They’re Deaf in One Ear

Former director of the Office of Management and Budget in the Obama administration Peter Orszag has an op-ed at Bloomberg that has parts or movements. The first movement is slow, meticuluous, and sobering, the second light and fanciful. In the first part Dr. Orszag makes a very convincing case that economic growth in the United States will be very much slower for the foreseeable future. That movement closes with this passage:

Even without long-lasting effects from the crisis, the official projections may be on the rosy side. An analysis by John Fernald, a senior research adviser at the Federal Reserve Bank of San Francisco, is largely agnostic about whether the impact from the financial crisis will last. But Fernald also raises another troubling point: that productivity growth had been slowing even before the crisis hit in 2007.

Fernald estimates that, as a result of the slowdown in productivity growth (along with an aging population), in the long run we should expect annual growth to average only 2.1 percent. Yet government forecasts are higher. The White House is projecting long-term growth of 2.5 percent per year, and the CBO puts it at 2.4 percent.

These differences may seem small, but don’t forget the power of compound interest (which has large consequences for income) or the budget deficit’s sensitivity to growth (which is surprisingly acute). Over the next decade, if Fernald is right, the deficit will be about $1 trillion larger than official projections suggest. Keep in mind, his analysis takes a benign view on whether the crisis itself will further diminish income in the long run.

Very slow real economic growth has a number of implications. For example, it casts real doubt on the 8% nominal growth assumed by many public pension plans. Most of all very slow real growth, at or near zero, means that cuts mean real reductions. The customary Washington usage of cuts meaning “reductions in the rate of growth” won’t work.

Here’s the allegro giocoso:

Which brings me back, once again, to the idea of a barbell fiscal policy. Policy makers in Washington should couple substantial upfront stimulus spending with even bigger, but delayed, deficit reduction. Both ends of this barbell are crucial: The stimulus can help to reduce the lasting effects of the crisis, and, given that the official deficit projections may be too sunny, the austerity will help prevent a future fiscal crisis. Furthermore, the combination is more politically feasible than either component alone.

I think that Dr. Orszag forgets that politicians are deaf in one ear. With their good ear they’ll hear “upfront stimulus” but “bigger, but delayed, deficit reduction” will fall on the deaf ear because, as noted above, in a period of very slow or no growth, cuts mean actual cuts.

What’s the solution? As I have been saying for some time, we need stimulus without deficits as proposed by Paul Samuelson many years ago, effected by replacing relatively nonproductive spending on agriculture, defense, healthcare, and education with more productive stimulus. I’ll leave what those might be to the reader but my favorites are things like energy production, improvements to the power grid, and telecommunications improvements, measures that will aid the economy of the future.

7 comments… add one

  • Icepick

    Furthermore, the combination is more politically feasible than either component alone.

    Well, nooooooo shit! It’s always more politically feasible NOW to make someone in the future do the actual hard stuff.

    Fernald estimates that, as a result of the slowdown in productivity growth (along with an aging population), in the long run we should expect annual growth to average only 2.1 percent.

    Does this take recessions into account? It doesn’t sound like it, as we’re having trouble sustaining that kind of “growth” without a (technical) recession.

    I’ll also point out that these lower numbers insure that people who have been out of work are going to remain out of work. The 2.4% and 2.5% numbers only offered the merest prospect of employment for LTUEs, but 2.1% growth doesn’t hold out any hope at all. To get people like me back to work we need growth of at least 5%.

    In other words, we will remain fucked for the foreseeable future, while the assholes in charge live like kings.

  • I don’t think that either Dr. Orzag or Dr. Krugman have a gut level feeling for the implications of very persistent very slow growth. Their reactions assume the economic environment they’ve known all their lives which is very different, indeed.

  • Icepick

    No, their reactions indicate that they don’t care, as long as they and their masters are in power. In fact, they know goddamned good and well that poor dependent people vote Democratic, and that anything that creates more poor people, more dependent people is good for them.

