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Austerity v. Expansion

June 17, 2010

So the economic situation is pretty dire.  True, we are in the midst of a recovery, but we are not recovering fast enough at all to stave off huge unemployment and massive deficits (due to lost tax revenue) for the foreseeable future.  Knowing that, the Senate voted down a “jobs bill” of some description yesterday, which I guess would have done something towards getting more money into the economy.  In the course of disagreeing with Ben Nelson about why he voted against the bill, Ezra Klein has this to say:

It’s of course true that Americans are concerned about both the jobs picture and the deficit. But to some degree, that’s a call for leadership, not poll reading. Repairing the economy might require a short-term increase in the deficit, and repairing the deficit requires long-term changes in spending. Nelson is one of the few with the credibility to explain that to Nebraskans, and one of even fewer who could propose such a compromise in the Senate. And I, for one, would gladly see a large stimulus paired with even larger long-term deficit reduction.

Finally, there’s the question of economic recovery. I agree that the economy is recovering. But I don’t agree that we’re recovering with adequate speed. The Bloomberg article says that “the economy will expand 3.2 percent this year and 2.9 percent in 2011,” which is far, far too slow to really dent unemployment, as the forecasts out of UCLA’s Anderson School demonstrate. That growth will leave unemployment near 10 percent for many years, and that means we’ll be dealing with millions of workers who’ve been out of the job market for some time, and are very difficult to reintegrate. Leaving the situation to sit could turn a bad recession into the new normal, where 7 and 8 percent unemployment simply become an accepted fact of life.

That seems like a good idea.  While there is a huge contingent of the American populace that is 100% opposed to short-term deficit spending, that same contingent is supposed to also be very concerned about the long-term deficit.  I’m very aware of the arguments against expansionary monetary and fiscal policy.  It’s also true that, contra Paul Krugman, the public money spent on additional stimulus would not really be recouped at any point.  You’re basically chalking up that huge amount of money to the loss column.  But, as many people have tried to emphasize over the last year or so, the problem is not short-term spending but long-term spending, and austerity isn’t really a risk I would be willing to take right now.

A good way to combine short-term spending with long-term spending reduction is to, as Klein suggest, throw them into the same bill.  Why not draft some sort of stimulus bill that includes, say, means-testing Social Security and federalizing Medicaid (to alleviate that state-spending-cancelling-out-federal-spending thing)?  That way, you’re committed to seriously reduce Social Security spending, a huge bulk of the budget deficit, with a measure that would portend to shovel money directly into the economy.  That piece of legislation is probably wayyy too big and controversial to get done before the November elections, but I think something along those lines is a good idea.  I just don’t see austerity as a good idea right now, especially with regard to monetary policy (Paul Krugman has been arguing this point incessantly for a good while now, and he might have convinced a few more people that he’s right if he weren’t being such a prick about it).

Of course, said stimulus would have to be designed a lot better than the ARRA was.  I’m still a fan of a really big payroll tax holiday.  This is all dust in the wind, though, for reasons that Tyler Cowen details here.

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