In the Beltway, the answer is always “faster deficit reduction!”
Mayor Michael Bloomberg of New York is in the news today for shutting down the Occupy Wall Street protests in Zuccotti Park. This reminds me that he spoke last week at a forum co-hosted by the Center for American Progress and the American Action Forum. Besides a couple of truly novel twists (comparing Social Security to OPEC?!) it’s actually useful bringing up his speech because it perfectly crystallized the dominant economic narrative that far too many policy-making (and media) elites tell themselves these days. The punchline of that narrative, presented with no evidence at all, is simply that we need to urgently move to cut the budget deficit.
Bloomberg is sure that providing more fiscal support (i.e., using larger near-term deficits to finance spending and investments) to the economy won’t work to reduce unemployment. How is he sure? Because we gave some already and unemployment remains high. This is like a fire chief claiming that pouring water on a fire won’t quench it because once there was a really big fire and his crew poured more water on it than they’ve ever poured before … but it kept burning. So, apparently we’re going to move to pouring gasoline on it. Really, it says so right in the press release – “the best stimulus is fiscal responsibility (where “fiscal responsibility” is nearly always Beltway speak for quick reduction of budget deficits through large spending cuts leavened with some tax increases).”
I know that my harping on this may be getting old, but people haven’t stopped doing it yet, so here we go again: the failure of fiscal support would leave clear footprints in economic data. The textbook case for why debt-financed fiscal support does not lead to net new jobs and economic activity in some cases is that the first-round effect of spending and tax cuts are counter-balanced by rising interest rates that “crowd-out” private investment. There has been no rise in interest rates, hence there is no crowding-out.
Bloomberg is also sure that businesses aren’t spending enough – and that their failure to spend is because of vague uncertainty:
“But as important, and the subject for today, is the broader uncertainty that exists about the country’s long-term fiscal stability… . Nearly every CEO I talk with says the same thing: If the Federal government passed a real deficit reduction plan – and we’ll talk about what ‘real’ means in a minute – business leaders would respond just as they did in the 1990s, when President Clinton and Congress adopted a long-term deficit reduction plan that gave businesses more certainty about the market.”
But businesses are spending. Actually much, much more than they did during the first two-and-a-half years of the early 1990s expansion.
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And there is no actual evidence that uncertainty is constraining them. And if businesses are uncertain about the future, aren’t they at least happy enough with today’s record-high profit margins?
I guess this is the quality of fiscal policy analysis I should expect from somebody who seems to think that Congress forced banks to finance the housing bubble.
Enough for now – suffice to say that this speech could’ve been generated by a Ye Olde Beltway Centrist Cred-Producing software package from the mid-1990s. With this mindless invocation of “smaller deficits will fix everything,” is it really so hard to figure out why countries respond so poorly to financial crises?