The broad outlines of economic policy are not really that complicated or hard to understand. Don't believe me? Well, just listen to Nobel Prize-winner Joseph Stiglitz as interviewed on Democracy Now! Wednesday, as he sheds light on a series of big topics that have been the subjects of far more heat than light. First, on the newly-hot-again topic of foreclosures:
AMY GOODMAN: Our guest is Joseph Stiglitz, Nobel Prize-winning economist, professor at Columbia University. His book is out in paperback, Freefall: America, Free Markets, and the Sinking of the World Economy.
So, just to summarize, you are for a national moratorium on foreclosures.
JOSEPH STIGLITZ: I think--inevitably, I think we have to be moving towards that. And the reason is very simple. There were such--the bad practices were so rife, the inequities were so rife, the fraudulent behavior was so common, that at this point we don't know what is a valid mortgage and not. And the consequences of throwing somebody out of their home, when they shouldn't be, are hard to reverse. I mean, just imagine what it does to the family--education of the kids are interrupted--what it does to the community. So, when we have to balance the injustices--and life is unfortunately always balancing one side versus the other--and where will their mistakes be easily reversed and where not? My view is, if we keep them in the homes for a little longer, they owe the money--they still owe the money, that doesn't let them off the hook--but what we're saying is we're not going to speed up this process of-where there's the serious risk of an inequity that will not be easily compensated for.
Who can argue with that when it's put so simply and directly? Answer: No one. Which is why there's so much invested in making sure that it's never put so simply and directly. That's sort of the pattern that's established throughout this interview.
Regarding the need for further stimulus, and why the deficit is a red herring just now, he's equally lucid and to-the-point:
AMY GOODMAN: Joe Stiglitz, the deficit, the battle cry of the Tea Party movement, of the Republicans, as well. Robert Rubin has weighed in, says any new stimulus plan is highly likely to be counterproductive. What do you think has to happen? Does the deficit matter? And how do you think it should be dealt with?
JOSEPH STIGLITZ:My view is we cannot afford not to stimulate the economy. So, you know, anybody that says we should go back to austerity or we should not have a second-round stimulus just doesn't understand economics. And let me be very clear about this. If we don't stimulate the economy, the economy is going to get weaker. When the economy gets weaker, tax revenues go down and expenditures go up. Already, more than 40 million Americans are on food stamps. Number of people on Medicaid is reaching record levels. So, revenues go down, expenditures go up, deficits get worse. If you stimulate the economy, then people get jobs, they spend money, tax revenues go up. Now, if we spend the money on investments-investments in education, technology, infrastructure-you grow the economy in the short run from the stimulus, you grow the economy in the long term because of the returns that you get on these investments.
I mean, just think about this from the point of view of a firm. If you are a firm and you could borrow at zero to two-and-a-half percent, which is what the government can borrow, and you have investment opportunities that you owe ten, 15, 20 percent, you would be irresponsible, you would be foolish, not to undertake those investments. So, anybody that says, "I'm going to only look at one side of the balance sheet, the liabilities; I'm not going to look at the other side, the assets," is really not understanding economics. It's that kind of reasoning that got our country in the trouble in the first place, the people who didn't-you know, shortsighted behavior of the banks that got our country in trouble in the first place. And to me, I just view those kinds of statements as totally irresponsible.
Get that? Look what he does in place of the standard, brain-dead, totally misleading analogy with household budget-balancing (which, taken literally, would mean that no one should ever hold a mortgage, right? Or a car loan?) He makes a genuinely appropriate and valid analogy with a business and its investment opportunities vs. costs. Another example that so lucid and on-point that the only way to counter it is to suppress it.
How is it that someone as smart as DeLong still thinks it's a matter of argument? The evidence that he's amassed quite clearly proves that it is not. It's no more a matter of argument than was invading Iraq to get rid of WMDS that weren't there, and that Iraq would never have used against us unless we invaded, even if they were there. Argument simply has nothing to do with it. To the contrary, the more vacuous and preposterous the "argument" is, the better. After all, anyone can make a sound argument. To make one bad argument after another for 20-30 years, and never suffer any consequences whatsoever--now that's a sign of real power.
