Posts Tagged ‘Stimulus’

Obama Makes Lemonade out of Lemons

Friday, December 17th, 2010

I have to say that I have been surprised at the liberal fulmination over the two year extension of Bush tax cuts. On one level, I get it: it’s frustrating as hell that the Republicans acted as irresponsibly as they did over the past two years and have been rewarded with a control of the House, 6 new seats in the Senate and the policy that they care about the most: tax cuts for the rich (which are also the least economically stimulative of the policies that have recently been considered). Still, it’s hard to say that you couldn’t see this coming and I would argue that the total package is not a bad deal either politically for Obama or economically for the country.

Regarding the extension of tax cuts for the rich, the die was probably cast when the Democrats punted on taxes in the run up to the election. They didn’t have the votes in the Senate for an extension of tax cuts for just the middle class (due to Republican filibuster threats and Democrats that vote like Republicans) and didn’t want to put a handful of their own members in a situation of filibustering the Democrats’ tax bill just before a tough election. The House, in turn, refused to take another tough vote if the Senate couldn’t pass the bill.

The Democrats problem here was the same one that they had for the past two years: they were afraid to stand up to the Republicans and provoke a fight over taxes. What they should have done is made the Republicans (and Lieberman, Ben Nelson, Blanch Lincoln, etc.) filibuster….and I don’t mean have a cloture vote, say that they couldn’t get 60 votes and then go home early for the weekend. I mean make them stand up on the Senate floor and talk and talk and talk about why they were filibustering tax cuts for 98% of the people so that they could preserve taxes for the top 2%.  They may not have gotten their bill passed, but it would have been a clear contrast for the American people and they could have prepared the public for the fight we are having now and put pressure on Republicans for a better deal. Senate Democrats have complained that Obama is not standing up enough to the Republicans, but they are the ones responsible for not dealing with this issue until the last two weeks of this session and giving the Republicans maximum leverage.

And while the deal cut with Republicans is far from an optimal deal, there are a number of ways that this deal works politically as well as economically for the President and the country as a whole. First, most economists agree that the economy needs additional stimulus and that the worst thing you can do during a deep recession is to cut government spending and raise taxes. Obama clearly believes this as well, since he has argued for it both domestically and internationally again and again, even when he can’t get agreement from allies.

A comparison of the framework agreement between the Obama administration and congressional leaders and another option

Just after the election, I commented on Peter Beinart’s lamenting ”the Death of Keynesianism” as a result of the Republican victory. In the aftermath of the election it seemed that the dysfunction in Washington left Ben Bernake’s Fed holding the only weapon in the fight to revive our economy. But the president is showing that the death of Keynesianism has been greatly exaggerated, at least for the short term. While the policies agreed to in the compromise are far from the most effective stimulative policies, they will provide some lift to the economy that would have been missing had the Republicans governed like they campaigned.

As I’ve said before, I’m not completely opposed to a 2 year extension of the Bush tax cuts for the top 2%, although I would rather see those provisions expire and the money be redirected to tax cuts that actually stimulate more (like a payroll tax cut that benefits employers as well as employees (instead of just employees)). It also would have been nice to get some construction projects to deal with our crumbling national infrastructure, but perhaps this was a bridge too far for the Republicans. What we will get is a  package of tax cuts that, depending on how you break them out, amount to close to a stimulus of $900 billion (or $600 billion over and above what had previously been supported by both parties).

In addition to the economic benefits of the tax cut deal, Obama may reap some political rewards as well. As Chuck Todd has pointed out, part of Obama’s problem over the past two years has been that he has acted more like a Prime Minister trying to shepherd his agenda through Congress than a President using the bully pulpit to call legislators out in order to build support for his agenda (as he was able to do so effectively in the 2008 campaign). And while the strong reaction from the left has been surprising, recent opinion polls have showed broad support for the deal. In addition, economists have projected that the tax cuts will increase the  GDP by as much as 1%, create an additional 3 million jobs and decrease the unemployment rate by close to 1.5%.

As an added bonus, the debate has shown just how hypocritical the Republican party’s leaders really are. For the past two years, they consistently complained about the budget deficits that were run in order to prevent an even larger economic collapse than we actually had. They pretended that they couldn’t distinguish between short term deficits to prop up the economy, and long term structural deficits that were unsustainable. As my conservative uncle liked to say, the Tea Party led Republicans were going to bring “fiscal responsibility” back to Washington. And what did they do within a month of their election? Add another $900 billion to the deficit before the new Congress even got there. Like I said previously, I understand that you need to run deficits in times of economic downturn. But I didn’t spend the last two years running a constant campaign against those deficits. 

Some have argued that the Republicans may be successful at extending the Bush tax cuts for the top earners in 2012. But this also sets up a fight that Obama can use to his advantage. If the Republican House brings up the extention in 2012, it should die a quiet death in the Senate. Plus, the country will be focused on deficit reduction by then, and Mitt Romney can explain to the country in the presidential debates why he wants to add another $700 billion to the debt and the onus will be on him to propose cuts to programs in order to pay for them.

The deal is far from perfect. But, all in all, it’s a much better deal than I thought Obama could get just a few months ago.

But don’t take my word for it. Take Charles Krauthammer’s.

The Death of Keynesianism?

