Tuesday :: Jan 26, 2010

What The Economists and Analysts Are Writing

by Turkana

Just for fun, I thought it would be interesting to avoid the shrill, and take a peek at what some leading liberal economists are saying. the shrill is running very high, in certain circles, but here's a little rational analysis, from some rational people. It might not whip you into a frothing fury, but it might help you to think this through.

James Kwak, of The Baseline Scenario:

To me, it sounds like Obama has decided to imitate Bill Clinton, except that he’s going to skip 1994 and jump right to 1995-1996–the years that gave us welfare reform and the Anti-terrorism and Effective Death Penalty Act, among other things. Deficit reduction is a classic “Third Way” policy, but by doing it this way Obama is ceding ground to the government-haters (who just want to cut spending) without getting anything (future tax increases, or votes for health care reform) in return. As DeLong says, “it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It’s quite another to negotiate against yourself and in addition attack employment in the short term.”

That would be UC Berkeley economics professor Brad DeLong, who is generally pretty sympathetic to the Obama Administration's economic moves:

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

And he quotes this part of the original New York Times article:

But one administration official said that limiting the much smaller discretionary domestic budget would have symbolic value. That spending includes lawmakers’ earmarks for parochial projects, and only when the public believes such perceived waste is being wrung out will they be willing to consider reductions in popular entitlement programs, the official said.

“By helping to create a new atmosphere of fiscal discipline, it can actually also feed into debates over other components of the budget,” the official said, briefing reporters on the condition of anonymity.


As another deficit-hawk points out: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It's quite another to negotiate against yourself and in addition attack employment in the short term. The fact that the unemployment rate is projected to remain stable over the next year means that there is a 30% chance it will go down, a 40% chance it will stay about the same, and a 30% chance that it will go up--and whatever it turns out to do, the administration's budget has just given it an extra bump upwards.

And UCLA law prof Jonathan Zasloff, who often works and writes on economic matters:

I’m trying to think of what could possibly be a worse plan. Let’s see: we might be entering a double-dip recession;unemployment is in double-digits, and you are going to freeze spending? What in God’s name are they thinking?

Perhaps the worst thing about this is how it cedes the ideological ground to the Republicans. At some point someone must make an argument for government. I think it was former Senator Paul Simon Harry S Truman who said: “give the voters a choice between a Republican and a Republican and they will choose a Republican every time.”

Deficit hawk Calculated Risk, aka Bill McBride:

This is an important issue, but I'd rather wait to address the deficit until after we see clear signs of a recovery.

Note: I have a long history of being a deficit hawk, but I don't want to see a repeat of the mistakes of 1937...

And he links to his own post from September:

Today I believe some people are getting upset about the wrong thing at the wrong time. As Samwick noted, during a recession the deficits will increase - from falling tax revenues, automatic stabilizers and stimulus spending. Maybe some people disagree with the stimulus package, but that isn't going to change (except additions like extending unemployment benefits again).

Eliminating the recessionary deficit requires the economy to recover, and unfortunately the recovery will most likely be choppy and sluggish, but eventually a recovery will happen. Eliminating the structural deficit will be much more difficult and will require hard choices, but now is not the time.

And another who warned of this, beforehand, was Michael Linden, at the Center for American Progress:

Those who claim that we could get the budget back to sustainability if we only cut out earmarks, or say that the solution is to simply freeze discretionary spending, are just peddling fiscal snake oil.

The budget deficit is likely to average about $900 billion per year over the next five years. Even by the most expansive definition of “pork-barrel spending,” earmarks amount to less than $20 billion a year. Eliminating them all would reduce the deficit by less than 3 percent. The federal government is certainly going to have to do a better job of spending each dollar wisely and diligently seek ways to improve efficiency across the board. But earmarks are actually a vanishingly small drain on our nation’s overall finances, and eliminating them will not even get us one-twentieth of the way to balance.

Freezing discretionary spending, the spending that Congress reappropriates every year, at current levels will similarly yield only very small budgetary savings. The federal government spent a bit more than $625 billion on non-defense discretionary programs in 2009. The Congressional Budget Office projects that, in five years, the federal government will spend about $660 billion on the same programs. Freezing non-defense discretionary spending at current levels would therefore only produce a total savings of $35 billion in 2015. That year, the budget deficit is expected to be around $760 billion. Saving $35 billion would solve less than 5 percent of the problem. There may be some savings to be found in non-defense discretionary programs, but a spending freeze would accomplish extremely little in the way of measurable deficit reduction.

U of Oregon economics prof Mark Thoma thinks the politics reeks:

Instead we get cheap political tricks that are likely to backfire. How will this look, for example, if there's a double dip recession, or if unemployment follows the dismal path that the administration itself has forecast?

This seems to be a case of the former Clinton people in the administration (or wannabees) trying to relive their glory days instead of realizing that those days are gone, the world is different now and it calls for different solutions.

I wasn't in favor of having so many Clinton administration people in this administration, and nothing so far has caused me to change that assessment. They're nothing but trouble.

And speaking of the politics, the usually avid Obama supporter Nate Silver doesn't like the politics:

First reactions aren't always the best ones, but my first reaction to tonight's news is that it's a mistake on par with John McCain's "suspending my campaign" gaffe.


I'll let the economists talk about the wisdom of curtailing government spending in the middle of a massive consumption deficit, but what concerns me more is the politics. Specifically, the sort of cognitive dissonance that is going to be created in the mind of the average voter when the White House is promising to freeze spending on the one hand (or, more accurately, this will be the media caricature of their gambit), and on the other, trying to defend its stimulus and its health care reform package, trying to excuse the bailout package as a necessary evil, and perhaps trying to champion new programs.

And he thinks this might give Obama a quick, small bump in the polls.

But Obama's not the one on the ballot in 2010; in the medium run, it's most likely effect is to confuse voters, and in the long run, it'll probably either be forgotten about or become Another Broken Promise™. The narrative about the "perpetual campaign" is generally kind of facile, but this whole thing has a weirdly campaign-trail quality to it.

Krugman and Ritholtz and some other good people have yet to weigh in. But from the looks of it, if you cut through the hysteria, to a lot of thinking people this isn't playing so well. On either the economics or the politics.

And that Krugman guy:

It’s appalling on every level....

And it’s a betrayal of everything Obama’s supporters thought they were working for. Just like that, Obama has embraced and validated the Republican world-view — and more specifically, he has embraced the policy ideas of the man he defeated in 2008.

Turkana :: 6:16 AM :: Comments (9) :: Digg It!