(Originally posted at New Deal 2.0)
Over the weekend, Jonathan Chait wrote an article critical of “the Left’s” critique of Obama’s economic policy. He criticized the “magical thinking” shown by people who assume the president is more powerful than he is and can push things through Congress, as well as people like Drew Westen who argues that Obama needs to be a better rhetorician when it comes to talking about unemployment and the government. It’s worth reading because it’s likely to be a conversation that will be with us for some time.
One major problem with Chait’s critique is that there is an excellent case to be made that the Obama administration has had the wrong ideas about both the nature of the unemployment crisis and what the government’s response should be since the get go. Drew Westen has a specific theory about presidential rhetoric; if we expand Westen’s definition to include ideas, beliefs, and assumptions about the economy, then there is a stronger case to be made against the administration.
To start at the beginning, it looked like the administration thought this would be a shallower recession than it was. The stimulus was thought of as an insurance mechanism against the worst case scenario, rather than something to bring the economy back up to full employment. There was an emphasis on restoring confidence in the financial sector immediately rather than working out the housing market issue, with the administration even proposing some strong steps to find funding that sidestepped Congress (like PPIP). This is consistent with the idea that the financial sector would lead us out of the recession, rather than just sit on a record level of reserves.
Given that we had a housing bubble, it would have been essential to formulate some process to deal with the losses from the housing crash. Housing is a key part of the business cycle, a major channel for monetary policy, and the bank servicing model created during the bubble is currently set up in a way that is designed to exacerbate fraud and corruption. But HAMP and other programs meant to deal with the housing and foreclosure crises failed even their modest goals and didn’t even spend the money they had. And how could they have worked well? They were designed to float the housing problems out a bit and manage the rate of foreclosures while Wall Street and the economy, in a shallow recession, bounced back. Liberals like Elizabeth Warren and Damon Silvers pointed out that these programs were too little and too late at the time, though they were ignored.
The rush to austerity and the appeasement of the confidence fairy hit early. By December 2009, Treasury officials were telling Chait’s colleague Noam Schieber at the New Republic that they needed “some signal to U.S. bondholders that it takes the deficit seriously” and “spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect.” A senior administration official told Chait 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 case you didn’t notice, we’ve just hit some of the lowest 10-year rates on government bonds in history, at least until I look again in a month.
Brad Delong, like many liberals, flagged that piece as a reason he was becoming increasingly bewildered by the administration’s thinking (Scheiber responded). But if you are worried first and foremost about bond vigilantes, it makes sense. That’s just the wrong thing to be worried about.
The administration was overly optimistic throughout 2010. By 2011, they put most of their rhetoric in full-on confidence mode. Obama is wonky and it is often easy to trace the origins of his ideas, and he went around promoting the most nihilistic interpretation of Rogoff/Reinhart’s book (rightfully flagged as the most dangerous set of ideas in the world by Joe Weisenthal). Obama gestured towards structural unemployment arguments and a skills gap while Gene Sperling was all about restoring confidence as an end-goal. And, of course, stimulus is sugar. The centerpiece of the 2011 State of the Union was a Win the Future that focused on long-term growth rather than getting back to the short-term trend. Liberals countered by arguing unemployment is a major problem that can be impacted by both fiscal and monetary policy.
For many who liked Westen’s piece, they were probably reacting more to a reading that says Obama needs to get serious about liberal ideas more than one that gives a theory of how politics works. For these were all choices about how to view the world, choices to accept one set of ideas over another set of ideas. And they were all ideas that focused on a neoliberal model of financial sector confidence, rather than the liberal Roosevelt program of reworking mortgages and implementing aggressive monetary and fiscal policy. Even with a reactionary opposition and a deadlocked Senate, ideas matter.
Tonight’s speech was a chance to reboot these ideas. How did it go?
Let’s go through some specifics:
- It eliminates the payroll tax for workers in a way tilted towards small businesses and cuts it in half on the employer side. The employer side tax cuts are a bad way to go about it, but if they pass they can do some good. There should be additional worry that it will be difficult to raise this at a later date, putting pressure on the way we fund Social Security. The emphasis on tax cuts, which make up the majority of the bill, is consistent with moderate GOP stimulus package plans of the kind we saw in the Bush tax cut extensions.
- Jared Bernstein should be happy — there’s $25 billion targeted at school infrastructure rebuilding.
- It punts on housing. It looks like a refinancing plan, which is good. It targets the worst hit areas, its effects will feel like a permanent tax decrease, and consumers are well incentivized to do it quickly. But it’s not a sufficient idea, it will be carried out through HARP rather than a new initiative, and it isn’t clear how the FHFA will deal with it.
- $75 billion in infrastructure spending, including a infrastructure bank.
- “The most innovative reform to the unemployment insurance program in 40 years.” I’ll cover this in detail in the future, but work-sharing looks interesting while the “bridge to work” is potentially troublesome.
- “A $4,000 tax credit to employers for hiring long-term unemployed workers… Prohibiting employers from discriminating against unemployed workers when hiring.” I think this is great on the first read. Tackling long-term unemployment is an important item, and this is likely to have a significant effect in getting the long-term unemployed back to work.
What does this signal on the ideas front? We’ll see where the deficits speech goes in the next week, but it certainly looks to be a move against the austerity/confidence games that the administration lost 18 months playing and toward the government moving on creating jobs. There’s a need to give an extra lifeline to a weak economy and it’s the government’s job to do it. The fundamentals — low inflation, low wage growth, high unemployment, low job vacancies, record-low borrowing costs — all demand this plus even more. Obama also identified the enemy: those that would opportunistically use this moment to dismantle the parts of government they don’t like and shift power and wealth to the top. Significantly more than I asked for in a speech; let’s see where it goes now.