Friday, August 10, 2012

The President's Job

Brad DeLong gets it. He's looking at a quote from the upcoming Michael Grunwald book about the early years of the Obama presidency, with the president saying "Look, I get the Keynesian thing. But it's not where the electorate is." DeLong:
If Obama does not understand that his job is not to please the electorate by indulging its prejudices but rather to manage the path to a strong economy, he needs to be told what his job is every hour of every day until he does understand that.
That's exactly right, and it's especially true within the first couple years of the administration, when politically the goal has to be to build the best possible economy for re-election.

Right now, Obama can say any economically illiterate thing he wants, and as long as it doesn't cause the Euro Zone to implode somehow, it probably doesn't matter at all.

I will say one thing in potential defense of Obama...Politico has this quote in the context of the staff wanting Obama to make stimulus speeches. It's not crazy for Obama, in that context, to take into account what he talks about in public, as long as it doesn't prevent him from continuing to do the right thing on policy. I think it's highly unlikely that Obama could generated massive support for Keynesian policies by giving the correct speeches.

On the other hand, I do think that there are two groups who probably could have used additional education in 2009 who might have been receptive to a White House message that was never as clear as it could have been: Democratic opinion leaders, and elite journalists and pundits. Obama might have fully understood "the Keynesian thing," but I think there's pretty good evidence that quite a few "neutral" pundits who were inclined to at least give the new president a chance really didn't understand basic Keynesian concepts. In particular, I suspect that a lot of people really didn't know that there were sound, boring, reasons fully supported by mainstream economics for running very large short-term budget deficits. And I suspect that that group includes quite a few Democratic Members of Congress.

I've also increasingly come around to the idea that the original stimulus probably should have included built-in triggers that would have automatically increased spending (and perhaps tax cuts) based on economic indicators, perhaps along with other triggers to shut things down if the economy was recovering. Perhaps Olympia Snowe and the Benator wouldn't have gone for that, either, but I'd like to know whether anyone thought about trying it.

18 comments:

  1. Nah, Snowe never met a trigger she didn't like, and if they'd somehow planted the idea so that she thought it was hers...

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  2. I read the quotation somewhat differently, though I acknowledge it is ambiguous...

    My sense is the President is admonishing his team to be pragmatic. Even if the President agreed 2 trillion is the right policy, if voters (followed by their elected officials) oppose that proposal, the White House ends up with nothing (or, alternatively, 900b, which now looks like a loss rather than a win).

    Of course, there is some value in presidents "doing the right thing" or "fighting the good fight," but in general I'd argue pragmatism is a presidential virtue. See Carter, Jimmy.

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  3. If you remember the early years of the Obama presidency, about one third of the country was absolutely high on corporate-funded Tea Party batshit insanity. They were about ready to burn the country down and Fox News/Glen Beck were egging them on. The country was in an extreme right-wing hissy fit, due in no small part to the fact that a negro had just gotten hisself elected. Obama cheerleading Keynsianism would have done little to change these extremely strong prevailing winds of wing-nuttiness.

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  4. Never overestimate the information of journalists. Just saw Wolf Blitzer say "likely voters" equaled registered voters plus those likely to register. Castellanos corrected him but still.

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  5. "I've also increasingly come around to the idea that the original stimulus probably should have included built-in triggers that would have automatically increased spending (and perhaps tax cuts) based on economic indicators, perhaps along with other triggers to shut things down if the economy was recovering."

    Yes.

    Had Obama said we need $1.4 trillion stimulus and got 900 billion he'd today be in better political shape, because he could say he told us it wasn't enough. This seemed obvious at the time. I never understood why Obama went out on a limb with rosy projections right after a financial meltdown.

    Finally, some Keynesian policies are easy to explain to the public at large. Let's try a few:

    The economy is the sum of what we all produce. Unemployed people are producing nothing. Anything we can do to get people back to work helps us all. They spend their pay and all sorts of businesses have more customers, and soon enough they are hiring to meet demand. An employed person is wasted economic recovery.

    Interest rates are low. No, we shouldn't have run deficits in the Bush years. We should have continued the Clinton surpluses. But just because we shouldn't have borrowed then doesn't mean we shouldn't borrow now when rates are low. We have an opportunity to develop our infrastructure with practically no interest on the loan. We are foolish not to do it. As Keynes said, worrying about the deficit in a depression is like yelling Fire! in a flood.

    It is crazy to lay off teachers in a depression.

    Modest inflation is a sign of a strong economy, because businesses can only raise prices if they have customers. We should be more afraid of 8% unemployment than 5% inflation.

    Ask an honest businessman what causes him to hire. The answer is customers who want to buy. The economy grows when people have money to spend.

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    1. It's true that there's a lot of economic loss in unemployment, but there's potentially even more loss in stimulus itself. For example, Greenspan did a great job keeping unemployment low with the stimulative effect of low interest rates after 9/11 and the burst of the tech bubble. People were of course happy to have the jobs, but a lot of that work was wasted on the production of the wrong goods and services (mostly housing and all the crazy consumer spending based on the bubble that developed). Now, I don't think there's much risk of creating a new bubble at this point, but the market-distorting effects of stimulus will still cause us to waste our limited resources on malinvestments.

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    2. I think the Keynesian point is that high unemployment is itself a gigantic waste of resources. At such time resources are not "limited" in the normal sense.

