the long fiscal game
I supported the stimulus package, but agree with the likes of Ryan Avent that the problem with Obama’s stimulus was that it was not only poorly executed, but that that execution is rooted in a systemic problem:
A country committed to stimulus will take care to prepare to use stimulus. It will construct a system of automatic stabilizers that provide immediate counter-cyclical aid as an economy deteriorates. It may have a backlog of needed infrastructure projects at the ready, which can be rushed into action as conditions warrant. A country generally skeptical of stimulus, on the other hand, will reach for it in an emergency and find that it is unprepared. Automatic stabilizers will be too small and will require constant Congressional maintenance. Too few projects will be shovel-ready. The need to legislate will lead to inclusion of pork items that aren’t particularly stimulative. Stimulus will be less targeted, timely, and effective as a result.
My take for some time has been that Larry Summers and Tim Geithner are no more pro-Keynesian than Greg Mankiw or other detractors of a stimulus approach. And, just as it was a bad idea to have a government with a distaste for government running major a government operation like the response to Katrina (i.e., G.W.B.), it has been a problem having economists running the response to the crisis who are implementing a Keynesian approach while quietly holding their noses. Which brings me to Martin Wolf’s insightful post on how the politics of supply-side economics have influenced modern thinking both among Democrats and Republicans:
To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.
The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.
In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage.
As I’ve said before, I believe the Obama administration needs to link (or realistically, to have linked) the stimulus to a broader narrative about the need to shift the country toward a more competitive footing. Over the last forty years, we have lurched from one major recession to another as the various fixes we’ve devised to keep the “world’s most important economy” afloat have turned up, time after time, well short of adequate. All the while, we have been utterly avoiding the long-term implications of the decline of manufacturing. Maybe I’m just stuck in time, but I continue to think that Clinton basically got the economic stuff right: we need to focus on global trade and leading the world in innovation and science. While Obama talks this talk, he’s not tied this kind of rhetoric directly to his (increasingly piecemeal) approach to righting our faltering economy. You don’t have to go as far as Andy Grove’s protectionist proposals. But Obama does need to articulate a longer term rationale to addressing what ails the economy.
Manufacturing output is higher than it has ever been, excluding the recession. And it is recovering quite nicely now. Even as a percentage of GDP, manufacturing has remained relatively stable for the past several decades.
The problem fewer workers are needed to produce higher-quality manufacturing goods. This is not unique to America–Germany and China, too, are losing manufacturing jobs.
Expecting manufacturing to pick up the slack in demand for unskilled workers is no more realistic than expecting agriculture to do the job. We need something else to do so; and there don’t appear to be many candidates.
Thorfinn
July 27, 2010 at 4:17 pm
You are right. I should be more precise when I invoke this manufacturing trope: yes, we manufacture as much if not more as we ever have, but we do it with far fewer people. I should have said: the decline of manufacturing employment. Because, yes: the problem is that it is unclear how we are going to sustain wealth creation in to the future.
seansafford
July 27, 2010 at 4:22 pm
What did Clinton do that was so great? I’m not being sarcastic, I just don’t know why people think he was such a great president.
I don’t know what a “competitive footing” would be, but at least part of it has to be education, since better educated workers, even low-skilled ones, are more flexible and able to change jobs. The stimulus package’s strings to state education assistance and the Race to the Top programs that Obama started, especially now that the Department of Education is taking charter schools seriously, will probably have more of an impact on the labor force than V-chips and school uniforms, which is all I can remember Clinton doing.
As people get richer they spend more money on services than on objects – smartphones are much more expensive than telephones fifty years ago but most of the additional cost is in software and design. Look at how many more nail and tanning salons, pet sitting services, coffee shops and movie theaters there are now than there were 20 years ago. Concert tickets, video games, movies, all of those things are now much more expensive relative to the food and clothing than they were 20 years ago. Maybe most of the jobs in those industries aren’t sexy, but they’re no less sexy than making windshield wiper blades or operating a drill press.
