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Outlining the stimulus and deficits debate

I've been frustrated by the imprecision afflicting the debate over stimulus and deficits. Yesterday, for instance, saw a column by David Brooks that many viewed as anti-stimulus but in fact advocated the two forms of stimulus -- unemployment benefits and state and local aid -- presently on the table. So it may be worth spending a couple of minutes outlining the various positions in this debate. For the purposes of this post, I'm just going to assume all positions are held with total sincerity, as this is simply to outline different poles in the debate.

• Short-term stimulus/long-term deficits: This group believes that we need to spend now, and hard, but it doesn't necessarily believe that we need to worry about medium or long-term deficits. A lot of people are caricatured as holding this position. To my knowledge, very few do. Its most serious proponent is James Galbraith.

• Short-term stimulus/long-term deficit reduction: This is where Brad DeLong, Paul Krugman and most of the White House's economic team sits. This group sees a massive gap between what the country could be producing and what it is producing, near-10 percent unemployment, and record-low interest rates that both suggest deficits are not worrying the market and make borrowing remarkably cheap for the federal government. Stimulus is not only necessary, but feasible, and both fiscal and monetary tools should be employed.

As for the impact on the deficit, it's negligible, and temporary. The long-term deficit is what we need to worry about, and it's largely driven by health-care spending and demographics. It needs to be dealt with -- and the country took the first steps when we passed a health-care reform bill that included an excise tax on high-value health insurance and an independent commission to cut Medicare spending -- but it shouldn't be confused with stimulus.

• Short-term relief/long-term deficit reduction: This is where some of the moderate Republicans sit, and Ben Nelson is there with them. Unemployment insurance is necessary, they say, and maybe even some state and local aid. But no more increases in the deficit. Not a dollar. It doesn't do enough in the short term, and it freaks the market out about our ability to get our house in order over the long-term. Speaking of the long term, we need to do something about it. But there's no consensus -- and usually no mention -- as to what.

• Short-term austerity/long-term deficit reduction: This is where more conservative Republicans tend to cluster. In this telling, we're already Greece -- we just don't know it yet. The only answer is immediate cuts in spending, though there's no willingness to consider tax hikes. The long-term picture is much the same: sharp, albeit mostly theoretical, cuts in spending. Insofar as any specifics are mentioned, it's usually the one John Boehner let slip to Dan Balz: A small increase in the age at which people get full Social Security benefits. A few Republicans, like Paul Ryan and Tom Coburn, have been more specific about their preferred spending cuts, but their ideas haven't gotten much traction.

Readers know that I trend toward short-term stimulus and long-term deficit reduction. In particular, I'd like to see rapid extension of unemployment benefits and fairly generous aid for state and local government. I'm not convinced that many other stimulus policies could get into the system very quickly, so I think monetary policy is a better bet.

I'd be happy to pair that with long-term deficit reduction, but a serious accounting of debt numbers leads you to the conclusion that stimulus isn't a major factor in either direction. At the moment, the federal debt is about $13.2 trillion. To put the stimulus in context, $200 billion in further spending would amount to 1.5 percent of our debt. Say what you will about it, but stimulus is not what created the problem, and given that the real issue is the speed with which debt is projected to accumulate in the future, forgoing it is not part of the solution.

By Ezra Klein  |  July 7, 2010; 10:00 AM ET
Categories:  Budget  
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Next: Unemployment benefits are not a deficit issue

Comments

It seems to me that there ought to be a compromise between groups 2 and 3 (I assume group 3 is Nelson, Snowe, Collins and Brown) which would be 62 votes to do something. That would be to put money into benefits and state and local government offset by spending cuts in years 4 and 5 of the current 5-year budget resolution. Also move up some infrastructure projects to FY2011 that might otherwise occur in FY 2013 and 2014. Am I missing something?

Posted by: gregspolitics | July 7, 2010 10:20 AM | Report abuse

David Leonhardt of NYT had a good list of what things can be done - http://www.nytimes.com/2010/07/07/business/economy/07leonhardt.html?ref=business

Even if half of those things are done, we will be better.

Further, I think Ezra is ideological and blind when he advocates "...fairly generous aid for state and local government..." because this is a perfect opportunity to impost discipline on State and Local governments if money is to flow from Washington to State Capitals. It does not make sense Fed helps Sacramento when Cal State refuses to control it's high public labor cost, its pension and its health care costs.

Same applies at Fed level too. Joe Klien has put is rightly - why have expensive public pension & health care benefits for Public jobs when there is no competition from Private job opportunities and people will die to get a public sector job. Even Penn. State Govorner Rendell gets it.

