THE STASH DECEMBER 10, 2009
Brad DeLong parses my piece today on the administration's struggle to create jobs while still minding the deficit and pronounces himself "increasingly bewildered about administration thinking." He raises several fair points. I figured I'd try to provide a bit more background on each one in response.
1.) Refering to my opening paragraph about this summer's consensus among Democrats that "[t]he stimulus was working more or less on schedule, and the job market was gradually recovering,"* DeLong writes:
Huh?" On August 16, 2009 many--Barry Bosworth for one--were saying that the stimulus was, as someone in his audience put it, "1. too slow; 2. too small; 3. too much in silly tax cuts out of which the M[arginal ]P[ropensity to ]C[onsume] will be much less than 1." It's not clear to me whether Noam is setting up an overstated rhetorical antithesis here, or whether the political Democrats really were in a bubble about the state of the economy late last summer.
Definitely not an overstated rhetorical antithesis there. Now, obviously, not every member of the administration and every Democrat on the Hill signed onto the consensus I describe. But, based on several conversations with people in the administration and on the Hill, I'd say it was the prevailing view. It was the September jobs report (which came out in early October) that really jarred people.
2.) I quote a senior administration official who says that, “The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs.” In response to which DeLong writes:
I've been looking for such Wall Street analysts, and have had a hard time finding them--except among the goldbugs, the politically-motivated fellow travelers of Donald Luskin, and others of that ilk. I see a lot of people saying that such a scenario might happen--that it is one possibility. I don't see credible people saying that it is the central tendency.
I happen to agree with DeLong that such a canceling-out is unlikely. But, in fairness to the administration official, my sense is that he wasn't convinced it was going to happen, or that he thought the odds were necessarily better than even. Just that it's a risk the administration wants to minimize when it spends money on job creation, not a reason not to spend money on job creation.
3.) I quote another administration official talking about the political difficulty of combining more stimulus with a commitment to longer-term deficit reduction--one way to have your stimulus without freaking out the bond market. “The odds that you could get both done in an election year with ten percent unemployment are mighty low,” says this official. In response to which DeLong writes:
This seems to be simply wrong: Those Democrats concerned with jobs now appear to me to be eager to get more spending now even if they have to pay for it with spending caps and revenue triggers five years and more into the future. And those Democrats who are deficit hawks above all are willing to provide more spending now to sweeten the long-term curve bending. It might not work, but there is a sweet spot that everybody on the Democratic side is willing to vote for.
In a vaccuum, I think there's a chance you could hammer out a deal between liberals and moderates here. But, as I say in the piece, it's hard to believe the GOP will endorse "revenue triggers" at this point. And, if not, it's hard to believe they'll refrain from bashing Democrats for raising taxes in the run-up to next year's midterms. I didn't really get into the source of the political problem with this official, but that's certainly my read on it.
4.) I note that, even if you could pass both things next year--stimulus and a deficit-reduction package that kicks in a few years later--it wouldn't necessarily work, because people might not spend the extra stimulus money for fear that their taxes would go up. In response to which DeLong writes:
You can either say that you think that bigger deficits now that create expectations of bigger deficits in the future will be ineffective, or (if you are Ricardian about it) that bigger deficits now accompanied by expectations of smaller deficits in the future will be ineffetive, but you cannot say both at the same time.
If I understand him correctly, DeLong is essentially saying that points two and four contradict one another. It can either be the case that more stimulus now will be ineffective because people will assume we'll run bigger deficits in the future, which raises long-term interest rates. Or it can be the case that more stimulus now will be ineffective because people will assume we'll run smaller deficits in the future, and will simply save rather than spend the money. But it can't be the case people will assume we'll run both larger and smaller deficits in the future.
Two quick points: One, I mostly agree that there's a contradiction here, with the caveat that it's theoretically possible for both premises to hold if the first group of people were bond holders and the second group were consumers, and there was very little overlap between the two.
The more useful response is that DeLong has put his finger on a relatively important feature of administration thinking on these questions, which is that it's (understandably) a bit all over the place. Some officials think an imminent rise in long-term rates is a potential problem; others think low rates of consumption of additional stimulus is a potential problem; some think both could be problems (under different scenarios); some neither; of the people who think both, different people attach different weights to the different scenarios, etc., etc. I guess the bottom line is that there isn't really a coherent Administration Position here. At least not yet. Just a lot of bright people trying to think through potential pitfalls as they grope toward a policy decision. That's the process I was trying to illustrate in my piece, in any case.
Update: *Just reading back over the "consensus" I mention--about Democrats thinking the stimulus was working and the job market was improving this summer--it's worth pointing out that it's not that Democrats thought the unemployment rate wouldn't go higher. As I understand it--and I think the president and various administration officials said this beforehand--they *did* expect the unemployment rate to hit 10 percent. What they didn't expect was for the unemployment numbers to get worse at an increasing rate, rather than a decreasing rate. So when the September employment report came out showing the number of job losses rising from around 200,000 in August to around 260,000 in September, people got pretty worried. They were expecting job losses to keep shrinking each month. (The irony is that, after subsequent revisions, the September job-loss number did turn out to be smaller than the August number...)