The White House and the Economy
Mike Konczal writes today about both our short-term deficit and our long-term deficit:
Why do we have to worry about the second, long-term deficit in the “two deficits” scenario? My understanding of the neoliberal landscape was that it was to convince the bond market that further stimulus would be temporary, thus allowing a larger short-term stimulus to drive down unemployment without freaking out the bond market....You can doubt that a second stimulus would panic the bond market (I do), but the logic makes sense.
But now, he says, news reports suggest that the Obama administration views long-term deficit reduction simply as a good in itself because it will spur "confidence" in the economy:
This new idea is that making the bond market happy in-and-of-itself will produce prosperity and full employment through increasing confidence. The major drag on the economy isn’t low aggregate demand but confidence. Now the assumption isn’t that we have to keep the bond markets as happy as they were but instead make them much happier, which will then increase investments and spending through this increase in confidence. Hence long-term spending cuts, lots of gimmies to incumbents in supply-side investments and other things powerful interests love but don’t necessarily make demand-based economic sense.
I simply don’t see any evidence of why, or even how, this would work. What are the arguments that confidence is the major check on the economy? I understood the “two deficit” argument, but this new approach is just substituting in the interests of bondholders for the entire economy. If a very-polite version of expansion austerity is guiding the administration’s thought this is even more of a disaster than these stories convey.
At a guess, there are two things going on here. The first is the one Mike talks about: there are a lot of people — Wall Street is full of them — who fundamentally believe in a kind of folk economics in which austerity and discipline are rewarded and profligacy is punished. So if you demonstrate some discipline, businesses will start hiring again because they have confidence in the future.
The second thing is simpler: the political landscape for serious stimulus spending is so grim that no one has the energy to effectively argue against the folk theories. What's the point, after all, when even the most brilliant argument will immediately founder on the reality that Congress just flatly isn't going to pass a stimulus bill? And if that's the case, then why not make the best of a bad situation and argue in public that long-term deficit reduction is good in and of itself? It's better than nothing, after all, and who knows? Maybe it'll work. What's more, politically it's a lot better to cut a deficit deal that makes you look like a leader than it is to barnstorm the country talking up a stimulus and getting nothing for your efforts. That just makes you look like a loser.
I have no idea which of these two dynamics is dominating the decisionmaking at the White House. But I'll bet they both have a strong influence.