April 23, 2014

What matters is "marginal" job creation and "marginal" deficit reduction

With today being the one-year anniversary of the American Recovery and Reinvestment Act of 2009 (more commonly referred to as “the stimulus”), and President Obama expected tomorrow to announce his Presidential commission for deficit reduction, I’m hearing a lot of claims and rhetoric about what has “worked” versus what has not, and what has to be done going forward versus what should remain “off limits.”

In all these arguments and politically-colored “evaluations”, I hear misplaced focus on (the stark and easy-to-talk-about) absolutes, averages, and aggregates, when what matters economically are relatives, marginals, and individuals.

Let me elaborate a bit with the two issues at hand…

On the Stimulus: Republican critics of the stimulus argue that the “proof” that the stimulus hasn’t worked lies in the still-bad numbers of the unemployed–-that since ARRA’s passage last year, total jobs in the economy have decreased, not increased.  As the New York Times’ David Leonhardt explains:

The reasons for the stimulus’s middling popularity aren’t a mystery. The unemployment rate remains near 10 percent, and many families are struggling. Saying that things could have been even worse doesn’t exactly inspire…

[T]he debate is largely disconnected from the huge stimulus experiment we just ran. Why? As Senator Scott Brown of Massachusetts, the newest member of Congress, said, in a nice summary of the misperceptions, the stimulus might have saved some jobs, but it “didn’t create one new job.”

But of course ARRA made a difference and surely did “create jobs” at the margin–-even if the economy continued to lose jobs in aggregate.  If the net job losses would have been greater without the stimulus, then the stimulus “created” jobs.  That ARRA prevented some jobs from being lost is surely the case in the state and local government sector, where it did not matter what kind of incentive (”substitution” or relative price) effects the stimulus set up for those governments; those governments have budgets that have been so thoroughly bumped up against their binding constraints that any kind of transfers to those governments (even pure cash ones) have to have prevented some of their workers from being let go.

That doesn’t mean that ARRA couldn’t have been better designed to get more (or faster) “bang per buck”; there were parts of the policy that were far more about steering the longer-term economy in a slightly different direction than about stimulating economic activity (any kind of economic activity) now.  And even the parts of ARRA that were done in the name of “stimulus” weren’t always so “stimulative”, because there was too much worry about getting the “right mix” of tax cuts versus spending–-where the notion of “just right” depended on the politics, not the economics.

On the President’s Fiscal Commission: The big question is whether Republicans are going to participate.  Get ready for tomorrow’s rhetoric from the Republicans that there doesn’t need to be a (general) “fiscal” commission–there needs to be a “spending” (cuts only) commission.  As the Washington Post’s Lori Montgomery reports:

On Tuesday, however, House Minority Leader John A. Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) again declined to say whether they would name members of the panel. “Blue-ribbon commissions are fine and dandy, but we’re still waiting for a response from the president on our proposal to start cutting spending right now,” said Boehner spokesman Michael Steel.

But this presidential commission/advisory panel is going to be different than the President’s earlier “tax reform” one.  The New York Times’ Jackie Calmes explains that this advisory body is going to leave everything on the table, including tax increases that contradict the President’s own campaign promises:

Elected Republicans, however, are under intense pressure from their party’s conservative base to oppose any tax increases — a line in the sand that dims any prospects for bipartisan cooperation. Yet economists, including veterans of past Republican administrations, are vocal in insisting that the debt problem is too great to be solved without increasing revenues somehow and perhaps moving to a new consumption tax system like Europe’s.

The same economists also say a significant deficit-reduction plan is not possible unless Mr. Obama breaks his campaign promise not to raise taxes for households making less than $250,000. Last week, Mr. Obama said he would not impose that condition or any other on a fiscal commission.

And of course I think that’s a good thing to leave on the table, because even though it’s true that growing entitlement spending, especially health spending, is our greater challenge over the longer term, it’s also true that “bending the health cost curve” isn’t going to get us to the President’s goal of 3 percent of GDP deficits by 2015.  And although one shouldn’t push for absolutely balanced budgets and complete elimination of the deficit now or even decades from now, we still need to work on relative deficit reduction–and relatively more fiscally responsible policies–as soon as possible.  How to do it sooner rather than later?  Given the present “margin” of policy choices, you have to consider tax increases, and you have to consider smart tax increases that raise revenues in more efficient ways than just raising statutory tax rates.  There are ways of achieving a more sufficient level of revenue that don’t have to involve trading off with the goal of promoting a strong economy, as long as we’re able to get rid of the constraint of President Obama’s campaign promise by allowing the new commission to work unencumbered by it.

The first place to start is letting go of the notion that “Obama tax policy” has to include Bush tax policy extended.  For as Jackie Calmes also writes:

When George W. Bush took office in 2001, the government projected surpluses of $5.6 trillion for the coming decade.

In an analysis of what happened next, the economists Alan J. Auerbach and William G. Gale found that much of the accumulated debt owes to Bush-era policies and to the recession, with its costs in lost income taxes and automatic benefits for the unemployed. The one-time costs of stimulus and bailout measures are “really small stuff” relative to the rest, Mr. Auerbach said.

More than Mr. Obama could have imagined, the situation now tests his promise to break Washington’s gridlock and to lead in making “the hard choices.”

Steve Pearlstein also has an excellent column today about this upcoming test of the President’s leadership:

Viewed in that context, the current political disarray need not be an insurmountable problem for President Obama, but rather could represent a golden opportunity to demonstrate the leadership the country needs and craves. He will not demonstrate that leadership by running around to carefully staged events in which he tells ordinary voters what he thinks they want to hear. Nor will he demonstrate it by redoubling efforts of his PR war room to respond to every attack or piece of Republican disinformation with overwhelming rhetorical force. Rather, the real challenge is whether the president can strengthen the bond of trust between himself and the American people by having the courage to tell the hard truths and make the hard decisions, irrespective of short-term political consequences and the tut-tutting of the commentariat.

The irony is that only by doing that which may be unpopular and unpolitic can the president revive his longer-run political fortunes…

I’m hoping the fiscal commission will serve as a good “tutor” to the President on this leadership test, which is all about helping the American people accept the “hard choices” that will pay off in the longer term.  It has to start with the President being willing to talk about them more.

--Cross-posted at economistmom.com