Jared Bernstein has an interesting proposition for progressive/liberal economic writers. We should talk less about what the administration and Democratic leader should do and more about what they could do:
Especially re the WPA-idea, this got me thinking about the relative value of important voices like Paul’s promoting what we should do right now as opposed to what, given political constraints, we could do.
And I think now is a good time to emphasize the latter….There will be no WPA-type programs in our near future. There was no appetite for them in the Obama admin in the midst of the worst recession since the Great Depression and there’s a lot less now. The reasons for that are interesting and I’ll speak to them another day. But it ain’t happening….
It’s also congenitally hard for politicians to get behind “a serious program of mortgage modification.”….The politics of this idea are deeply wound up in moral hazard. People forget, but it was precisely this action—giving mortgage relief to someone at risk of default and not to someone who was struggling to keep up their payments—that birthed the Tea Party.
Yes, it’s true that leaders must stand up to such views and do what’s right for the economy…damn the torpedoes and all that. But those of us espousing such actions must respect, or at least acknowledge, that those torpedoes are not pointed at us. They’re pointed at politicians who take them seriously and thus we need also need to espouse plans b, c, d and so on.
Paul Krugman, Brad Delong, and David Dayen all post interesting responses. With all due respect to Bernstein, I’m on team “should.” Nobody has said this directly, so I will: It’s not clear the problem is that the administration agrees with Krugman/Delong style economic liberals on what needs to be done but disagrees on tactics. That may have been true in 2009, but it doesn’t seem right now. On two issues very important to the recovery – housing and balancing the concerns between weak jobs/growth and deficits – I think they have a different point of view on what should be done.
For Fun, Two Coulds
Just so I can help the cause, here’s an doable could: Have local municipalities and states use eminent domain to purchase underwater mortgages at market prices and then immediately sell them to the GSEs. Harvard law professor and financial regulation expert Howell E. Jackson promoted this during the TARP debate and Congressman Brad Miller has argued a version of this program for the Federal government . The same principles can work at the state level. The GSEs can prearrange the buys so there’s little risk to local balance sheets. The GSEs can then mark down the debt to a manageable level above the purchase price. There can be an equity clawback for the GSEs if we are worried about unfair windfalls and moral hazard for homeowners.
Notice Congress is not required here. No Republicans, no 60th Senator. If the Obama administration is worried about owning this, responsibility is diffused with the state and local elected officials who pull the first trigger. It can be targeted to the weakest parts of the nation.
On a second note: If the administration is worried about doing direct action similar to the New Deal’s Home Owners’ Loan Corporation (“HOLC”) program, they can check if the servicing banks are obeying the law in foreclosures. Where’s the aggressive, criminal investigation to show that this is serious? Where’s President Obama and other senior staff holding press conferences with people who didn’t even have a mortgage being foreclosed on because the broken payment infrastructure of the banking industry has gone out of control? Anyone pressuring the OCC? Anything?
Many commentators think the Obama administration hasn’t and isn’t doing enough on housing. The problem for economic commentators is linking that up to the weak recovery. Here’s what I just wrote in the American Prospect:
President Barack Obama’s administration seems to be struggling with the question of whether foreclosures are a good thing or bad thing for the economy. The industry and some policy-makers contend that the housing sector has so many foreclosures to get through that the quicker we get through them, the better. If borrowers got mortgages that they didn’t deserve and couldn’t afford, the quicker these mortgages are dispensed with, the faster recovery will come. In this view, as long as the foreclosures are spaced out enough to keep pressure off the banks, letting foreclosures happen ultimately gets us back to a better economy.
But this thinking is perverse. Foreclosures have huge social costs and put pressures on an already weak market. They put disinflationary pressures on an economy that is resorting to unorthodox monetary policy to keep prices steady. Foreclosures reduce the value of neighboring properties, causing uncertainty and retrenchment by neighbors.
As properties remain abandoned, blight and crime enter. The costs of a foreclosure to a municipality, which one study estimates is around $20,000 per event if the property is abandoned, put pressure on already weak local budgets. At that rate, two foreclosures is close to a teacher’s salary. The decision not to seek a comprehensive solution to the foreclosure crisis will likely be remembered by history as being as disastrous as Treasury Secretary Andrew Mellon’s infamous call to “purge the rottenness out of the system” through mass liquidation during the Great Depression.
