in Which I Am Becoming Increasingly Bewildered About Administration Thinking
Noam Scheiber reports from inside the Obama Administration:
Balancing The Budget: As of late this summer, Democrats in Washington shared a tidy consensus about the economy: The stimulus was working more or less on schedule, and the job market was gradually recovering. That meant the administration could start thinking about how to rein in the country’s yawning budget deficit, if not actually scale it back yet...
To this my first reaction is: "Huh?" On August 16, 2009 many--Barry Bosworth for one--were saying that the stimulus was, as someone in his audience put it, "1. too slow; 2. too small; 3. too much in silly tax cuts out of which the M[arginal ]P[ropensity to ]C[onsume] will be much less than 1." It's not clear to me whether Noam is setting up an overstated rhetorical antithesis here, or whether the political Democrats really were in a bubble about the state of the economy late last summer.
What followed turned that tidy consensus into a pigsty.... “The entire town is more schizophrenic than I’ve ever seen,” says one senior administration official. “Everyone cares about jobs, and everyone cares about fiscal discipline. The weight shifts week by week, unemployment report by unemployment report.”...
[T]here’s no such win-win solution this time... the only way to further stimulate the economy is to spend. “Now is not the time politically or economically to emphasize fiscal austerity,” says Simon Rosenberg, president of NDN, a Washington think tank. “That day will come.” Rosenberg is surely right about the need to punt for the moment on the deficit. But it turns out that this choice is only the beginning of the discussion, not the end... spending more money now could actually raise long-term rates, thereby offsetting its effect. “The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs,” says one senior administration official.
To this, my reaction is: I've been looking for such Wall Street analysts, and have had a hard time finding them--except among the goldbugs, the politically-motivated fellow travelers of Donald Luskin, and others of that ilk. I see a lot of people saying that such a scenario might happen--that it is one possibility. I don't see credible people saying that it is the central tendency. And I don't see anybody selling long-term Treasuries on any substantial scale as a way of betting that such a scenario will come to pass.
Does anybody know to whom Noam and this SAO are referring?
And, of course, if you do fear adverse bond-market reaction to more shot-term government spending, there is an immediate and natural cure:
On paper, the way to deal with this is to spend now while pledging to cut later on, so as to persuade the bond market the infusion is temporary. “Everyone would of course like to be able to do something substantial on jobs in the short term and lock in tough, fiscally responsible policies in the medium term,” says a second administration official. But actually executing this fiscal maneuver is unspeakably difficult.... “The odds that you could get both done in an election year with ten percent unemployment are mighty low,” says this official. It would be hard enough to rally liberals around the cause of deficit reduction so soon after the deepest recession in 70 years; getting the GOP on board would be hopeless. Already, Republicans have shamelessly highlighted Medicare cuts in order to derail health care reform...
This seems to be simply wrong: Those Democrats concerned with jobs now appear to me to be eager to get more spending now even if they have to pay for it with spending caps and revenue triggers five years and more into the future. And those Democrats who are deficit hawks above all are willing to provide more spending now to sweeten the long-term curve bending. It might not work, but there is a sweet spot that everybody on the Democratic side is willing to vote for.
Then the administration, speaking through Noam, becomes less than coherent:
If the administration were to announce, say, a $200 billion job-creation bill along with a tough deficit-reduction package beginning in three or four years, anticipation of the latter could undercut the former. The reason: People who think their taxes will get raised save more and consume less. And, of course, the whole point of additional stimulus is to goose consumption...
You can either say that you think that bigger deficits now that create expectations of bigger deficits in the future will be ineffective, or (if you are Ricardian about it) that bigger deficits now accompanied by expectations of smaller deficits in the future will be ineffetive, but you cannot say both at the same time.