Saturday, November 13th, 2010

Here’s Peter Beinart’s Post Election piece. Aside from the contentious bit about “American Exceptionalism,” (which is a separate topic worth returning to later),  the larger issue is where the economy has been and where we go from here. Beinart argues that the biggest casualty of this election is not Democrats, but Keynesianism, the economic theory that argues that when the economy is in recession, the government needs to pump money into the system in order to pick up the slack. While Keynesianism holds that the most effective way to do this is through government spending, temporary tax cuts are also considered stimulative. The idea here is that during times of recession, the private sector stops investing so even if the government lowers taxes, the additional income is likely to be saved or used to pay off debts, not invested into the economy.

Ironically, the discrediting of Keynesianism comes at a time when we have just seen its success. As much as the stimulus was maligned by the Republicans, independent experts such as John McCain’s top economic advisor have argued that it was an integral part of the successful government efforts to avert a Great Depression 2.0. Mark Zandy writes in a report earlier this year that without the massive government intervention by the Treasury Department, Congress and the Federal Reserve (AKA–Lower Interest Rates, TARP and the Stimulus–AKA everything the Tea Party was against), GDP in 2010 would have been 11.5% lower, there would have been 8.5 million less jobs and the country would have been experiencing deflation. While much of this change can be attributed to TARP and the Fed’s actions, Zandy estimates that in 2010 GDP is 3.5% higher, unemployment is 1.5% lower and there are 2.7 million more people employed due to the stimulus.

I’m not arguing that the stimulus was perfect, that there wasn’t waste, or that it couldn’t have been more effective if it was designed differently, but I am arguing that it was effective and that the Republican alternative of just tax cuts and monetary policy would have created the same giant deficit, and produced less economic growth, because despite the lowest US tax rates in 50 years, no one was creating jobs or expanding their busineses in 2009 and interest rates were already at close to zero.

Why Obama wasn’t waving this report around on the campaign trail is a mystery to me, but it is difficult to base a campaign on:  ”you think things are bad now, just think of how bad they would have been…” Also, while government intervention did prevent a Great Depression, job creation has stalled this year as private industry (which is actually doing quite well) has been content to sit on large cash reserves instead of hiring new employees or expanding their businesses.

It has become an article of faith among Republicans that Health Care Reform, Financial Reform and the prospect of capping carbon emissions has created a climate of uncertainty that has decreased investment. This argument probably has some merit, but I think it’s overblown. You can complain about a 2000 page Health Care Bill, but health care costs increased over 100% in the last decade. The heath care status quo was inherently uncertain and remains so. Similarly, we could have quibbles over how much regulation of the financial industry is necessary, but again, anyone who watched as Wall Street crashed this economy should have trouble arguing that reforming the banking industry wasn’t needed. In fact, it’s clear that Obama, Geithner and the Banking Committees in Congress engaged in a deliberate strategy of minimizing the impact of financial regulation on the existing system (yet another eggregious example of how much special interest control our government).  

A good case can be made that, while the stimulus and other government intervention succeeded in creating a floor for the economy, the current stall in the recovery highlights the fact that there should have been more incentives for private sector hiring. In retrospect, the stimulus should have included tax cuts that were specifially targeted to job creation, like a payroll tax, instead of the $500-$1000 tax cuts that were given to 98% of Americans. Those tax cuts fulfilled an Obama campaign promise, but probably did little to stimulate the economy.    

Republicans, for their part, were either incapable of telling the difference between short term stimulus and long term deficit spending, or they did a great job pretending that they couldn’t tell the difference (I honestly am not sure which). For their obstructionism and unwillingness to help rescue the economy in any way, they reaped the rewards in this election. Democrats also played right into their hands, by not making any credible moves to cut the deficit in the long term, and in fact, using Medicare cuts that should have been used to balance the budget, to fund Health Care Reform.

Just to give a sense of the hole we find ourselves in, here is a report on the jobs created in October. This number was a positive surprise, since 150,000 jobs created in the month was higher than expected and it comes on the heels of 4 months of net job loss (due to lost government jobs), but the increase was not enough to move the unemployment rate. The article points out that

even if the economy suddenly expands and starts adding 208,000 jobs a month — as it did in its best year this decade — it would still take 12 years to close the gap between the growing number of American workers and the total available jobs.

So Beinart’s frustration is not misplaced. Despite the money that was spent on the stimulus, our infrastructure is still in major need of upgrade and a targeted effort to invest in American infrastructure could stimulate significant private sector job growth.  As China and India industrialize and reorient their economy for the 21st Century with investments in green technology, our infrastructure is crumbling and our politicians are so immobilized by partisan politics that they can’t agree on a plan to decrease our dependence on foreign energy, despite the fact that everyone knows how important this is for the country. 

Republican control of the 2/5 of the Senate has stopped this kind of investment in America and the midterm election results make them even less likely. We have officially entered an era of retrenchment, where the question is not how should we stimulate the economy, but how should we balance the budget. While the economic pain continues for the country, all options to stimulate the economy (including tax cuts) have effectively been taken off the table. In the coming weeks, Democrats and Republicans will argue about whether to keep the Bush Tax Cuts or let them expire. But even this debate is only about whether to take the foot off the pedal, not a new strategy for how to accelerate.

But don’t worry Republicans. now that your guys are calling shots in Congress, I’m sure that the Democrats will give Boehner and the Republicans as long as they gave Obama to start creating jobs.

How does next week sound?