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The Mistaken Pivot To Deficits: The Obama Administration's Biggest Unforced Error

Matthew Yglesias alerts us to:

Origins Of The Mistaken Pivot To Deficits: Zachary Goldfarb has a fascinating piece looking at Treasury Secretary Timothy Geithner as the main architect of the mistaken decision to turn the corner and start focusing on deficit reduction rather than jobs...

I had understood that the position of Geithner (and Orszag) was that what the economy needed was:

  1. In the long run, putting the social insurance state on a sound financial basis.
  2. In the short run, more stimulative fiscal, monetary, and banking policy to fight high unemployment.
  3. That (2) had to be carefully calibrated so as not to undermine (1).
  4. That, in fact, the only way to get more stimulative fiscal policy was as part of an integrated plan to also do (1).
  5. That additional pressure on the Federal Reserve for more stimulative monetary policy was likely to be unproductive.
  6. That stimulative banking policy was very difficult to do, and that--with the stress tests a success, even with HAMP a failure--there was little more that could be bureaucratically accomplished.

But Zach Goldfarb says something quite different: he says that Geithner (but, apparently, not Orszag) was opposed to stimulative fiscal policy (and also stimulative monetary and banking policy?) on principle:

Zachary Goldfarb: Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop”...

If true, then it is not so surprising that the Treasury never managed to take any effective steps to significantly boost the economy's supply of high-quality assets by taking risk onto its balance sheet--either mortgage risk via HAMP, corporate risk via PPIP, or other programs.

UPDATE: [I am becoming more and more convinced that this Romer-Geithner exchange quoted by Goldfarb is unrepresentative of Geithner's position--that his objection was that it wasn't worth spending the president's three hours a week he had to spend on economic policy on fiscal stimulus measures that were not going to go anywhere, not that he had a neo-Hayekian objection to fiscal, banking, or monetary measures to boost aggregate demand.]

As Felix Salmon writes:

How fiscal ideology trumped job creation | Felix Salmon: In this debate, Romer is right and Geithner is wrong. For one thing, economic growth isn’t necessarily the only or even the best way to create jobs.... And even if you agree that economic growth is a great way to create jobs, it’s not at all obvious that deficit reduction is a better way to jumpstart growth than stimulus.... Geithner cut his teeth in a world of bond vigilantes, an era when James Carville said that he would like to be reincarnated as the bond market, because then he could intimidate everybody. And after that, Geithner dealt with a series of international sovereign-debt crises where countries found themselves hammered by enormous bond spreads.

But right now the 10-year bond is yielding less than 3% even after the debt ceiling has already been reached and the government is in frantic moving-money-around mode to try to avoid drastic cuts or even default. Clearly it’s not high long-term interest rates which are holding back economic growth. And although it’s all well and good for Geithner to talk about building a credible long-term fiscal strategy, where I part ways with him is the idea that such a strategy is incompatible with short-term stimulus. Indeed, I think we need a short-term stimulus to get enough Americans working again that tax revenues can rebound healthily and make a serious dent in the deficit.

It’s clear at this point that such a stimulus is not going to happen. The result is going to be devastating for millions of needlessly-unemployed Americans — and also for the fiscal health of the country as a whole. Geithner, it seems, deserves to shoulder a large part of the blame for that...

And Matthew Yglesias comments:

Origins Of The Mistaken Pivot To Deficits | ThinkProgress: The real mistake here, though, was made by the president. Having people on your staff who share common values but have a range of views is a good idea. But this is an issue that’s much more in the Romer/Summers wheelhouse than Geithner’s or Orszag’s. The ultimate decision was probably over-determined, with it seeming to other members of the team that there was no legislative path forward for additional stimulus so that becoming optimistic about the confidence-boosting potential of releasing deficit plans was mentally pleasing. In general, the Obama administration stands out for having at times a weak grasp of the non-legislative functions of the presidency and doesn’t seem to spend much time worrying about Fed appointments or stimulative things executive agencies can do.

I would in large part disagree: the congressional-gridlock situation did indeed overdetermine the failure of stimulus II to exist, but not the absence of monetary expansion II and banking policy II.