Matt Yglesias

How Much Would Escalation in Afghanistan Cost

For a while now I’ve been saying that the fastest way to end the war in Afghanistan would be to to ask General McChrystal’s staff to produce a plan to make it deficit neutral and find sixty votes in the senate for his financing plan. Today, Spencer Ackerman points out that an excellent LA Times piece by Christi Parsons and Julian E. Barnes that digs into the issue of how much going bigger in Afghanistan would cost seems to indicate that the Pentagon agrees with me. Thus, they’re fudging the numbers to make their preferred policies look cheaper than they really are:

The Pentagon cost includes higher combat wages, extra aircraft hours and other operations and maintenance costs, but omits such items as new weapons purchases — one-time costs that vary by year — and support equipment like spy satellites and anti-roadside-bomb technology.

The Pentagon also does not try to estimate costs of new bases for additional soldiers.

But in a memo early this month, obtained by The Times’ Washington bureau, the Pentagon’s own comptroller produced an estimate that broke with the customary Defense formula and did include construction and equipment.

Estimating weapons and equipment costs is clearly going to be difficult. But it’s equally clear that $0 is the wrong estimate. And as we see, the DOD has some way of doing this for internal consumption.

Meanwhile, I’d like to see Paul Krugman or other advocates of more stimulus weigh-in on whether debt-financed escalation of military effort would have a beneficial impact on the labor market situation. I think it’s deplorable that U.S. political culture tends to regard military-related appropriations as exempt from normal budgetary considerations, but it’s possible that that’s a loophole worth taking advantage of in this case. All those new weapons purchases the Pentagon doesn’t want to estimate are manufacturing jobs for someone, right? Obviously this shouldn’t the primary consideration in dictating military strategy, but I do think a comprehensive look at the macroeconomic impact of defense policy choices—both the costs and benefits of hugely expensively military undertakings—is a necessary element of the strategic consideration.

Home Sale Pace Up, Inventories Falling

(cc photo by I See Modern Britain)

For all the talk about how the current economic crisis started in the housing market, taken on its own terms the ups-and-downs of the real estate industry are pretty straightforward. New households are formed at a certain rate. And homes become obsolete at a certain rate. When you have a prolonged period of time when homes are being built faster than they’re needed you get a crash in prices and construction activity. But after a fallow period of construction, the excess supply should eventually get bought and people will want to buy homes again. Thus it shouldn’t come as much of a surprise to see the National Association of Realtors reporting that inventories are shrinking on rising sales. It’ll be a while until there’s a lot of new demand for residential construction, but the arrival of that day is fairly inevitable—the population is growing.

The problem, however, is that we’ve got much bigger economic problems now than the decline in employment in the construction industry. In particular, we’re facing the prospect of an extended period in which widespread joblessness leads to a general lack of demand for goods and services, which itself leads to joblessness and low levels of investment, leading to more joblessness.

Sewage Spill

Talk of environmental problems in recent years has tended to focus on climate change, but an excellent Charles Duhig piece in The New York Times reminds us that thanks to inadequate capacity at the nation’s sewage treatment plants many cities still find themselves dumping raw sewage into rivers when heavy rain falls.

Part of the problem is the spread of the ever-villainous vast surface parking lot, whose non-permeable surface (in contrast to, say, grass or trees) creates extra water flow. But the largest issue is simply that upgraded the capacity of sewage treatment plants is the kind of infrastructure project we’ve been neglecting for decades. That, in turn, should be a reminder that it shouldn’t reall be all that hard to come up with useful things to do if there’s an interest in additional job creation measures.

The Three Percent Solution

Building on yesterday’s idea, borrowed from Brad DeLong, that the Fed could stimulate the economy by raising its long-term inflation target from two percent to three percent it’s worth noting that there are other arguments for thinking that this would be a good idea. First off, it’s worth noting that three percent inflation is still pretty low. There’s nothing magical about the two percent number, and a somewhat higher figure is still very much consistent with the basic idea that low inflation is good.

Second, a higher inflation rate would speed the process by which households climb out from over-indebtedness. Third, a higher inflation rate would ensure that in the future the Fed has more “running room” for conventional monetary policy before hitting the zero bound and getting into this madness. Fourth, a higher inflation rate would speed the process by which real wages and prices adjust to whatever real shocks the economy may or may not be suffering from.