    And surely they can read charts and graphs as well as I can. I see that we’re four million jobs short of where we were when the economy tanked, starting in December of 2007. I see that a lot of the jobs that have been created during the recovery are low-wage and low-quality. I see that median incomes aren’t just stagnating, but are actually falling. I see that even assuming the participation rate should be coming down due to demographics, the participation rate is STILL a good two percentage points lower than it should be, meaning the UE rates are all a good two points lower than reality.

    _I_ can see that, a mathematics student with just a touch of economics training and some marginal real-life work experience. Orzag and Krugman can’t even read the same graphs as me? Either they’re completely oblivious, or this is the result they favor, which makes them evil bastards. I’m voting that they’re evil bastards, that they’re enjoying this impoverishment of the people, that it is their goal, that they are profiting by it, and that all of this crap they print is for PR purposes only. Because what they’re saying makes no sense, defies reality, and obviously defies reality to anyone with any sense for data whatsoever.

  • Icepick

    And here’s the new indication of what the Democratic Party really thinks about joblessness as a problem:

    Obama’s jobs council shutting down Thursday

    Because, you know, problem solved!

    Actually, that’s a little unfair. They still acknowledge that joblessness is a problem, because it will allow them to exploit their positions for personal gain.

    Instead, a White House official says the administration will focus on new ways to engage with the business community and create jobs, including expediting permits for infrastructure projects.

    Note what this says: They don’t want to create a better permitting process, they want to engage businesses on a case by case basis. Yeah, nothing potentially exploitable in creating a favor bank.

  • Which brings me back, once again, to the idea of a barbell fiscal policy. Policy makers in Washington should couple substantial upfront stimulus spending with even bigger, but delayed, deficit reduction.

    The problem with this is any rational person would realize it is a policy that has a very low probability of ever being enacted. About the only time it has really happened in the last 30-40 years was under Clinton. And even then I think it was a fortuitous event than one that was planned.

    What’s the solution? As I have been saying for some time, we need stimulus without deficits as proposed by Paul Samuelson many years ago, effected by replacing relatively nonproductive spending on agriculture, defense, healthcare, and education with more productive stimulus.

    While this is great in theory, it is problematic in application. Once you get the government involved you’ll get the rent seeking. And rest assured agriculture, defense, and health care interests will be arguing for their slice of the “re-cut” pie.

    Even absent rent seeking government has a very poorly understood “objective function”. For consumers it is utility, for firms profits (or revenues, or even market share). That is consumers and firms have a clear cut goal they are trying to achieve. Government? Not so clear cut. When a government program is seen to fail, rarely is the reaction, “Darn, that didn’t work, lets look for something better to spend the money on.” The reaction is often, “We need to spend even more!”

    And keep in mind that when you “re-cut” the government spending pie there is a word in there you yourself have used, “cut”. And cuts with low real economic growth…they mean something…as you’ve said. So those administering this program and the representatives of the states they live in will also resist cuts.

    _I_ can see that, a mathematics student with just a touch of economics training and some marginal real-life work experience. Orzag and Krugman can’t even read the same graphs as me? Either they’re completely oblivious, or this is the result they favor, which makes them evil bastards. I’m voting that they’re evil bastards, that they’re enjoying this impoverishment of the people, that it is their goal, that they are profiting by it, and that all of this crap they print is for PR purposes only. Because what they’re saying makes no sense, defies reality, and obviously defies reality to anyone with any sense for data whatsoever.

    And now you can see why my claim that Krugman is insane is the charitable one.

  • Icepick

    And now you can see why my claim that Krugman is insane is the charitable one.

    I never disputed that.

  • Drew

    “And now you can see why my claim that Krugman is insane is the charitable one.”

    I’m less charitable. He’s an evil fucxxxx. His ideology supercedes his concerns for the Average Joe. Anything for the cause, including making hamburger of the Average Joe in its pursuit. That’s a working definition of evil.

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