Sign me up for the Hippie CaucusPosted: July 2, 2011
If you’re like me, you’ll get a big laugh out of Brad DeLong’s on-going tongue and cheek label of pretty much every economist as being a member of the “hippie caucus” simply for giving the MSM a lesson on economic theory. It’s not exactly the most complex model or theory that drives the idea that you deficit spend during a tough economy to create jobs and stimulate business. Every first year macroeconomic principles students learns that. My guess is that most of congress and the President never got that far.
So, here’s a list of Brad’s Hippie Caucus and the statements based on simple economic theory that puts them into membership. These are some big name economists basically saying what I’ve been saying for a few years now. The deficit is a long term problem. The immediate problem is business’ lack of customers. It’s an aggregate demand thing and increased government spending is the obvious policy remedy.
The first member is Laura Tyson who I’d really like to see as Treasury Secretary or head of the CEA again. She served under Bill Clinton. You remember Bill Clinton? He’s the one that had the best job creation record of any modern president.
But the overwhelming evidence suggests the opposite: when the economy has excess capacity, high unemployment and weak private demand, cuts in government spending reduce growth and eliminate jobs.
On this point, there is widespread agreement among experts. Ben Bernanke, chairman of the Federal Reserve, recently warned that sudden fiscal contraction might put the still fragile recovery at risk. The June report from the C.B.O. contains a similar warning. Even William Gross of Pimco, a vocal critic of the long-term fiscal position of the government, cautions that a move toward fiscal balance, if implemented too quickly, could “stultify economic growth.”
As Simon Johnson noted in his recent Economix post, fiscal contractions are expansionary only under special conditions. None of these apply to the United States today.
So what should policy makers do? They should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually –- and pass both at once, as a package. Approving a deficit-reduction plan but deferring its starting date until the economy is near full employment will cut the odds that immediate contraction will tip the faltering economy back into recession.
Indeed, passage of such a package could bolster growth by easing investor concerns about future deficits, reducing long-term interest rates and strengthening consumer and business confidence.
The next member is Larry Summers. You remember him, he’s the one we thought the President may have actually listened to when doing his economic policy thing? Well, I’ve apologized for thinking Summers turned his back on his credentials and I’m having to eat my words again.
SUMMERS: I worry about a number of things with respect to growth. Most profoundly I worry about lack of demand in the United States. That means that factory capacity is unused, it means that buildings sit empty, it means that too many people are unemployed. And I look for measure that will serve to promote the level of demand in the United States. That’s why using this moment to repair our infrastructure is so important. That’s why I believe that the payroll tax cuts that put money in people’s pockets and increased employers incentives to hire are so important. And that’s why I believe that opening foreign markets and promoting U.S. exports which creates more demand is so important. And China is obviously an important part of that story.
So we already know that Paul Krugman is in the Hippie Caucus, but here’s an addition via Krugman. Traxis Partners Hedge Fund multimillionaire Barton Biggs is saying the same thing. Surprisingly enough, this comes from the WSJ whose editors have drunk enough Grover Norquist koolaid to be dead heads.
The U.S. and Europe are set to grow at an anemic pace for the foreseeable future unless the government can step in with an enormous fiscal stimulus, according to a veteran investor.
Speaking exclusively with The Wall Street Journal, Barton Biggs, managing partner at multibillion dollar hedge fund Traxis Partners, painted a bleak outlook for the developed world with only huge government intervention likely to improve things.
Mr. Biggs, former chief global strategist for U.S. investment banking powerhouse Morgan Stanley, demanded the U.S. government temporarily return to ideas used in the Great Depression as a way to get the country back to higher growth.
“What the U.S. really needs is a massive infrastructure program … similar to the WPA back in the 1930s,” he says.
The plan would be to employ some of the many unemployed people, jump start the economy, as well as help catch up with Asia, which is building state-of-the-art infrastructure from new mechanized port facilities to high-speed trains.
He suggested financing such building through the sale of U.S. Treasuries.
Okay, so Mark Thoma’s on the list too. No surprise there either. However, this comment is not on his blog Economist’s View, it’s at the FT.