As for manufacturing, I don’t think the US produces quarterly breakdown of GDP by industry like most countries, but in monthly manufacturers’ surveys, output is still well below where it was before the recession. And China is aboslutely not losing manufacturing jobs.
JPW
July 27, 2010 at 7:07 pm
I don’t really want to get into too deep of a discussion about what the economy “should” look like because I think its not only impossible to say, but also fundamentally problematic to attempt to push toward a particular kind of economy. I’m not advocating “picking winners”.
But I do think there’s something problematic about equating the jobs that are created from, say, tanning salons and those that come from making windshield wipers. Windshield wipers are not just a convenience: they add to the productivity of users by making it safer to drive at higher speeds in the rain. If we didn’t have wipers, there would be a demonstrable drag on the wider economy. We would be less productive. And more productivity makes it easier and more likely we will generate wealth in this country (and others too). Without getting into the distributive effects of this (i.e., how much of that value to workers retain in their wages; how are those wages distributed between relatively more and relatively less skilled workers…), it seems pretty evident to me that tanning salons do not add to people’s productivity. They don’t generate wealth. They are solely consumption goods.
And as more and more of our economy seems to be characterized by consumption goods, we are therefore digging ourselves into a deeper and deeper hole. Specifically: what troubles me is that we have supposedly survived this long by retaining the design and “brand-management” pieces of the value chain and “most of the value” is concentrated. Is it really? Isn’t there a circularity to that? Brand-management is so valuable because we consume so much. But the wealth that supports all of that consumption comes from an economic engine that requires more and more consumption.
That cycle can’t possibly be sustainable.
So, without trying to define “competitive footing” any more clearly, all I can say is that it seems obvious to me that the “innovation” part of the value chain — which we ALSO do pretty well at historically — does a lot more to generate ‘real’ wealth. So, yes, education, science, infrastructure are all worth investing heavily in.
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Safford, Sean
July 27, 2010 at 7:36 pm
Sean,
Yes, I think that’s a good diagnosis. Though I would still quibble over “wealth creation.” As recent rises in output and industrial production suggest; I think that can still happen, even in today’s economy. Companies like Ford and Harley are doing better than ever, as the NYT suggests.
It’s the distribution of skills and talent, and the demand for those skills that’s the problem. Firms continue to create wealth; they just don’t require large amounts of unskilled labor to do so. I don’t know what exactly the gov is supposed to do about it–I think science/tech, or commanding heights industrial policy will simply further boost the part of the economy that does well and hires few.
Maybe we’ll just have to settle for having a large permanent underclass, supported by transfer payments. Maybe immigration restriction should be back on the table (yes, I know immigration doesn’t take away jobs–but it does have distributional consequences, particularly on existing immigrants).
JM,
On China’s manufacturing jobs–take this up with Robert Reich http://robertreich.blogspot.com/2009/05/future-of-manufacturing-gm-and-american.html . All those rust-belt factories in Manchuria, Sichuan are gone.
Thorfinn
July 27, 2010 at 7:45 pm
Buchanan and Wagner (1977) argue that its actually Keynesian ideas, rather than supply-side ideas, that has led to politicians’ ability to spend without taxing. They recommend a balance budget amendment and monetary rules rather than central bank discreption. Given that its systematic, as you point out, how would you remedy the fiscal/monetary situation?
I’m confused on your distinction between the production of consumer versus capital goods. Why does it matter if we have open trade?
Also, why do you use employment as your measurement? It’s akin to saying the US is unsustainable because farm employment has dropped from 90-something percent of the workforce to 2% today. We still produce food as we still produce manufacturing goods – just with less labor. I see this as a good thing.
joshmccabe
July 28, 2010 at 5:26 pm
@Josh. I don’t think I could put it much better than this:
seansafford
August 2, 2010 at 3:23 pm