This course of action seems to be anathema to the powers that be, but it seems strongly preferable to a prolonged period of ten percent unemployment and a possible series of trade wars and the like.

Public Mostly Holds Republicans Responsible for Recession, But Democrats Now Catching More Blame

One reason that Barack Obama has stayed in pretty good political shape despite a terrible economic situation is that the public has consistently recalled that this recession began under George W Bush and reached its highest point of crisis under Bush. But as horrible labor market conditions persist, it’s natural that Democrats are attracting more and more ire:

A CNN/Opinion Research Corp. survey released Friday morning indicates that 38 percent of the public blames Republicans for the country’s current economic problems. In May, 53 percent blamed the GOP. According to the poll, 27 percent now blame the Democrats for the recession, up 6 points from May, and 27 percent now say both parties are responsible.

I’ll just note that this highlights one important respect in which the filibuster undermines democratic accountability. It’s a good thing for the public to hold Democrats responsible for results even if the problems the Democrats are dealing with began under GOP rule. That instinct creates appropriate incentives for incumbent politicians to focus on solving problems rather than on allocating blame. But giving defeated electoral minorities veto power over large elements of national policy tends to undermine this dynamic. What’s wanted is an opportunity for the Obama administration to take its best shot at fixing the economy, followed by an “accountability moment” in which failure is decisively punished. Instead, especially if the GOP picks up two or three Senate seats in 2010, we’re likely to get a muddle that refocuses politics on blame-shifting efforts.

Bernanke: No Jobs for You

The good news about this Ben Bernanke speech to the Economic Club of New York is that he shows no sign of wanting to join David Ignatius in tightening monetary policy. The bad news is that he sounds awfully blasé about the prospect of a prolonged period of double digit unemployment:

Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities. Although resource slack cannot be measured precisely, it certainly is high, and it is showing through to underlying wage and price trends. Longer-run inflation expectations are stable, having responded relatively little either to downward or upward pressures on inflation; expectations can be early warnings of actual inflation, however, and must be monitored carefully. Commodities prices have risen lately, likely reflecting the pickup in global economic activity, especially in resource-intensive emerging market economies, and the recent depreciation of the dollar. On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time.

Now if you were just asking my opinion, I’d say something very similar to what Bernanke is saying here. But Bernanke isn’t just offering an opinion, he’s the country’s top monetary policymaker. And he’s telling us that his vision of recovery involves a long period of labor market weakness and low inflation. He says that this situation is “likely to warrant exceptionally low levels of the federal funds rate for an extended period” but the very high level of unemployment seems to clearly militate in favor of further easing. Bernanke acknowledges that he has a “dual mandate to foster both maximum employment and price stability” but he’s also acknowledging in this piece that he hasn’t fostered anything close to full employment, and doesn’t think his policies are likely to achieve anything close to full employment any time soon.

But then why isn’t he doing more?

Is It Too Late for Work-Sharing?

Pat Garofalo has a good overview at the Wonk Room of the idea of trying to use “work-sharing” programs, “subsidizing employers who reduce workers’ hours (and maintain their pay) instead of laying some of them off.” This doesn’t seem to be an idea anyone except Dean Baker is very enthusiastic about, though people are getting more interested in it because it’s cheaper than additional fiscal stimulus:

Something that I think hasn’t gotten enough attention here is whether we haven’t passed the moment when this would have been most helpful. Such a program, enacted 12 months ago, could have avoided a lot of layoffs. But looking forward we’re not so much worried about large additional net job losses. What we’re worried about is that given the large number of unemployed people, we need to see large net job growth but instead we could be seeing job growth so anemic that it doesn’t even keep up with labor force growth. That’s a very serious problem. But it’s not clear to be that it’s a problem work-sharing really addresses.

It’s also worth saying that even looking backwards we were in a very different situation than Germany. Germany’s export-oriented economy was heavily hit by the recession because demand for their products vanished. But in that sense they were very much a secondary casualty of the recession. The presumption was that once growth returned elsewhere, people would go back to buying German stuff and employment would return at more-or-less the same firms that it had been at in the past. In the U.S. context, it’s not clear how much help work-sharing would have provided to people working in the building trades who lost their jobs.