Stories are coming out now (see Paul Kiel and Olga Pierce, Dems: Obama Broke Pledge to Force Banks to Help Homeowners) that Summers and Geithner didn’t see any advantage to cramdown and other serious foreclosure relief efforts. Democrats go on the record saying that during the cramdown debate Treasury Secretary Tim Geithner “was really dismissive as to the utility of” cramdown, and Larry Summers “was not supportive of this” to any degree, even though President Obama campaigned on it. They were concerned about the health of the financial sector above all else, and other programs were designed to accomodate that goal (see Interfluidity on HAMP and any of the old debates on PPIP for a read on this take).
Think of how different the “shoulds” are here. I’m on the team arguing that cramdown and foreclosure-relief measures fairly shares the losses between homeowners and banks while putting a floor on macroeconomic losses by preventing the fire selling of assets into a depressed economy. The other side seems to believe that anything that would put pressure on the financial system needs to be avoided at all costs to get the recovery to pick up. It doesn’t surprise me nobody is happy with each other’s “coulds.”
A Weak Recovery
It’s sometimes tough to understand the logic of the Obama administration on where the economy is in late 2010 through now, and part of that is fighting for a coherent vision of what is wrong with the economy and what needs to be done. Without a “should” it, right-wing ideology owns the battlefield by default.
As visiting Roosevelt Institute fellow Corey Robin’s noted in his piece Reclaiming the Politics of Freedom:
When right-wing ideas dominate, we get right-wing policies. After the midterm elections in November, it seemed the most natural thing in the world—to the right, the media, Obama and parts of the Democratic Party—to freeze the pay of federal workers and extend the Bush tax cuts for two years. Incoherent as policy—the first presumes that the deficit is the greatest threat to the economy; the second, the lack of consumer spending—it makes sense as ideology. The best (and only) thing the government can do for you and the economy is to get out of your way.
The Obama administration moved from jobs and the economy to debt reduction last year. But of course the recovery wasn’t over yet. What still needed to be done? Here’s Welcome to the Recovery, Treasury Secretary Timothy Geithner, August 2, 2010:
…That uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth…..
As the economists Ken Rogoff and Carmen Reinhart have written, recoveries that follow financial crises are typically a hard climb. That is reality. The process of repair means economic growth will come slower than we would like….
We have a long way to go to address the fiscal trauma and damage across the country, and we will need to monitor the ups and downs in the economy month by month. The share of workers who have been unemployed for six months or more is at its highest level since 1948, when the data was first recorded, and we must do more to ensure that they have the skills they need to re-enter the 21st-century economy. Small businesses are still battling a tough climate. State and local governments are still hurting.
There are urgent tasks to be undertaken to reinforce the recovery, and Congress should move now to help small business, to assist states in keeping teachers in the classroom, to increase investments in public infrastructure, to promote clean energy and to increase exports. And while making smart, targeted investments in our future, we must also cut the deficit over the next few years and make sure that America once again lives within its means…
What shoulds motivate the coulds here? The story goes like this: the real lifting is done, and we must remember that following a financial crisis there’s a limited amount that the government can do. There’s a minor program of stuff left to do that conceptually involves clean-up. What’s left is to get workers skills, because the long-term unemployed will be left behind as new jobs come. We need to make some small targeted nudges to businesses to get them to hire through various R&D style credit rebates. And we need to start to get very serious about cutting the deficit because the medium-term deficit is going to be a check on any real recovery.
Regular readers know I don’t see the economy that way. I don’t think Reinhart/Rogoff justifies inaction. The idea that job openings justifies moving to skills training and other “structural” concerns isn’t justified in the data. I haven’t seen good evidence that the long-term unemployed are a particularly weak form of labor against historical trends and I’m not particularly convinced that R&D style tax credits aren’t just collected as rents by incumbents. And I think the administration moved to deficit reduction too early, as I don’t see why medium-term debt/GDP ratios impact a recovery. I see that we should be concerned about a jobs problem, while the administration sees that we should be concerned about a confidence problem.
All these are “should”-level economic disagreements between parts of the liberal coalition, and they should be debated with respect and with evidence. But they desperately need to be debated.