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Elite Opinion Makers, Stimulus & Long Term Debt Reduction

June 15, 2012

It is important to note another key feature of my frustration with economics (as practiced in the realm of public policy theater): the “elite opinion makers” seem to keep recycling their arguments, even when reality keeps delivering them evidence to the contrary. We’ll talk labor mismatches and union busting, but then we see that labor mismatches don’t work and the economy is definitely being dragged down by public sector job losses (in Red states, primarily), so we switch to the regulation and government policy schtick for awhile – and when that falls apart under scrutiny, we are back to the government debt and “invisible bond vigilantes” or some obtuse version of magical pixie dust and  the “confidence fairy.” On and on and on we go. And the beauty of it is that each time we confront the arguments all over again, as if seeing them for the first time. As a purely intellectual exercise it ceases to hold any meaning after awhile, but as a delay tactic – if delay furthers your agenda – it is sublime excellence.

So, here is a new twist on an old game, and a fresh look at the “new conservative position” – that is to say, having forgotten their position that stimulus doesn’t work (I’ll give them credit for almost abandoning “expansionary austerity” under the groaning weight of reality) but having reversed their position on stimulus (without admitting as much) they are hanging onto the idea that long term debt reduction must be tied to short term stimulus. The truth or falsity of that claim is not at all clear to me (or anybody else crunching numbers dispassionately) but it has become the “common wisdom.” This is an example of just how dangerous these “elite opinion makers” can be. Anyway, let’s get started with Mike Konczal’s excellent debunking.

The question posed is simple: “If short term stimulus is a good idea, why isn’t a good idea devoid of other constraints?” Why should we tie our hands and offer up any kind of long-term concessions or give any bargaining power to that camp if we all agree we need short term stimulus? First Konczal gives two examples of “Very Serious People” and their proposals along these lines, then he asks and answers the question of why these two different proposals (short term stimulus and long term debt reduction) must supposedly go together:

Take the Domenici-Rivlin Restoring America’s Future plan. In the overview it states, “First, we must recover from the deep recession that has thrown millions out of work… Second, we must take immediate steps to reduce the unsustainable debt … These two challenges must be addressed at the same time, not sequentially.” (The deficit hawk Comeback America Initiative report is similiar, with $500 billion dollars in infrastructure over two years tied to focusing on long-term deficit reduction.)

It’s never very clear why these two must move together. The more aggressive argument is that the market will panic and raise interest rates if the long-term deficit is not addressed, immediately canceling out the stimulus. The more widely used version is that stimulus now would increase the longer-term debt, hence making the longer-term challenges worse and the crises and challenges occur more quickly.

So first we have the aggressive version: beware the bond vigilantes, despite having been proven wrong again and again, and then – in case you’ve wised up to that little piece of unreality – we’ll give you the “more debt means scarier stuff sooner argument,” which sounds reasonable by comparison… But is it? Konczal quotes a paper by Delong & Summers:

This is why something like Delong-Summers paper “Fiscal Policy in a Depressed Economy” is so important. It finds that “under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens.”

Yes, THAT Larry Summers. The more you look, the more you find that what passes for “common sense” is actually opposed by some very heavy hitting, right leaning economists (plus all the usual lefty suspects). You have to be increasingly radical in your Free-Marketeer beliefs to ignore the reality. Konczal is arguing with an Elite Opinion Maker in this piece, Peter Orszag.

Here’s where Peter Orszag’s “Barbell Approach Only Way to Lift Heavy Economy” enters the picture. Orszag argues that that Delong-Summers approach is flawed because it ignores this two-deficits (or what he calls the barbell) problem, which argues that even if short-term stimulus is a good idea it should be linked to long-term deficit reduction…

But these stimulus-only proposals, by not lifting the other side of the barbell, are incomplete for three reasons: First, substantial stimulus-only proposals have no chance of being enacted. Second, even if they could be, they would accelerate the date at which we again run up against the debt limit — and their proponents have no strategy for dealing with that impediment. Finally, even if the debt limit were simply assumed away (an ivory-tower approach that might prove appealing to some stimulus-only proponents), the impact of any stimulus would be stronger, and our international credibility enhanced, if it were combined with specific, but delayed, actions to reduce the deficit.
Konczal rightly points out that the first and second arguments are political problems. Meaning, if the other side simply will not do what makes sense unless you give them something, that should hardly count as an analysis of the correct thing to do. In a bigger context, that is admitting that by skewing all the way to the right, all solutions will start at the middle and give up half the distance to crazy, just because the extreme right won’t help otherwise. The correct response to such a problem (and I do believe it exists) is to skew all the way left instead of triangulating, or learn to get along (much public shaming might be necessary) or switch to a parliamentary system where the party in power gets to enact their plans until the public loses confidence and gives the other side a go at it.
Anyway, the third argument is an economic argument, but one that Orszag has seemingly been on the other side of just recently – so it smells like rank ideological opportunism, yet again:
The third is an economic argument, which says long-term deficit reduction measures would increase the credibility of the United States. Normally that translates into lower long-term interest rates for government borrowing. Would that help? Here’s Peter Orszag arguing against QE2 in December 2010: “a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future.” Would a few basis points gained through credibility help now, especially if the long-term effects were painful? Even if it did, it may bolster the case for the barbell approach, but it still doesn’t necessitate it.
But this is all just ideological cover. It is not real science, as I have pointed out again and again. The Very Serious People have already decided on the right answer, facts and evidence be damned, and that is the shameful legacy of economics-as-ideological-persuasion-tactic-instead-of-evidence-based-science.
As an interesting side note, Konczal referenced this article in JacobinMag and while I haven’t had time to parse the whole thing, there does appear to be a reference to an interesting economic history of Social Democracies in Europe from WWI – here is a little bit of the flavor of it (Amazon Wishlisted for Later):

The starting point for understanding social democracy’s slow collapse since the 1970s is to grasp the economic underpinnings of its success in the Golden Age. As the Dutch political scientist Ton Notermans documents in Money, Markets, and the State, a penetrating history of social-democratic economic policy since World War I, the precondition of left governance under capitalism has always been the ability to reconcile full employment, requiring expansionary monetary policy, with price stability; and this depends on the availability of mechanisms to control inflation directly at the source, by repressing or moderating wages or prices without having to resort to the weapon of unemployment.

In the absence of such price-repressing instruments, maintaining a tolerable level of inflation requires the bludgeon of permanently high unemployment achieved through tight money. Social democracy under such conditions is impossible, since the only tools that politicians can now credibly claim to boost employment are microeconomic: “reforms” that attack union bargaining power, minimum wages, job protections, social insurance contributions, and the like. To make matters worse, the regime of high interest rates necessitates chronic austerity, as public debt increases faster than national income and social spending has to be constantly cut back.


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