With Great Political Independence Comes Great Responsibility not to Mire the Country in Double-Digit Unemployment

Yesterday David Ignatius accused Chris Dodd of wanting to politicize the Federal Reserve’s control of monetary policy. Kevin Drum points out that Ignatius has this wrong. But it’s worth noting something deeper about Ignatius’ concerns:

The political challenge to the central bank’s authority comes at an especially delicate moment — as the economy begins to rebound and the Fed considers future tightening of monetary policy. It will need public support to combat inflation. But as the New York Times noted in a front-page article last week, the Fed is “under more intense attack than at any time in decades,” from both left and right.

This is nuts. Unemployment is over ten percent. And unemployment is rising! There’s no inflation happening. It would be good for the Fed to have public support in combating inflation if combatting inflation were a good idea. But it’s not a good idea. Not a good idea at all. To repeat, unemployment is at 10 percent and rising. All the evidence suggests that the Fed ought to be attempting additional monetary expansion to return the economy to an acceptable growth path, not tightening monetary policy to combat inflation. In fact, the expectation that if inflation emerges the Fed will stamp it out immediately has become a source of economic problems.

Conventional wisdom is in favor of central bank independence. But insofar as that CW has validity, it’s because it’s been our experience that independence leads to good monetary policy. A prolonged period of double-digit unemployment would mean, almost by definition, that your monetary policy is not good. But none of the world’s major central banks seem to feel that additional monetary expansion would be a good response to massive joblessness and sluggish growth. But if massive joblessness isn’t a good time for monetary expansion then when is? If Ignatius and Ben Bernanke don’t like the populist agitation happening right now, they’re really going to hate the populist agitation that’ll be happening after 12 more months of sustained high unemployment.

War as Stimulus

Like most progressives, I find it extremely annoying that Beltway conventional wisdom exempts military-related expenditures from the normal rules of budgeting.

At the same time, in these days of recession it does occur to me that to some extent this is a two-way street. I’ve been inclined to complain that most of these more ambitious visions for Afghanistan, for example, don’t seem to meet any kind of reasonable cost-benefit test. After all, they could use better security, a Provincial Reconstruction Team, and a “civilian surge” in Newark, New Jersey. But if you take the hypocrisy of the political system as a given, this looks a bit different. At the end of the day, war expenditures don’t trade off with domestic expenditures, they trade off with increased levels of public debt. Under normal circumstances, that still means that military operations should be (though they generally aren’t) subject to real cost-benefit scrutiny, since higher debt levels has real social costs. But the basic progressive analysis of the current economic situation is that higher short-term debt levels are socially beneficial, right? The story is that World War II—at least from the perspective of the American economy—wasn’t a huge economically wasteful use of resources. Sure it was more wasteful (in economic terms, obviously the “beating Hitler” benefits were quite real) than some other possible projects, but it still on balance was helpful in ending the Depression.

ADDITION! Just after I finished writing this post, but right before I put it up, I saw Christopher Drew’s NYT story “High Costs Weigh on Troop Debate for Afghan War”:

While President Obama’s decision about sending more troops to Afghanistan is primarily a military one, it also has substantial budget implications that are adding pressure to limit the commitment, senior administration officials say. [...] Senior members of the House Appropriations Committee have already expressed reservations about the potential long-term costs of expanding the war in Afghanistan. And Mr. Obama could find it difficult to win approval for the additional spending in Congress, where he would have to depend on Republicans to counter defections from liberal Democrats.

I think that to an extent invalidates my musings above. I assume the reference to “senior members of the House Appropriations Committee” refers primarily to David Obey who’s expressed concerns about this.

Expectations-Management

Paul Krugman has spent a lot of time writing about the desirability of more expansionary fiscal policy, but yesterday he seemed to say that this is a second-best alternative to his real preference of something like a Scott Sumner approach to monetary policy:

The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.

But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).

In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.

But Krugman thinks this isn’t going to happen. He doesn’t focus on this solution because “I don’t think I’ll get anywhere, at least not until or unless the slump goes on for a long time.” Hence, the focus first on expansionary fiscal policy and now increasingly on direct support for employment.

But if this political analysis is correct, then aren’t the monetary authorities going to end up undermining anything that can be done on the fiscal side? You can see how fiscal policy could be effective as an adjunct to monetary efforts, but if fiscal and monetary policymakers try to work at cross-purposes, then my understanding is that monetary policy wins.

Eurozone Now Enjoying Anemic Growth

(photo by me, available under cc license)

The recession ends in Europe though this isn’t much of a recovery:

The E.U.’s statistics agency, Eurostat, reported that G.D.P. growth in the 16-member euro zone improved by 0.4 percent from the second quarter, following five consecutive quarters of contraction. Growth was still 4.1 percent lower than a year earlier.