DeLong writes (emphasis added):
A Keynesian economist would say that demand is way low--and that the government needs to boost it. A monetarist economist would say that spending is way low--and so the government can either boost velocity by boosting the opportunity cost of holding money (which is most easily done by printing more government bonds--running bigger deficits) or boost the money stock by printing money. A market-oriented economist would say that U.S. Treasury (and German government, and Japanese government bonds) right now are extraordinarily valuable assets--and thus that the way to maximize economic value is to print more of them, i.e. run bigger government deficits.
The only response I hear is that the market lacks confidence. But the market doesn't lack confidence in the government. THe market lacks confidence in the private sector--it lacks confidence that unemployment will be low and capacity utilization high enough for private businesses to make the operating profits needed to service their debt, and that the financial system is well-enough capitalized that those operating profits will flow through to newly-issued financial instruments rather than being diverted to cover unrecognized but very real past losses. I could understand: "we need to shrink risk premia by having the government guarantee new bond issues." I cannot understand: "we need to shrink risk premia by raising taxes and cutting spending for the fiscal year that starts in July."
I could understand losing the argument if consumer price inflation was rising, if expectations of inflation in the Treasury-TIPS spreads were rising, if real interest rates on long U.S. Treasury bonds were rising, if there were any signs at all that we were moving from the green zone to the yellow zone as far as the U.S. Treasury bond's status as safe asset in the world economy were concerned. But we are not doing that....
Somehow we seem to have lost the argument--within the ECB, within the French and the European governments, within the British Liberal Party, within the Bank of England, within the Federal Reserve, with U.S. Senator number 60, and even within the White House.
And I do not understand how, or why we have lost the argument.
Of course, invading Iraq was "just" a gargantuan war crime, costing the lives of a million people or more. The turn toward fiscal austerity could bring about such a vast worldwide economic catastrophe that it could trigger conflicts on a scale approaching WWII. That's certainly what happened the last time that the global economy was this badly mismanaged.
The Center on Budget and Policy Priorities has released a new report focused on the need for swift action to avoid crippling cutbacks in state-level spending next year. I've written repeatedly about the crippling impact of failing to support state governments during this recession, and the problem just keeps getting worse and worse, since the new cuts that will come next year will be on top of the cuts already made. By doing so much less than was needed, the Obama Administration has already done far more to shrink the size of government--at least at the state level--than any conservative Republican might dream of. And the result is that hundreds of thousands of jobs have been lost that could easily have been preserved. Here's a chart from the report, which is meant to emphasize the job loses looming ahead due to state-level budget shortfalls. But look at how pitiful the federal contribution has already been so far:
The CBPP doesn't dwell on that--preferring to look at the jobs that were saved or created--which may be wise for them given their position in the policy advocacy universe. But for us pushing from outside, it's important to keep the big picture in mind, in order to stay focused on the need to change the whole framework of thinking. Here's how the CBBP report begins:
ADDITIONAL FEDERAL FISCAL RELIEF NEEDED TO HELP STATES ADDRESS RECESSION'S IMPACT
Without It, States' Steps to Balance Their Budgets
Could Cost Economy 900,000 Jobs Next Year
By Iris J. Lav, Nicholas Johnson, and Elizabeth McNichol
Summary
States face a serious fiscal problem that could force them to institute additional deep budget cuts and tax increases in 2010, weakening the fragile economic recovery and harming vulnerable children, seniors, and people with disabilities, among others. The federal assistance that states received for their Medicaid programs under this year's economic recovery legislation is scheduled to end with a "cliff" on December 31, 2010, and the assistance states received for education and other services also will be largely exhausted by then. Although that date is more than a year away, the problem is coming to a head now.
That's because states - which continue to face huge budget shortfalls that they must close - are taking steps now to plan their budgets for state fiscal year 2011, which starts on July 1, 2010 in most states. Governors will send their budget proposals to their legislatures between next month and February 2010 in almost all states. The legislatures will have to pass budgets as early as March or April in some states and by the end of June in almost all states. If states do not know they will receive additional federal fiscal relief, they will begin implementing new budget cuts and tax increases by this summer, at the latest.
