Obama stimulus, deficit plans: 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 â€śthe stimulusâ€ť), and President Obama expected tomorrow to announce his Presidential commission for deficit reduction, Iâ€™m hearing a lot of claims and rhetoric about what has â€śworkedâ€ť versus what has not, and what has to be done going forward versus what should remain â€śoff limits.â€ť
In all these arguments and politically-colored â€śevaluationsâ€ť, 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 handâ€¦
On the Stimulus: Republican critics of the stimulus argue that the â€śproofâ€ť that the stimulus hasnâ€™t worked lies in the still-bad numbers of the unemployedâ€“that since ARRAâ€™s passage last year, total jobs in the economy have decreased, not increased. As the New York Timesâ€™ David Leonhardt explains:
The reasons for the stimulusâ€™s middling popularity arenâ€™t a mystery. The unemployment rate remains near 10 percent, and many families are struggling. Saying that things could have been even worse doesnâ€™t exactly inspireâ€¦
[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 â€śdidnâ€™t create one new job.â€ť
But of course ARRA made a difference and surely did â€ścreate jobsâ€ť at the marginâ€“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 â€ścreatedâ€ť 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 (â€ťsubstitutionâ€ť 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 doesnâ€™t mean that ARRA couldnâ€™t have been better designed to get more (or faster) â€śbang per buckâ€ť; 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 â€śstimulusâ€ť werenâ€™t always so â€śstimulativeâ€ť, because there was too much worry about getting the â€śright mixâ€ť of tax cuts versus spendingâ€“where the notion of â€śjust rightâ€ť depended on the politics, not the economics.
On the Presidentâ€™s Fiscal Commission: The big question is whether Republicans are going to participate. Get ready for tomorrowâ€™s rhetoric from the Republicans that there doesnâ€™t need to be a (general) â€śfiscalâ€ť commissionâ€“there needs to be a â€śspendingâ€ť (cuts only) commission, their argument being that the long-term fiscal challenge is mostly on the spending side of the budget, not the tax side. As the Washington Postâ€™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. â€śBlue-ribbon commissions are fine and dandy, but weâ€™re still waiting for a response from the president on our proposal to start cutting spending right now,â€ť said Boehner spokesman Michael Steel.
But this presidential commission/advisory panel is going to be different than the Presidentâ€™s earlier â€śtax reformâ€ť one. The New York Timesâ€™ Jackie Calmes explains that this advisory body is going to leave everything on the table, including tax increases that contradict the Presidentâ€™s own campaign promises:
Elected Republicans, however, are under intense pressure from their partyâ€™s conservative base to oppose any tax increases â€” 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 Europeâ€™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 thatâ€™s a good thing to leave on the table, because even though itâ€™s true that growing entitlement spending, especially health spending, is our greater challenge over the longer term, itâ€™s also true that â€śbending the health cost curveâ€ť isnâ€™t going to get us to the Presidentâ€™s goal of 3 percent of GDP deficits by 2015. And although one shouldnâ€™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 reductionâ€“and relatively more fiscally responsible policiesâ€“as soon as possible. How to do it sooner rather than later? Given the present â€śmarginâ€ť 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 donâ€™t have to involve trading off with the goal of promoting a strong economy, as long as weâ€™re able to get rid of the constraint of President Obamaâ€™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 â€śObama tax policyâ€ť 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 â€śreally small stuffâ€ť relative to the rest, Mr. Auerbach said.
More than Mr. Obama could have imagined, the situation now tests his promise to break Washingtonâ€™s gridlock and to lead in making â€śthe hard choices.â€ť
Steve Pearlstein also has an excellent column today about this upcoming test of the Presidentâ€™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 fortunesâ€¦
Iâ€™m hoping the fiscal commission will serve as a good â€śtutorâ€ť to the President on this leadership test, which is all about helping the American people accept the â€śhard choicesâ€ť that will pay off in the longer term. It has to start with the President being willing to talk about them more. More tomorrow.
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