The rebound appeared to be powered by Germany. There, G.D.P. growth rose by 0.7 percent from the second quarter, when it was up by 0.4 percent. Compared to a year earlier, German G.D.P. was down 4.7 percent.

That these kind of numbers can signal the end of a recession mostly shows the somewhat arbitrary significance of the number zero. Those are terrible growth numbers, and imply that labor market conditions are getting worse. What’s more, a place like Spain is currently experiencing depression-like conditions and the European Central Bank seems to be looking for any kind of vague excuse to halt expansionary policies. This kind of just-barely-above-zero growth might turn into the ECB’s opportunity to step on the breaks, which would be a terrible idea.

Obama Administration Considering Giving in to Deficit-Mania

TARP, the much-derided Troubled Asset Relief Program, has an odd structure. $700 billion in expenditures were authorized, but the program was structured such that much of the money would be paid back—some with profit—and indeed a lot has been paid back. Consequently, the executive branch has the ability to either make the net cost of the program much less than $700 billion or else to in effect spend the same money twice. In principle, this could have been a good way to get additional stimulus into the economy without additional legislation. Leftover TARP money and TARP repayments could be used, for example, for small business loans to support entrepreneurs looking to expand their operations.

Instead, Deborah Soloman and Jonathan Weisman report that the White House is considering letting short-term political optics dictate policy:

The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

They say that the idea “is still a matter of debate within the administration.” Let’s hope they reject it. There is one and only one good reason to prioritize short-term deficit reduction, and that’s if you believe that prioritizing short-term deficit reduction will improve economic growth. We know from previous reporting that nobody on the White House economic team believes that this is the case. The pressure to look at deficit reduction is political pressure, “pressure to show it is serious about tackling the budget deficit.” In brass tacks political terms, however, a substantial deficit in 2010 is inevitable either way. The question is whether it’s a substantial deficit that voters will find forgivable thanks to the robust economic recovery and falling unemployment, or if it’s a substantial deficit that voters deem intolerable thanks to an anemic recovery and high, flat unemployment. The politics here are all about getting the policy right.

Nicholas Poussin, The Adoration of the Golden Calf

Realistically the best use of these funds might be semi-corrupt pork barrel projects designed to persuade key legislators to stop threatening the country with a debt default and start voting “yes” on key legislation. We could build a giant golden calf in Indiana in place of the false God of fiscal austerity. And as I’ve had occasion to note in the past, the administration has arguably been too eager to ask what substantive policy concessions Olympia Snowe wants and unduly reluctant to ask what our country can do for the lobster industry. Contractionary fiscal policy would be an extremely costly way of buying congressional breathing room.

Mysteries of the BLS Seasonal Adjustment Process

Remember on Friday when unemployment rose and 190,000 jobs were lost? Floyd Norris points out that even though these events were widely reported they didn’t actually happen. Instead, according to the Bureau of Labor Statistics the number of jobs went up and the unemployment rate went down. But then a seasonal adjustment factor was applies, and put things into negative territory.

Brad DeLong was inspired to make similar observations in mid-October when the media reported that new unemployment claims had fallen when, in fact, they rose and then were seasonally adjusted into negative territory:

One issue here is that in unusual times the seasonal adjustment process based on the recent past is probably not going to give you the best results. That said, I don’t think dumping the process would help, the labor market really does exhibit a lot of seasonality. But I think responsible journalism should report both numbers fairly prominently. Even if an uptick in economic activity turns out to be purely seasonal, it’s still a real occurrence in the world.

The Demographics of Unemployment

Interactive feature from The New York Times lets you see the unemployment rate for different demographic subgroups. The feature is labeled “The Jobless Rate for People Like You” so I checked and saw that white men aged 25-44 with college degrees have an unemployment rate of just 3.9 percent. Even if I reclassify myself as Hispanic it’s just 4.8 percent. Fortunately, I’m also allowed to see how people who aren’t like me are doing. Thus we learn that for African-American men aged 15-24 the unemployment rate is a staggering 30.5 percent. Even for the subset of young black men who have college degrees (which has to be a pretty tiny slice of the 15-24 set) the unemployment rate is 12.7 percent.

In general, unemployment is higher for the young than the old higher for the worse-educated than for the better educated, higher for men than for women, and higher for blacks than whites.

