Economic Ideas: A Response to Chait’s Piece on the Left and a look at Obama’s Job Speech

(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.

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11 Responses to Economic Ideas: A Response to Chait’s Piece on the Left and a look at Obama’s Job Speech

  1. JaredB says:

    That’s $30bn if you count the $5bn for fixing up community colleges!

    • Anjon says:

      Congrats Jared! You got your FAST!
      But, do you think they could have it all hit in 2012? Is fast really fast enough?

      • JaredB says:

        Thanks. Since FAST! is distributed through Title 1, a well known mechanism, we believe we could get resources out to the largest school districts within months and that they could start repairs within months after that.

        The key is that they don’t have to apply because we know they need the work. Other need to apply but not to Feds, the State agencies which can move the $ quickly also.

  2. Copy edit: “There was an emphasis on restoring confidence in the financial sector ….”

    Note the lack of agency in that sentence and the passive voice. Suggest replacing with something more like: “Obama is owned by the banksters, and therefore….”

    I think the Georgia program is terrific, though. You “audition” for a job, the employer gets free labor for a few months, plus maybe a few rounds on the casting couch, and when it comes time to actually pay you, it’s Sayonara! It’s classic Obama kabuki, a rickety Rube Goldberg device that distracts from the real problem, which is lack of aggregate demand. Because — and follow me closely, here, neo-liberals — if there were demand, people would want to, ya know, buy stuff, and then businesses would hire people to make it, or at least haul it out of the shipping containers from China.

  3. Pingback: Good and Bad Arguments About Obama and the Economy : Lawyers, Guns & Money

  4. Jim In Panama says:

    None of his proposals will get through the Tea Partied house. I knew it the minute he walked into the chamber, it was apparent immediately that he hadn’t stopped being black.

  5. Ranjit says:

    It makes no sense for a liberal to trade a temporary stimulus largely comprised of tax cuts for permanent cuts to Medicare and Social Security. What’s going to have a greater effect on utility long-term: a temporary payroll tax cut or the raising of the Medicare eligibility age? It’s not even close.

    Sorry, this plan would have been OK as a moderate conservative brand of economic stimulus if it were not tied to slashing the most successful American health care program in our history. As it is, it signals a decisive shift to the right of the Democratic Party and the effective disenfranchisement of the majority of Americans who support maintaining Medicare. In fact, it amounts to a failure of American democracy itself.

  6. virag says:

    is it really possible that the whitehouse didn’t understand the severity of the situation from day one? or was it that they simply didn’t listen and didn’t _want_ to understand because it didn’t fit with preconceived notions and policy positions? that sort of thinking explains the failure to stake out better positions on so many issues at the outset. as has been stated over and over again, his vague rhetoric during the campaign may have sounded sorta liberal and activist, but the concrete policy ideas and administration personnel were anything but.

  7. Anjon says:

    Hey Mike. Here’s my analysis. Projecting an additional 2.4 Million jobs in an moderate-optimistic scenario

    1. Economy could see net job creation of 200K to 300K per month in 2012, for a total of around 3 Million net jobs in calender year 2012
    2. Of that, 80% or 2.4Million jobs will be reasonably attributable to the proposed Obama Jobs bill.
    3. Projected 2012 GDP of 4.7%, of which 2.7% is attributable to the Jobs bill
    4. Very high uncertainty associated with this forecast, both upward and downward.

    Feel free to check it out and provide feedback!

  8. Dan Kervick says:

    I’ve been puzzling over over one particular question all day: What is Obama’s theory of what exactly is going on in our economy?

    I understand the the speech was aimed at practical proposals for addressing the obvious problem of very high unemployment, and properly so. And I know Obama is constrained by the political environment and the exigencies of the moment from freely venting large theories about the nature of our economic life. But still I wonder: How does Obama think we got here? How does he explain in his own mind the fact that we are now three years into what has turned into one long recession, and that job losses, and the persistence of these job losses, have turned out to be historic in scope?

    Reading between the lines, I think I know what he thinks. And I don’t think I like it. My guess is that he believes most of the unemployment is mainly the fault of the unemployed, who failed to educate themselves sufficiently to make themselves “competitive”, and who are now going to have to sweat out their mistakes for many years, accepting lower wages and living standards, as they bring themselves back up to snuff.

    I don’t detect even a hint that he is sympathetic to alternative idea: that a perfectly normal and on-average deserving middle class has had their prosperous way of life stolen from them by out-of control Ponzi lenders and blood-sucking rentiers, and by a broken system of income distribution that has been pulling higher and higher percentages of the monetary rewards for our work output toward the top of the income scale, to such an extent that the credit bubble that was desperately sustaining this exploitative system has finally burst, and the ransacked middle class can no longer support the their old way of life.

  9. ezra abrams says:

    re lefts critique obama
    torture is wrong. full stop. Has O done all he could here ?
    nuclear power is a bad idea
    the history of hte last 60 years is one of the top 1% or so siezing ever more power; has o been an articulate advocate for rebalancing power
    Social security on the table – by definition, someone who is putting ss on the table is not a liberal or a democrat

    You say, quote
    “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. ”
    what planet are you, and delong, and thoma and krugman etc etc living on ?
    as a practical matter, as a matter of politics and soundbites on TV, which is where most americans get their ideas from, the payroll tax holiday is the death of social security.
    That you economists are stuck on angels on the head of a pin macro analyses of multiplier effects is really disheartening.
    to paraphrase Alinksy, liberal economists are the people who retreat into theory whenever there is a fight….I can’t tell you how distressed I am at the way the “liberal” economists are taking this.
    I guess you tenured econ guys all have good pensions and don’t feel, emotionally, how imp ss is

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