Friday [a week ago, now] brought two numbers that should have everyone in Washington saying, “My God, what have we done?”
One of these numbers was zero — the number of jobs created in August. The other was two — the interest rate on 10-year U.S. bonds, almost as low as this rate has ever gone. Taken together, these numbers almost scream that the inside-the-Beltway crowd has been worrying about the wrong things, and inflicting grievous harm as a result.
Ever since the acute phase of the financial crisis ended, policy discussion in Washington has been dominated not by unemployment, but by the alleged dangers posed by budget deficits. Pundits and media organizations insisted that the biggest risk facing America was the threat that investors would pull the plug on U.S. debt. For example, in May 2009 The Wall Street Journal declared that the “bond vigilantes” were “returning with a vengeance,” telling readers that the Obama administration’s “epic spending spree” would send interest rates soaring.
The interest rate when that editorial was published was 3.7 percent. As of Friday, as I’ve already mentioned, it was only 2 percent.
For the past two and a half years - ever since a Democrat took over the presidency, since Republicans certainly weren't worried about this when they were in charge - the right-wing has made a concerted effort to scare Americans about the federal deficit. (Yeah, forget Dick Cheney's observation that "Reagan proved deficits don't matter.")
Well, I wasn't too happy with the borrow-and-spend policies of the Bush administration, and I've actually been worrying about the deficit for years. But the depths of the worst economic collapse since the Great Depression is not the place to be obsessing about government debt.
In fact, the best thing we could do for the deficit is to put people back to work. Instead, governments are slashing their workforces, and otherwise cutting spending, which is just making the whole situation worse.
At the federal level, I'm convinced that Republicans are pushing this for exactly that purpose. They don't want our economic situation to get better, because that would help President Obama's re-election chances. And Democrats, as usual, are too craven and too feckless to fight them, certainly not effectively.
Barack Obama has tended to adopt Republican rhetoric. I don't know if he's just that conservative, or if he thinks it might appease them, but he's wrong either way. The federal deficit is a long-term problem, but not what we should be focusing on today.
Although you’d never know it listening to the ranters, the past year has actually been a pretty good test of the theory that slashing government spending actually creates jobs. The deficit obsession has blocked a much-needed second round of federal stimulus, and with stimulus spending, such as it was, fading out, we’re experiencing de facto fiscal austerity. State and local governments, in particular, faced with the loss of federal aid, have been sharply cutting many programs and have been laying off a lot of workers, mostly schoolteachers.
And somehow the private sector hasn’t responded to these layoffs by rejoicing at the sight of a shrinking government and embarking on a hiring spree.
O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.
For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?
When it comes to policy proposals, Krugman pointed out (this was before Barack Obama's job speech yesterday) that Republicans would oppose anything Obama proposed. Nothing he proposed would make it through the House, anyway - literally, nothing.
So, since it wasn't going to pass Congress anyway, Obama needed to make it "big and bold." Well, was it? I really can't tell, myself. I don't have the background to be able to judge that. (My college minor in economics - decades ago - just doesn't cut it.)
But Krugman seems to have been impressed:
First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It’s not nearly as bold as the plan I’d want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment.
Of course, it isn’t likely to become law, thanks to G.O.P. opposition. Nor is anything else likely to happen that will do much to help the 14 million Americans out of work. And that is both a tragedy and an outrage. ...
It calls for about $200 billion in new spending — much of it on things we need in any case, like school repair, transportation networks, and avoiding teacher layoffs — and $240 billion in tax cuts. That may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan — which wouldn’t deliver all its benefits in the first year — would fill only part of that hole. And it’s unclear, in particular, how effective the tax cuts would be at boosting spending.
Still, the plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck. As I said, it’s much bolder and better than I expected. President Obama’s hair may not be on fire, but it’s definitely smoking; clearly and gratifyingly, he does grasp how desperate the jobs situation is.
My biggest problem with Obama is that we haven't been hearing any political leadership on our side. We haven't been hearing anyone - our president, ideally - argue that we shouldn't be worrying about the deficit right now, not until we get the economy moving again. So basically, without anyone on the other side, the Republicans have been winning by default.
Economically, I think that's been disastrous. And politically, I think it's been disastrous, too. Now, maybe Obama is starting to understand that, I don't know. He did address a bit of that yesterday (the full text of his speech is here):
I agree that we can't afford wasteful spending, and I will continue to work with Congress to get rid of it. And I agree that there are some rules and regulations that put an unnecessary burden on businesses at a time when they can least afford it. That's why I ordered a review of all government regulations. So far, we've identified over 500 reforms, which will save billions of dollars over the next few years. We should have no more regulation than the health, safety, and security of the American people require. Every rule should meet that common sense test.