New Lows in Key Demographic Subsets

Heather Boushey dives deeper than the headlines in the latest unemployment report and finds little but bad news:

The dismal labor market for workers is evident in nearly every series the BLS has from its household survey, which measures labor market weakness. Nearly a million workers have left the labor force over the past year; two-thirds of those unemployed are out of work because they lost their prior job, dwarfing new and returning labor market entrants; 9.3 million workers are employed part-time even though they would prefer a full-time jobs; and the share of the population with a job has fallen to 58.5 percent, lower than at any point since 1983; adult men’s employment rates fell to 66.7 percent, hitting another all-time low (going back to 1948); and teens are seeing their worst labor market ever—unemployment among 16- to 19-year-olds is a record 27.6 percent.

The high unemployment among teens is going to retard their acquisition of basic labor market skills and they’ll suffer lifelong consequences as a result. You sometimes hear it said that we can’t afford to burden the future with additional debt and “printing money.” The reality is that we can’t afford not to. Surveying the political situation, there’s probably more room for action on the Fed side of things than the Congress/White House side, but either way we need more expansionary policies.

Politics and Public Works

Paul Krugman wonders why we don’t just do direct public works like in the WPA:

You can make a pretty good case that just employing a lot of people directly would be a lot more cost-effective; the WPA and CCC cost surprisingly little given the number of people put to work. Think of it as the stimulus equivalent of getting the middlemen out of the student loan program.

So why aren’t we doing this? Politics, of course: government is the problem, not the solution, even when it is, you know, the solution, and cheaper than running things through the private sector.

Possibly the best way to think about this would be as an alternative to the repeated extensions of unemployment insurance payments. Instead of saying to people whose UI benefits are about to expire “just kidding, here’s an extension” we could say “you’ll keep getting checks but you need to show up at such-and-such a place and pick up trash in parks.” This would be somewhat more expensive than a UI extension—you’d need to pay for garbage bags and supervisors—but it would have less of a disemployment effect than UI extensions and we’d also get cleaner parks in the bargain. It’s a little bit perverse to be paying people to do nothing when there’s work that could use doing.

But a problem modern advanced economies have in advancing this sort of scheme is that the people already working in the public sector don’t want to be squeezed out by facing competition from quasi-unemployed engaged in public works schemes. In other words, the key stakeholders on various different sides of the equation prefer the inefficient choice of just cutting checks—it involves less debt for the “centrists,” less competition for public sector unions, and less arduous demands on the unemployed.

Unemployment Passes 10 Percent

More bad news on the labor market front:

Takeaways: One, people need to stop worrying about inflation. Two, the federal government should deploy more aid to state and local governments. Three, instead of easing up on the easing of monetary policy the Fed needs to ease even more, probably by taking some advice from Scott Sumner about ways this is possible.

Nelson: Bad Economy Means We Should Wreck Economy, Destroy Planet, Let Health Care Languish

I suspect we’re going to be hearing a lot more of this sort of thing in the weeks to come:

Democrat Ben Nelson, a Senator from Nebraska, said the slumping economy and rising joblessness will be factors as Congress considers climate change and health care legislation. They are also driving concerns about the budget deficit, which widened to a record $1.42 trillion in the fiscal year that ended on Sept. 30, he said.

“When the economy’s not strong there’s a lot of interest in controlling spending,” Nelson said.

This really makes no sense. If Nelson thinks the health care and climate legislation before congress would have a ruinous economic impact or something, then of course he shouldn’t vote for either bill. But that’s independent of the current state of the labor market. In reality, neither bill will have much of any impact on a 12-18 month time horizon since their provisions take time to phase-in. Both are aimed at long-term problems—the economic devastation wreaked by an out-of-control health care system and the environmental devastation wreaked by out-of-control greenhouse gas pollution. There’s never a perfect day to tackle a long-run problem, but delaying action doesn’t help the economy in the short-run and only makes it harder to tackle the problem.

On controlling spending, this is nuts. With the economy weak Nelson wants to do . . . what? Lay off teachers? Halt infrastructure projects? Make sure that kids whose parents are unemployed end up malnourished? The economy is suffering from a catastrophic collapse in overall spending with households, businesses, states, and municipalities all pulling back. If the federal government pulls back too we’re going to go down the drain.

More Inflation Needed

Alex Tabarrok noted this morning:

I wish Arnold Kling were correct that inflation is around the corner. We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job done in short order and there is much to fear from populist backlash.