      He agreed that stimulus in good times wastes resources through malinvestments, and prescribed surpluses.

      Your response confirms he is right about surpluses in good times. If he is right about good times (Greenspan,
      Bush tax cut) that is not really evidence he is wrong about bad times. To my mind it gives him credibility.

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    3. I think the Keynesian point is that high unemployment is itself a gigantic waste of resources. At such time resources are not "limited" in the normal sense.

      He agreed that stimulus in good times wastes resources through malinvestments, and prescribed surpluses.

      Your response confirms he is right about surpluses in good times. If he is right about good times (Greenspan,
      Bush tax cut) that is not really evidence he is wrong about bad times. To my mind it gives him credibility.

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    4. "He agreed that stimulus in good times wastes resources through malinvestments, and prescribed surpluses."

      My point is that stimulus in less than good times wastes resources as well. There isn't much risk to stimulus as a one-time shot in the arm, but pursuing stimulus for a decade or more guarantees that the entire structure of our economy is based on a wasteful allocation of resources. A recession is the economy's chance to rebuild on sounder footing, but I'm afraid we aren't following policies that will allow that to happen.

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  6. I thoroughly understand the Keynesian argument, which sounds very logical. But things are sometimes different in the real world, like one where you have a huge pile of debt already. When I look at Japan, I'm not seeing an advertisement of Keynesian theories working--not a disaster either, but then they also have trade surpluses that we don't.

    So I'd have to say I'm not sure a multi-year stimulus like we've had is a slam-dunk of an idea. It appeared to be helpful in 2009, but without continuing benefits in 2010 to now. And we don't know the future negative effects of the debt we've run up with the extra years of stimulus. If anyone is an expert on what will happen with all this debt, I'd love to hear.

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    1. The CBO reported that the increased debt from the President's stimulus would have a net negative effect on employment after ten years.

      I share your perspective on this. While the doomsday scenarios of a debt crisis are not impossible, extended stagnation seems much more likely.

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    2. Krugman argues Japan did not recover quickly because interest rates hit the zero bound, and counseled moderate inflation. By that argument their stimulus helped but was not sufficient alone. What is wrong with that argument?

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    3. I'll take this one, since I believe Japan is a case study for the limitations of Keynesian theory. Courtesy of Yahoo! Finance (the most awesome website in the history of the tubes), here's a 30-year look at the Nikkei, Japan's benchmark stock index.

      Note late 1989, when the index maxed out around 40,000 - even though its fair value, looking back from today, was around 1,000. When the index is at 40,000, investors, firms, other stakeholders, all expect an annual return of ~10% (or around 4,000), against which expectation they make their investments. Obviously, that is an incredibly unproductive way to invest, considering the "true" (looking backward from today) value of the Japanese market was so much less than where it was trading in 1989.

      If Professor Krugman thinks a bit of inflation, courtesy of higher interest rates, would sustain a market that was overheated by a factor of 40; well, with all due respect to his considerable Nobel intelligence, I fear he may have lost his mind.

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    4. Sorry - I've lost my mind - obviously higher interest rates don't elicit inflation, they fight it.

      Quickly changing subjects - here's another way to look at the Japan argument: suppose you were a long investor in the Nikkei, circa 1989, with a time horizon ending today. You would have plunked down your 40,000 (yen) to buy the broader market, and with an expectation of a nominal 10% rate of return, you would have hoped to sell today for 350,000 or so yen. You would get instead less than 9,000.

      It takes a tremendous leap of liberal faith to assume that difference could be bridged by better central bank policy or more borrowing.

      In fact, Keynesianism-as-a-solution-for-Japan is a bit like me choosing the highest quality gasoline on the expectation that it will transform my crappy old car into a Mercedes.

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    5. Couves, paying down the debt will have a negative impact on employment, whenever you do it. The point is to do it when the economy is stronger and not during a downturn when unemployment is already at crisis proportions, thus "stimulating" a downward spiral. A downward spiral is not going to help your fiscal balance. Just look at Europe, where austerity has produced a double-dip recession and they still have deficits. So, yes, you can reduce employment ten years from now or you can have a crisis today.

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    6. Scott, that's exactly the kind of short term thinking that leads to the problems we have today.

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  7. Couves, depression has long-term implications, too.

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  8. From a substantive point of view, some sort of counter-cyclical revenue sharing makes a lot of sense:

    (1) It allows state and local governments to plan budgets, because they know what their federal aid will be;

    (2) It gives flexibility for state and local governments to respond to local needs;

    (3) Under most plausible distribution formulas, which would be based on state or local economic conditions, it targets the aid where it is needed the most;

    (4) The aid phases out as the economy recovers, which is good from a long-term budget deficit standpoint, as well as addressing legitimate political concerns about the recession being used to make permanent changes in the relative role of the federal government;

    (5) In general, countercyclical aid adapts the size of the stimulus to the state of the economy, which is sensible from a Keynesian economic perspective;

    (6) From a CBO scoring viewpoint, CBO will tend to underscore the costs of a countercyclical revenue sharing package when CBO is underestimating the severity and duration of a recession, which means that it becomes politically easier to pass a larger package precisely when it is most needed.


    The main political drawback is that federal politicians do not like giving relatively unrestricted aid to state and local governments. This is true for both political parties. And it is true that state and local governments may not always make the wisest use of their revenue sharing dollars. But the constraints that federal politicians like to impose on state and local aid also may not always be wise.

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