Presuming they will get no more fiscal relief, states will have to take steps to eliminate deficits for state fiscal year 2011 that will likely take nearly a full percentage point off the Gross Domestic Product. That, in turn, could cost the economy 900,000 jobs next year. 1 Mark Zandi, Chief Economist of Moody's Economy.com, recently warned that these state budgetary actions "will be a serious drag on the economy at just the wrong time." ....
I wish I had a better read on Josh Marshall, I really do. Can he possibly be so naive that GOP stupidity still surprises him? I'd like to think not, believing he's in perpetual Claude Raines mode. But if so, he does it so well, he should be in show biz, not politics:
Not So Smart
It pains me to say this. But Sen. John Cornyn doesn't seem to be too bright. Cornyn was just on MSNBC explaining that spending in a severe economic downturn doesn't make sense and should be replaced by tax cuts since individuals can spend money "more efficiently" than government. I guess he doesn't get that the whole point of a stimulus bill is that in a severe recession individuals -- acting on rationale individual economic motives -- aren't spending. And only government, as a policy decision, can spend at a high rate notwithstanding the state of the economy.
He also claimed a 3x multiplier for tax cuts, which I don't think anyone believes. But I'm more interested in his point about the relative efficiency of private vs. public sector spending since it seemed to show that he doesn't understand what a recession, let alone a severe recession (which has qualitatively different dynamics), even is.
I know there are contrary theories of how economies work. But not grappling with the high level of risk in the economy that makes businesses and people unwilling to spend ... not sure you can enter the conversation without getting that.
Besides, he got MSNBC to give him face time for shoveling this shit, so who, exactly is the really dumb one, anyway, Josh?
Now Paul Krugman has something to say related to that, which should really get you steamed. It seems that the industries running up those costs don't want us to know whether they're doing any good. Knowledge leads to socialism, don'tcha know! (Actually, that's sorta true, but....)
In the middle of last week, a story erupted that the Congressional Budget Office (CBO) had issued a report saying that only a small fraction of the infrastructure spending could be spent before the current recession was over. Essentially, it would be useless for the primary purpose it was being spent on.
Less than half the money dedicated to highways, school construction and other infrastructure projects in a massive economic stimulus package unveiled by House Democrats is likely to be spent within the next two years, according to congressional budget analysts, meaning most of the spending would come too late to lift the nation out of recession.
A report by the Congressional Budget Office found that only about $136 billion of the $355 billion that House leaders want to allocate to infrastructure and other so-called discretionary programs would be spent by Oct. 1, 2010. The rest would come in future years, long after the CBO and other economists predict the recession will have ended.
Two days later, the Huffington Post reported that the report didn't exist. But that wasn't the worst problem with this story. CBO hadn't released a public report, but it had released some estimates to a handful of senators. Those estimates were highly questionable on their face, and good reporters should have questioned them immediately. Moreover, CBO should never have issued them as they were. Further compounding matters, Peter Orszag--former head of the CBO, now Obama's head of the OMB (Office of Management and Budget) responded with a letter (pdf) that soon became the standard Democratic line, but failed to cut as deeply as it should, perhaps out of loyalty to his old staff. Whatever the reason, only a few scattered Democratic voices seriously questioned the core of the CBO numbers--and those numbers are highly questionable on their face. What's wrong with this story, who blew it and how--as best I can figure it out so far--is all explained on the flip.
Note: I began writing this before Matt posted his diary. Below, I look at the short-term problem of how to START spending the money quickly and effectively. Obviously, the long-term challenge is just as great. We have to do both.
Conservative hacks may still be attacking the New Deal, but GOP economists, not so much. Support for a massive stimulus is bipartisan now amongst economists, Bloomberg reports:
Calls for $1 Trillion Stimulus Package Grow as Economy Tumbles
By Rich Miller and Matt Benjamin
Dec. 4 (Bloomberg) -- The one thing that isn't shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.
With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.
Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton's White House, are among those who say President- elect Barack Obama should push for a package of that size.
"They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption," said Rogoff, a former chief economist at the International Monetary Fund.
STATE BLOGS
