Try a lit­tle eco­nomic re­al­ism

Austin American-Statesman - - OPINION -

Let’s say you’re the leader of the free world. The econ­omy is stuck in the dol­drums. Nat­u­rally, you want to do some­thing. Many econ­o­mists say we need an­other stim­u­lus bill. They de­bate about whether the stim­u­lus should take the form of tax cuts or spend­ing in­creases, but the ones in your party are com­mit­ted to spend­ing in­creases. They trot out a plau­si­ble the­ory with com­puter mod­els to go with it. If the fed­eral govern­ment bor­rows X amount of dol­lars and pumps it into the econ­omy, that would pro­duce Y amount of growth and Z amount of jobs. In a $14 tril­lion econ­omy you’d prob­a­bly have to bor­row hun­dreds of bil­lions more to have any no­tice­able ef­fect, but at least you’d be do­ing some­thing to help the job­less.

These De­mand Side the­o­rists are giv­ing you a plan of ac­tion. But you’re not a the­o­rist. You’re a prac­ti­cal ex­ec­u­tive, and you have some con­cerns.

These De­mand Siders have very high IQs, but they seem to be strangers to doubt and mod­esty. They have to­tal faith in their mod­els. But all schools of eco­nomic thought have taken their lumps over the past few years. Are you re­ally will­ing to risk na­tional in­sol­vency on the ba­sis of a model?

More­over, the De­mand Siders write as if ev­ery­body who dis­agrees with them is im­moral or a mo­ron. But in fact many prize-fes­tooned econ­o­mists do not sup­port an­other stim­u­lus. Most Euro­pean lead­ers and cen­tral bankers think it’s time to be­gin re­duc­ing debt, not in­creas­ing it, as do many econ­o­mists at the in­ter­na­tional eco­nomic in­sti­tu­tions. Are you sure your the­o­rists are right and theirs are wrong?

The De­mand Siders don’t have a good ex­pla­na­tion for the past two years. There is no way to know for sure how well the last stim­u­lus worked be­cause we don’t know what would have hap­pened with­out it. But it is cer­tainly true that the fis­cal spig­ots have been wide open. The U.S. and most other coun­tries have run up huge, his­toric deficits. And while this has helped save pub­lic-sec­tor jobs, we cer­tainly haven’t seen much pri­vate-sec­tor job growth. It could be that govern­ment spend­ing is a weak lever to counter eco­nomic cy­cles. Maybe mon­e­tary pol­icy is the only strong tool we have.

The the­o­rists have high IQs, but don’t seem to know much psy­chol­ogy. Lord Keynes, though a lesser math­e­ma­ti­cian, wrote that the state of con­fi­dence “is a mat­ter to which prac­ti­cal men pay the clos­est and most anx­ious at­ten­tion.”

These days, debt-fu­eled govern­ment spend­ing doesn’t in­crease con­fi­dence. It de­stroys it. Only 6 per­cent of Amer­i­cans be­lieve the last stim­u­lus cre­ated jobs, ac­cord­ing to a New York Times/CBS News sur­vey. Con­sumers are re­cov­er­ing from a debt-fu­eled bub­ble and have a moral aver­sion to more debt.

You can’t read mod­els, but you do talk to en­trepreneurs in Racine and Yakima. Higher deficits will make them more in­se­cure and more risk-averse, not less. They’re afraid of a fis­cal cri­sis. They’re afraid of tax in­creases. They don’t be­lieve govern­ment-stim­u­lated growth is real and last­ing. Maybe they are wrong to feel that way, but they do. And they are the ones who in­vest and hire, not the the­o­rists.

The De­mand Siders are bril­liant, but they write as if chang­ing fis­cal pol­icy were as easy as ad­just­ing the knob on your stove. In fact, it’s very hard to get money out the door and im­pos­si­ble to do it quickly. It’s hard to find worth­while pro­grams to pour money into. Once pro­grams ex­ist, it’s nearly im­pos­si­ble to kill them. Spend­ing now cre­ates debt for­ever and ever.

More­over, pub­lic spend­ing seems to have odd knock-off ef fects. Pro­fes­sors Lau­ren Co­hen, Joshua Co­val and Christo­pher Mal­loy of Har­vard sur­veyed 42 years of govern­ment spend­ing in­creases in cer­tain con­gres­sional dis­tricts. They found that fed­eral spend­ing in­creases damp­ened cor­po­rate hir­ing and in­vest­ment in those dis­tricts. You wish some­body could ex­plain that one to you be­fore you pass on more debt bur­dens to your grand­chil­dren.

So you have your doubts, but you are prac­ti­cal. You want to do some­thing. Too much debt could lead to na­tional catas­tro­phe. Too much aus­ter­ity could lead to stag­na­tion.

Well, there’s a few short-term things you can do.

First, ex­tend un­em­ploy­ment in­surance; that’s a fool­ish place to be­gin bud­get-bal­anc­ing. Sec­ond, you need to mit­i­gate the pain caused by the state gov­ern­ments that are slash­ing spend­ing. You need a pro­gram mod­eled on Race to the Top. You will pro­vide fed­eral money to states that pass re­spon­si­ble long-term bud­get plans that will re­duce spend­ing and pen­sion com­mit­ments. That would save pub­lic-sec­tor jobs and ease con­trac­tionary pres­sures with­out throw­ing the coun­try into a fis­cal-debt spi­ral.

But the over­all mes­sage is: Don’t be ar­ro­gant. This year, don’t en­gage in reck­less new bor­row­ing or reck­less new cut­ting. Fo­cus on the fun­da­men­tals. Cut pro­grams that don’t en­hance pro­duc­tiv­ity. Spend more on those that do.

You don’t have the abil­ity to play the econ­omy like a fid­dle. You do have the abil­ity to lay some foun­da­tions for long-term growth and sta­bil­ity.

Matt Rourke

Frank Wal­lace, who has been un­em­ployed since May 2009, at­tended a June 23 rally or­ga­nized by the Philadel­phia Un­em­ploy­ment Project. Ini­tial claims for job­less ben­e­fits re­main above lev­els con­sis­tent with healthy job growth.

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