with some others are quick to join the I told you so chorus today. Here’s Brad deLong’s take on the disturbing unemployment data. It includes a long list of folks and links that said Obama’s stimulus was weak and toothless.

God! I really wish that I were not so smart!

Brad DeLong, March 25, 2009:

The Stimulus Package Looks a Lot Smaller Now…: We are going to need a bigger one in September, which means it has to be put into the budget resolution now…

Well, we didn’t. And now when it would be very nice to have a very large state aid program ready to be dropped into the fall reconciliation bill–and when it would be very nice to have a government-paid health corps starting up now as part of health care reform–we don’t.

So, you’ll also notice DeLong links to Mishell, Baker, Krapja and Rappeport. Stiglitz was all over the FT at the same time all of these quotes came out. Here’s the Krugman I told you so. Krugman’s blogpost is the one that my second link above mentions. I characterized then as Krugman inkles the D word. I linked to the post he mentions a few days after I said, sheesh, this thing isn’t going to be big enough and has way too many tax cuts! Every one was all over it back then. This is one time that Washington D.C. can’t say that the economists got it wrong.

Obama’s Anzio

I’m late on this, due to festschrifting. But another bad employment report yesterday. I’m feeling pretty bleak about this.

And the worst of it is that it was more or less predictable. I went back to my first blog post — January 6, 2009 — worrying that the Obama economic plan was too cautious. I wrote:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

Ed Harrison of Credit Writedowns explains why government spending is necessary yet again for those that didn’t get it the first time out in his startling article at Naked Capitalism “The Recession is over but the Depression has just Begun”.

The government plays a crucial role here because of the huge private sector indebtedness. In the U.S. and the U.K., the public sector is not nearly as indebted. So while, the private sector rebuilds its savings and reduces debt, the public sector must pick up the slack. Why do I say must? It’s because of an accounting identity which comes from the financial sector balances model. Marshall Auerback says it best in a recent post:

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts.

If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession – what Germany and Japan tried in the 1990s and in this decade. But, of course, the G20 and the IMF are all talking about global re-balancing. This cult of zero imbalances is something Marshall first brought forward back in April. And it ignores the accounting identity inherent in the financial sector balances model. I highlighted this model in my post, “Minsky: Turning neoclassical economics on its head.” However, I must admit to having a preternatural disaffection for large deficits and big government which is what Koo and Minsky advise respectively – a recent cartoon shows why. It is this knee-jerk aversion to what is viewed as fiscal profligacy which is at the core of the cult of zero imbalances.

Okay, so this is the deal. The states need to dump their balanced budget amendments for laws that force them to run surpluses when the revenues are flush and the good times are rolling. Then, they should be allowed to run deficits when recessions force them into imbalances. Until those balanced budget amendments get dumped, the Federal Government has to step in and step in big. THEN, we need to discuss why we let the both Bushes and Reagan run up such huge fiscal deficits playing revamp the military during good economic times. That’s an issue, as I’ve said, too. Just because the tax dollars pour in during a good economy doesn’t mean you have to spend them and continue running a deficit. The Clinton administration was the only administration to get this right. After the boom of the 1990s, they handed Dubya an economy that was in pretty good shape to weather just about anything or so we thought. That was until what remained of any regulation was either gutted, ignored, or underfunded to dysfunction. Now, we have both federal government and state governments that exacerbated potential problems to the point that this isn’t something that can be corrected with marginal leadership.

Unfortunately, marginal leadership appears to be what we have right now and that can’t be blamed on Dubya. If this stimulus fails as badly as it looks like it will, and that creates a political backlash, Obama must own this as his first huge mistake.

Why oh why, can’t we get some real Democrats back in charge of the economy?

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