But what we can't do - what I won't do - is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on for decades. I reject the idea that we need to ask people to choose between their jobs and their safety. I reject the argument that says for the economy to grow, we have to roll back protections that ban hidden fees by credit card companies, or rules that keep our kids from being exposed to mercury, or laws that prevent the health insurance industry from shortchanging patients. I reject the idea that we have to strip away collective bargaining rights to compete in a global economy. We shouldn't be in a race to the bottom, where we try to offer the cheapest labor and the worst pollution standards. America should be in a race to the top. And I believe that's a race we can win.
That's a nice start, it really is. But we need a lot more of it. And,... there's still a lot of tax cutting in this proposal - as usual. Admittedly, it includes tax cuts aimed at the average working person, not the wealthy. But note that cutting payroll taxes takes money out of Social Security and Medicare. Is that really what we want to do when Republicans are already claiming that we can't afford our social safety nets?
Obama also said that "everything in this bill will be paid for. Everything." Well, if there are off-setting cuts, that's hardly going to make this much of a stimulus, is it? (And yes, I suppose that it wasn't announced as a "stimulus," because that certainly wouldn't fly. But that's still what we need.) If it's paid for by increasing taxes on the wealthy, that's different (because that doesn't have a very big impact on our economy).
But, of course, that won't fly, either. Well, nothing is likely to get past the Republicans in Congress anyway, so maybe that doesn't matter. This is mostly a political document. Republicans won't do anything to help improve our economy, not as long as Barack Obama is president, unless they absolutely have to. So politics is the only tool Obama has.
So far, he's been horribly inept at wielding that tool. Let's hope that's finally starting to change. And let's hope that it's not already too late - for him and for us.
Incidentally, that "hair on fire" comment in Krugman's column referred back to an earlier part of it:
Before I get to the Obama plan, let me talk about the other important economic speech of the week, which was given by Charles Evans, the president of the Federal Reserve of Chicago. Mr. Evans said, forthrightly, what some of us have been hoping to hear from Fed officials for years now.
As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed’s target of around 2 percent, unemployment remains extremely high.
So how should the Fed be reacting? Mr. Evans: “Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”
But the Fed’s hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation. These days, the best — or at any rate the alleged wise men and women who are supposed to be looking after the nation’s welfare — lack all conviction, while the worst, as represented by much of the G.O.P., are filled with a passionate intensity. So the unemployed are being abandoned.
But we are starting to hear - finally - the right stuff coming from the Federal Reserve, don't you think? Fed Chairman Ben Bernanke gave a speech yesterday, too, and this is part of what he had to say:
While the weakness of the housing sector and continued financial volatility are two key reasons for the frustratingly slow pace of the recovery, other factors also may restrain growth in coming quarters. For example, state and local governments continue to tighten their belts by cutting spending and reducing payrolls in the face of ongoing budgetary pressures, and federal fiscal stimulus is being withdrawn. There is ample room for debate about the appropriate size and role for the government in the longer term, but--in the absence of adequate demand from the private sector--a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring. [my emphasis]
The prospect of an increasing fiscal drag on the economy in the face of an already sluggish recovery highlights one of the many difficult tradeoffs currently faced by fiscal policymakers. As I have emphasized on previous occasions, without significant policy changes to address the increasing fiscal burdens that will be associated with the aging of the population and the ongoing rise in health-care costs, the finances of the federal government will spiral out of control in coming decades, risking severe economic and financial damage. But, while prompt and decisive action to put the federal government's finances on a sustainable trajectory is urgently needed, fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery. Fortunately, the two goals--achieving fiscal sustainability, which is the result of responsible policies set in place for the longer term, and avoiding creation of fiscal headwinds for the recovery--are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the long term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.
I suppose these statements will just increase the attacks on the Federal Reserve, huh? After all, it's only been around since 1913, and I'm sure conservatives want to take us back much further than that (centuries further, if often seems). And unfortunately, there are some loons on the left, too, who'd help them do it, at least when it comes to the Fed.
At any rate, we're starting to hear the right things - or at least some of them - from the White House and the Federal Reserve. Whether it's too little too late, well, I guess we'll just have to see.