I disagree with them that immediate austerity is needed. The long-term budget problem in the US is driven mainly by rising health costs, and we have many years to go before this begins to create big budget problems. Thus waiting, say, two years to begin reducing the deficit will not substantially change the probability of big problems down the road. But delaying austerity measures avoids placing a further drag on an already struggling economy, so the likely benefits are relatively large.
One of the arguments for austerity is that it would give the Federal Reserve “increased room for manoeuvre to adopt further quantitative easing if the economy weakens further”. I agree that the Fed fears being placed in the position of appearing to monetise the debt, but again I do not think immediate action is needed. A budget plan that both political parties can agree to, which is implimented only when the economy is stronger, would do a lot to give the Fed the confidence it needs to act.
Here’s a member of the Hippie Caucus from across the Pond. That would be no other than the FT’s Martin Wolfe. He sums it up nicely by saying “enjoy the coming slump” but if you want to read the wonky way of saying it, here it is.
Few doubt there is excessive private sector debt in a number of high-income countries. But how is it to be reduced? The BIS notes four answers: repayment; default; higher real incomes; and inflation. Let us rule out the last and focus on the first. Repayment means spending less than one’s income. That is what is happening in the US private sector (see chart). Households ran a financial deficit (an excess of spending over income) of 3.5 per cent of gross domestic product in the third quarter of 2005. This had shifted to a surplus of 3.3 per cent in the first quarter of 2011. The business sector is also running a modest surplus. Since the US has a current account deficit, the rest of the world is also, by definition, spending less than its income. Who is taking the opposite side? The answer is: the government. This is what a controlled depression means: every sector, other than the government, is seeking to strengthen its balance sheet at the same time.
Another former Obama adviser that’s in the Hippie Caucus and may join my list of people that most likely quit Obama because he wasn’t listening to any economists. That would be none other than former budget director Peter Orzag. You know I thought Christie Romer was a good one and was confused when she was supporting that weak ass stimulus. I’m now even wondering about Austin Goolsbee.
Today’s fiscal policy debate straddles two divides: one between those who support jobs and those who favor austerity, and one between those who think additional revenue is needed and those who don’t.
On the first divide, both sides are right, because the truth is that the U.S. needs both jobs and austerity — and a combination would be more powerful than either piece by itself. We face a very weak labor market now and, over the medium- and long-term, an unsustainable fiscal path. It would make sense to combine an additional round of temporary job creation measures with a substantial amount of permanent deficit reduction that would be enacted now but take effect later.
So, I’ve been blogging around here like my hair’s on fire pretty much since this financial crisis set in. I wrote the Obama stimulus was too little and too focused on tax cuts to appease the few Republicans resident in a then overwhelmingly Democratic Congress with a president with a mandate and political capital. I blogged that we didn’t need to extend the Bush tax cuts to millionaires and billionaires because they were the only ones that were recovering nicely. I blogged that the President should forget about health care reform and focus like a laser on the sour economic recovery. I also said that all that would do would give the Republicans more hot air come the negotiations for the debt ceiling increase. I’ve blogged repeatedly that businesses–no matter what the tax rates or the rate of interests–are not going to spend their money on capital or labor here in the US because they need customers first and foremost. I’ve also written extensively that all this cheap Fed money at the discount window and tax breaks for industry was likely to be used in places like Asia instead of here in the U.S. Brad DeLong has done an excellent job showing you that many, many top economists believe the same things. So, next time any one tells you that all economists are always caught off-guard, please remember all of this.
I truly believe that Republicans are trying to tank the economy and that Barack Obama is either tacitly or complicity or ignorantly going right down the garden path with them. Again, if you’ve got terminal cancer and need surgery to save your life do you call some one who has never gone to med school to operate on you? If you’re wrongly accused of murder and you need some one to argue that you’re innocent, do you want some one that’s never been to law school to represent you? Why or why do so many idiots in the press, in the congress, and in the White House think they know more about the economy and the financial markets than those of us that have spent our lives researching, studying, and doing it?
We should be rioting in the streets like the English and the Greeks. Instead,we’re acting like sheep to the slaughter. What our government is doing right now is actively working against the interests of its people. There are laws in place that require it to responsibly handle the economy and create jobs. They are doing the exact opposite of this. We need to get mad. Voting for idiots is not working.