If you’ve been reading this blog, you know that I hold to the following four ideas:
- Monetary policy can’t do more for the economy now, because short-term interest rates are about as low as they can go. Demand has not picked up much. In this unusual situation — economists call it a “liquidity trap” — the economy is largely impervious to the kinds of solutions that the Federal Reserve Board can impose.
- A stimulative fiscal policy is the best way — perhaps the only sound way — to increase aggregate demand at this time. This could be in the form of tax cuts that encourage hiring (dramatically cutting the payroll tax, for example). Or the government could hire unemployed folks to repair or build needed infrastructure. Or both. There is a direct relationship between how much the government spends in such an effort and the amount of aggregate demand generated in the economy at large. Enough spending and the resulting virtuous circle pulls the economy out of the ditch. Then tax revenues soar and we’re half-way home. The obvious corollary is that the very worst thing to do in a liquidity trap is to cut government spending, a policy called “austerity.” But the latter is exactly what we are doing. We are not doing much of the former. The crashing sound you hear is economics students all over the world banging their heads against walls. (Or possibly the stock market.)
- Item 2 does not require, nor do I advocate, that government often run a budget deficit. It’s a timing thing. Government should spend like hell now, with the understanding that the books will move toward balance when normal growth is restored. (If a balanced budget amendment is needed to get this deal done, then so be it.)
- Obama has failed to do what’s required — bowing to what he perceives to be the political realities, while refusing to devote his rhetorical gifts to move the country toward the correct policy. I’ve been highly critical of him for this. Hence, this blog.
But if Jon Chait is correct, then what I want the President to do is unachievable. He implies it’s simply impossible for any president to persuade a majority of the public on the need for fiscal stimulus paid for with borrowed money. He argues that the paradox of thrift — the inclination to save like hell when times are hard even though, for a government navigating through economic misfortune, that’s unwise — is so intuitive and economic ignorance so widespread that our Republic will never be able to do the only thing that will work in the hardest of times. This an awful, almost unbearable thought. But could he be right? Here’s an excerpt from Chait, arriving via Andrew Sullivan:
Roosevelt generally enjoyed broad public support despite having no success at persuading Americans to share his Keynesian view. (Westen subsequently writes, “if you give [Americans] the choice between cutting the deficit and putting Americans back to work,” they’ll favor the latter. But the problem is that Americans don’t see that as a choice, which is wrong, but not a form of wrongness any president has succeeding in correcting.)
Roosevelt’s fortunes are a testament to the degree to which political conditions are shaped by the state of the economy. Roosevelt was wildly popular during the recovery, which coincided with his populist 1936 reelection campaign. Yet Roosevelt’s most populist governing period came after that election, when he took on the Dixiecrats. That period coincided with an economic relapse (caused by his premature abandonment of fiscal stimulus) which in turn severely damaged Roosevelt’s popularity. All these facts are rather hard to square with Westen’s narrative — not a surprise, I suppose, given his professed favoring of simple narrative over complex facts.
A … commenter points to a TNR editorial from 1933 that reads:
The head of a coalition government, accordingly, can exercise his freedom of action only within limits; the moment he irrevocably alienates his support on either the Right or Left, he is through. In the case of Mr. Roosevelt, you find that while he has acted with amazing boldness and imagination on a multitude of questions, he has shown great reluctance in facing up to a fight on any single clear-cut issue.