I wish Tabarrok could do more to convince his fellow free market types that this is correct. Because instead the political system seems to be dangerously obsessed with the idea that we need to start fighting inflation.

Another data point in the inflation-would-be-good direction comes from this recent Wall Street Journal article on how businesses have started hoarding cash. The idea of “risky investments” has come to be associated with financial firms gambling on financial assets, and now there’s a backlash against the very concept. But the reality is that for the economy to grow, businesses need to be making investments in their own capacity. And all such investments always involve some risk. One problem with these traumatic downturns is that everyone starts getting extremely risk-averse and hoards money out of fear that investments won’t pay off. That belief becomes, in turns, self-justifying since with so little investment happening there’s little growth and investments don’t pay off.

One way to alleviate the cycle, however, is to have some inflation. Inflation makes it very costly to sit on piles of cash, and makes it look better to go out and do something with it instead. A period of zero or falling inflation, by contrast, makes hoarding look like a pretty reasonable course of action.

What Does a Focus on Jobs Mean?

Alexander Bolton runs down the desire of center-right Democrats in the House and Senate to defer action on the progressive agenda:

In the run-up to the 2010 midterm elections, they don’t want to be forced to vote on climate change, immigration reform and gays in the military, which they say should be set aside so Congress can focus on jobs and the economy.

“It’s hard; the most important issue in front of us is the economy right now, and that’s where most of us really want to stay focused, the economy and jobs, that’s what our constituency is concerned about,” said Sen. Blanche Lincoln (D), who is facing a tough race next year in Arkansas.

I’m more sympathetic to this idea than is Steve Benen. Realistically, the viability of progressive governance is going to be determined by the state of the economy in 2010 and 2012. But where my sympathy vanishes is with the fact that the very same people who are so eager to throw Obama’s agenda overboard in order to focus on jobs and the economy don’t seem to have any actual ideas for boosting the labor market.

Instead you get Bob Etheridge: “Three things ought to be the top priority: jobs, jobs and jobs.”

And Blanche Lincoln:

“That’s an awful lot to bite off and chew for right now,” said Lincoln, who described herself as “not in a hurry” to tackle climate change, an issue she has some jurisdiction over as chairwoman of the Senate Agriculture Committee.

And Evan Bayh:

Sen. Evan Bayh (D), who is running for reelection in conservative-leaning Indiana, said “jobs should be our top priority and we shouldn’t do anything that detracts from that,” echoing a sentiment of many colleagues in similar positions.

And John Tanner:

“If it was up to me, I would figure out how to handle the war and fix the economy,” said Rep. John Tanner (Tenn.), a senior centrist Democrat who has found himself in the crosshairs of the National Republican Congressional Committee, which has recruited a promising GOP challenger.

This is pathetic. Setting aside elements of the progressive wish list in order to focus on improving the labor market is a reasonable idea. But this crowd doesn’t have any actual ideas for doing that. It seems to me that there’s good reason to think that resolving uncertainty about the future direction of American energy policy and immigration policy would, in fact, help spur economic growth. But I’d also be amendable to having congress take up additional stimulus legislation as a way to spur economic growth. Or maybe they could do tax reform. But as best one can tell Tanner & Bayh & Lincoln don’t want to do any of those things or anything else. It’s sad.

Obama, “Credibility,” and Fear of Failure

In the course of an exchange yesterday with Rich Yeselson about the deficit and the prospects of more stimulus, Marc Ambinder wrote:

Telling Democratic leaders and the White House to ignore Evan Bayh’s pleas for deficit reduction just isn’t going to work. In general, my sense is that the White House does not believe that Obama has the credibility to make the argument that government has to spend even more.

I’m not really sure why Obama would lack the credibility necessary. His job approval split is at 50-41 and has been basically stable at that level for a couple of months. That’s not the best job approval rating in the world, but it’s pretty good.

But does “credibility” really matter? Probably not. Insofar as the issue is that Evan Bayh doesn’t want to vote for more debt, then the question is whether he can be persuaded on the merits. I, personally, find Christina Romer and Larry Summers pretty persuasive. But as far as I know, they’re not actively trying to persuade anyone because the White House is afraid that if they try to persuade key legislators they might fail. That’s circular. There seems to be some feeling that the President has an obligation to act like he’s a Prime Minister and not bring proposals to the floor unless he’s sure they can pass, even though he doesn’t have a Prime Minister’s ability to coerce people into voting for his bills. But that’s not how our system works and there’s little reason to believe that trying and failing would somehow turn out much worse than simply refusing the try.

