Taking Steps

Fareed Zakaria argues along lines similar to the points I made yesterday. Tax cuts are just about played out as a means of fiscal stimulus and founding an economic policy based on them is just handwaving:

In the wake of a financial crisis caused by excessive debt, tax cuts are highly unlikely to lead to increased economic activity. People use the money to pay down their debts rather than shop for cars, houses and appliances. As for the idea that job creators are not creating jobs because their taxes are too high, think about it: Would Mitt Romney invest more of his money in American factories if only he had paid less than the 13.9 percent rate he paid last year?

However, as we’ve learned over the last several years there are no shovel-ready projects. This morning I heard Larry Summers being interviewed, making his case for borrowing money at today’s low interest rates and bringing forward maintenance projects which would otherwise be necessarily performed some time in the future, say, rebuilding Kennedy Airport.

The reason that’s not done is that there are no plans in place for doing it, it will take years to put together such plans, approve them, and let the contract, and the bidder to whom the contract would ultimately be let is a large, established company with a proven track record and incentives to perform the contract, now five or ten years from today, with the equipment and labor it has on hand rather than purchasing new equipment or hiring new workers. Construction projects aren’t performed the way they were during the Depression of the 1930s any more than banks operate the way they did in the 1830s.

This is not to say that there aren’t substantial, worthwhile infrastructure projects that would contribute materially to our productivity in the future. However, those projects would not do much for our economy now. Congress does not possess that kind of foresight; its vision extend mostly to the next election.

So, fiscal policy is just about tapped out as a means of boosting our economy out of the doldrums. Federal Reserve Chairman Bernanke has made it pretty clear that he is disinclined to use monetary policy to goose the economy, either. That leaves what we dread most: changing our behavior. Our behavior must change in such a way as to produce more economic activity rather than less.

Today 70% of the economy depends on personal consumption. That’s more than any other OECD country and higher than it was here not all that long ago. 70% personal consumption expenditures is not a law of nature.

5 comments… add one
  • PD Shaw Link

    That last line from Zakaria is grating. Romney is retired; he built his business, and sold it and whatever job creating he did was many years ago. He’s almost certainly investing almost solely in tax avoidance schemes now, so in a very real sense if you change his tax treatments he is very likely to change his behavior now because he’s got his pool of money, he’s not going to go back to work, and the only games he’s got is where to invest the pool and how to avoid taxes.

    I think the issues are beyond stimulus now. Do we raise taxes in a “recessionary economy”? Politically, I think the answer is no.

    I think there is a good argument that a comprehensive plan to right the fiscal ship such as Simpson/Bowles, which I think included the idea of staggered implementation would be good for the economy. I suspect the rich are saving their money now because (a) there are no plans to moderate the deficit, and (b) extremely high future taxes on them are likely.

  • jan Link

    PD Shaw

    Well said.

  • Government is simply too sclerotic to institute effective short-term solutions. It can’t even hire competently.

    Just to give you an example, I think I mentioned here last year that I was planning on taking a full-time GS job with the federal government. My future employer intends to hire me, but the position must still be competitively advertised. The process was started last November and the job just got advertised today. It’ll be on USAJobs (the federal government jobs site) for two weeks, then it will be another 1-2 months of red tape before I’ll actually be hired. It would be even longer than that, but President Obama instituted regulations to streamline the process so that employees must be hired within 60 days of a job advertisement closing. Nothing’s been done about actually getting positions advertised in a timely manner however.

    I told my brother, who runs the family business, about this and he was incredulous. For him, he talks to someone, tells them they are hired and they start work the next morning.

    There are a lot of things that sound good in theory, like a modern WPA program, but the problem as I see is that they aren’t going work without wholesale changes in how the federal government operates. Such changes will require significant Congressional action which doesn’t appear to be in the cards.

    As I’ve stated here often, I think things are going to have to get a lot worse before they get better. Reforms will come, IMO, only when problems can no longer be ignored or kicked down the road.

  • Government is simply too sclerotic to institute effective short-term solutions.

    I agree. That’s why even though the neo-Keynesians may be right in theory they’re wrong in practice. It’s too bad they get so angry and abusive when that’s pointed out to them.

    That quote of Yogi Berra’s keeps going around in my brain: “In theory there is no difference between practice and theory. In practice there is.”

  • Icepick Link

    I think the issues are beyond stimulus now. Do we raise taxes in a “recessionary economy”? Politically, I think the answer is no.

    It’s time to stop speaking about what we can politically do in “this environment” and start doing the things that need doing. The tax system should be reformed because the current tax system has become a burdensome drag on the economy and is riddled with special interest favors. This may or may not mean higher taxes on someone, but goddamnit, reform is necessary. This reform should be undertaken even if the economy starts growing at a 5% clip and the UE-3 rate falls to zero.

    Similarly, reforms need to be done to healthcare delivery in this nation, in order to contain costs. Fixing this is not going to fix the current economy, but it needs to be done.

    The regulatory environment needs to be streamlined nationwide.

    Et cetera, et cetera, et cetera.

    We need to focus on what needs to be done, and then politic accordingly, not the reverese. Such ass-backwards thinking is part of the reason we’ve allowed things to get so fucked up. The fact that the people running the country insist on doing it ass-backwards is an indication of their need to be removed.

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