Once again, we seem to be caught in a short-term/long-term problem. I written about this here and here, although that was more in the purely political/democratic sense of the problem.
The problem now is more purely economic (although political/democratic issues still pervade). The short term problem is that we may be sliding back into a recession (or worse). The long-term problem is that much of the western world has massive sovereign debt issues. More after the jump…The problem I foresee is that, as usual, the short-term problem(s) is/are bound to win out in these debates. It doesn’t seem like it now, because the word of the month/season is austerity. But the structure of government response to economic conditions — both substantively and political — seems inherently to tend toward stimulus.
There are myriad reasons for this. One is the political pressure for short-term benefits with long-term costs, but we’ve been over that before. But the opposite is almost more important. And that is the axiom that any fix to the long-term problem is inherently going to incur short-term costs.
This is best illustrated through example. Reasonably serious liberal policy-types — like, say, Ezra Klein in today’s Wonkbook — keep arguing that the answer to our problems is immediate stimulus coupled with long-term deficit reduction. Well, of course it is. The problem is getting from here to there; the second part of the argument is that now (i.e. today) is the wrong time to fix the long-term problem, because fixing the long-term problem will only hinder the economy recovery.
But when will fixing the long-term problem not hinder the economy?
The answer is: never. You cannot cut government spending/jobs without putting people out of work or making some people economically suffer, and you can’t raise taxes without incurring some dead-weight costs and perhaps putting some drag on the economy.
And so, even if the economy is humming along at 5% growth, any attempt to reduce long-term structural debt/deficit problems is going to be met with at least two forceful policy/political responses:
1) From liberals: the economy is humming and the government is flush with a revenue surplus. Now is the time to invest in American infrastructure, not cut governments jobs! Are you insane?!?!
2) From conservatives: the economy is humming and the government is flush with a revenue surplus. Now is the time to cut taxes, return the peoples’ money to them, and the spur even more growth, not raise taxes! Are you insane?!?!?
Either of these arguments are almost impossible to overcome. But to run any austerity policy, you need to overcome both of them. Pretty much the best you can ever do is to allow stimulus measures to expire by sunsetting them (i.e. limited amounts of government spending and/or pre-set expiration of tax cuts). This is pretty weak, though, because (a) it’s resisted forcefully (think Bush tax cuts), and (b) all it does it get you back to the pre-stimulus base-line, it doesn’t actually place you in an austerity mode.
And so we muddle onward, with consistent calls/implementations of short-term stimulus paired with long-term promises of austerity that never materialize. And each time, our “current crisis” is different, and cannot be ignored.
I’m not suggesting that we simply take our lumps now and have a depression induced by massive immediate cuts to government spending. What I’m suggesting is that it’s not perfectly obvious that the total amount of pain incurred by such a situation is more than the sum of pain that will drip, drip, drip over the next 10, 20, 30 years and ultimately lead to a worse crash upon our downgrade to C-grade bonds. If each short-term stimulus puts one more crack in the foundation, you’re just saving up your pain for the eventual default, not avoiding it. At some point, the money and credit run out.
Perhaps the real kicker is that the the only time you can get semi-serious plans for austerity (like right now) is when the argument for stimulus is greatest. This strikes me as a huge problem of democratic decision-making: it seems that the political will for austerity can only arise under the conditions in which it may actually be a very poor short-term decision: 1937, today, etc.
We have no sovereign debt problem in the US. Every time a GOP talking head says “We’re Broke” in some folksy tone, remember this: Every day for the past two weeks, we have seen the financial markets take money from equity markets and give it to the US government, saying “here is our money. Please go spend it.” If the fiscal multiplier during recessions is greater than 1 (and every single piece of evidence I’ve seen says that it is) then long term debt problems are absolutely no reason not to spend now. Unless, of course, the government refuses to collect the proceeds of its investments (that is, not tax).
This is not a question of short term spending creating more long term debt unless you make it one. We can borrow insanely cheaply right now, and we can easily write laws that allow us to spend now without contributing to the debt in the future. No drip, drip, drip unless you want it.
I agree, Tom, except for the second to last sentence: I see no evidence that democratic governments can control long-term spending effectively. The idea that you can “easily write laws” that create current stimulus and reduce long-term debt is, I think, not borne out by past examples. It’s *extremely* hard to bind future Congresses with current laws, and it’s one reason I’m skeptical of the Budget Control Act. The democratic pressure to not raise taxes and not cut spending makes short work of Deficit Reduction Acts passed many Congress ago.
At some point, the money and the credit will run out. I see no reason to believe that a modern democracy can make the adjustments necessary prior to that moment being imminent.
We might agree. I’m not sure. My point is that if you refuse to tax the proceeds from a fiscal stimulus right now (not down the road, right now) then yes, there’s a problem. There’s just no reason why you would have to refuse to do that. Maybe “easily” is the wrong word. We used to easily write those laws (we did that from the 1930s until the 1970s) just not anymore.
Maybe this is what I mean: in the current partisan climate you’re right, any stimulus will not be paid for. But that’s not a problem with democracy, or the inherent short-term/long-term tradeoffs of Keynesian management, that’s a problem with contemporary politic zaniness about taxes.