Markets Really Do Convey What Market Participants Think

Paul Krugman on an underdiscussed point:

And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I’m happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that “markets are anxious/jittery/worried about the deficit” — an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)

It’s really maddening that at the same time preposterous idea like strong forms of the Efficient Markets Hypothesis continue to be respectable that people seem unwilling to trust financial markets to accurately convey the beliefs of participants in financial markets. I would add to Krugman’s observations the fact that we have Cato’s Chris Edwards blaming anticipating inflation for the lack of private investment when the TIPS spread shows that markets aren’t anticipating inflation.

Right now economic conditions are bad. And the budget deficit is high. So I find it understandable if the man on the street chooses to conclude that the budget deficit is causing or contributing to the bad economic situation. But people writing about these matters ought to know better—interest rates are low and markets are assessing both default risk and inflation risk as low. So what about the deficit is supposed to be causing the problem? Meanwhile, to repeat myself the wise elected official is going to spend less time worrying about what voters think is to blame for the economic situation than he does on fixing the bad economic situation. Results matter more than folk theories.

Stimulus and the Future

Paul Krugman makes the important point that those who claim fiscal restraint amidst a depression is a favor to young people don’t know what they’re talking about:

Deficit hawks like to complain that today’s young people will end up having to pay higher taxes to service the debt we’re running up right now. But anyone who really cared about the prospects of young Americans would be pushing for much more job creation, since the burden of high unemployment falls disproportionately on young workers — and those who enter the work force in years of high unemployment suffer permanent career damage, never catching up with those who graduated in better times.

Even the claim that we’ll have to pay for stimulus spending now with higher taxes later is mostly wrong. Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue. Stimulus spending probably doesn’t pay for itself, but its true cost, even in a narrow fiscal sense, is only a fraction of the headline number.

The objective correlation of interests actually goes the other way around. A deflationary situation is good for retired people. They’re not impacted by the labor market situation, and flat-or-falling consumer prices make their revenue from Social Security or bonds go further. Young people, by contrast, would be much better off getting a job and paying taxes later than being unemployed out of school and suffering for it indefinitely.

Growth Growth Growth

Like Brad DeLong, I’m a bit puzzled by Bill Galston’s theory that adopting “a meaningful shift toward fiscal restraint” would be a good strategy for the midterms. People say they want this, but I can only assume that’s because people think such a shift would improve the economy. In fact, it wouldn’t. If Democrats implement policies that tank the economy, running around the country saying “well it polled well a year ago!” isn’t going to help them.

When it comes to macroeconomic management, you need to listen to your economists not your pollsters. Christina Romer’s analysis says we should be running bigger deficits, not smaller ones.

Did Barack Obama Cause The Collapse in Private Investment

One thing’s for sure, the depths of the current recession can be seen in the low level of private investment. And this chart from Chris Edwards certain shows that despite the stimulus-driven return of GDP growth, private investment remains depressed. We won’t have a real recovery until it comes back:

That said, his interpretation of this data is ridiculous:

Business investment continues to be in a deep recession. Companies are simply not building factories or buying new machines and equipment.

Why not? I suspect that many firms are scared to death of higher taxes, inflation, health care mandates, increased labor regulation, and other profit-killers coming down the road from Washington. That is speculation, but I haven’t heard a better explanation of the death of private investment in America.

Note that though the steepest cliff-diving happened in 2008 Q4 and 2009 Q1, the decline actually began way back in 2006, so it’s hard to say how fear of Barack Obama could have caused it. As for a better explanation, how about the problems in the financial system that were accumulating during this period and then reached a true crisis point in the fall of 2008? Surely we haven’t forgotten about that already, have we? And since the collapse, we’ve been facing a problem of low aggregate demand and deflationary expectations, both of which discourage investment, combined with massive overcapacity in real estate. The idea that anticipating inflation would cause an investment drought is both illogical and flies in the face of the fact that markets are not anticipating inflation.

I would note that not only did the current decline in private investment start fully in the Bush years, but that there was a similar declining private investment phase during 2001. Does Edwards see that as caused by Bush embracing high taxes and health care mandates? Isn’t it more plausible that that was the dot-com bubble bursting just as this is the real estate bubble bursting?