We need across the board containment of public labor cost burden (wages, pension & their health benefits) if American Public at large is to take on more debt for short term spending. Spending also have to be more widely beneficial like - infrastructure, edu. services, etc. instead of an individual entitlement restoration.

Posted by: umesh409 | July 7, 2010 10:22 AM | Report abuse

every sensible person knows 1 and 4 are nuts.

The issue is between 2 and 3.

Also what you forget is how people at 2 get to 2 and how people at 3 get to 3.

For example, I'd expect Krugman et al would welcome a further increase in taxes on the rich to put us much closer to the european model than we currently are while many in 3 (myself included) would love to use this as a time to say let's not go there and rein in public entitlements (as Umesh mentions above).

Don't forget how you get there (tax increase or spending cuts) because that's an important part of the puzzle.

Posted by: visionbrkr | July 7, 2010 10:30 AM | Report abuse

I applaud Ezra for trying to bring rationality to the discussion, but he left out an important part of the argument.

Early in the stimulus debate, President Obama said that ALL spending is stimulus. This is true - BUT - all spending is not good stimulus.

Good stimulus provides a reasonable return on investment, bad stimulus is just an expense that can never be recovered. The worst stimulus is propping up government entities whose budgets were unwise to start with. Too often that merely leads to "bad" baselines that will contribute to future deficits in both the states and federal government.

Posted by: pilsener | July 7, 2010 10:44 AM | Report abuse

I agree that #2 makes sense, but you criticize people in category #4 for not being explicit enough about their ideas for long-term deficit reduction. That said, you don't outline your ideas either.

Those who followed you during the HCR debate know that you do have ideas about the long-term deficit, but how realistic are these to accomplish politically now that health-care reform has passed and probably won't be touched by Congress again for a long time?

There's letting some or all of the Bush tax cuts expire, but again -how feasible is that?

What are your ideas for long-term deficit reduction to pair with short-term stimulus?

Posted by: madjoy | July 7, 2010 10:59 AM | Report abuse

Does anyone in the category 2-4 use specifics about what you'd like to see cut from long term spending or what taxes you'd like to see raised? Sure, the Republicans by and large don't, but neither by and large do Democrats. What should the tax system and Medicare/Medicaid look like in 2020?

Posted by: windshouter | July 7, 2010 11:04 AM | Report abuse

When considering only the positions held by the current federal government, one sees only the four schools of economic thought aptly summarized above; however, this merely underscores a theme in a previous message ("the papers that sound right are, unsurprisingly, the ones that accord most closely with our view of the world.") Look beyond Washington -- look beyond the existing central authority!

What about the school of thought that embraces federalism -- the school of thought that believes in a multi-layered government in which a small and benign central authority provides defense and a guarantee of rights while diverse states pursue their own agendas? In other words, what about the school of thought that says the central authority should operate in a manner which causes it to shrink? Such a view is held by no member of the current central authority -- present Members of Congress want to hold the economic strings because doing so gives them power.

A similar struggle is taking place in the EU, where the central authority wants to penalize states which operate primarily via borrowing ("budget deficits"). As a matter of monetary policy, the EU central authority finds power in being the controller of such borrowing, while member states (the UK, for example) bristle at the potential loss of independent spending ability.

The fatal flaw in economic policy [and economic thinking] seems to be reliance on centralization of authority -- the putting of all one's eggs into a single rickety basket (to borrow a phrase from a long-forgotten Supreme Court decision).

Posted by: rmgregory | July 7, 2010 11:05 AM | Report abuse

Something I don't see covered in this debate: what will be the effect of the state aid on the attempts to rein in state spending? The big states like NY, CA, and IL, have intractable budget problems that their legislature's keep papering over with short term fixes. Is it enough to think that we can give them this short term (dare I say) bailout and trust that they're going to get their house in order as the economy improves?

Posted by: quannw | July 7, 2010 11:19 AM | Report abuse

"Readers know that I trend toward short-term stimulus and long-term deficit reduction. In particular, I'd like to see rapid extension of unemployment benefits and fairly generous aid for state and local government. I'm not convinced that many other stimulus policies could get into the system very quickly, so I think monetary policy is a better bet. "

So presumably you wouldn't have a problem with redirecting unspent stimulus money from other projects that haven't been started yet to these priorities?

Also, "To put the stimulus in context, $200 billion in further spending would amount to 1.5 percent of our debt. Say what you will about it, but stimulus is not what created the problem, ". The $200 billion is just the latest round this year. I believe that the total stimulus spending since 2009 is somewhere on the order of $1 trillion, including the original stimulus bill and the other unemployment extensions and other aid passed since then.

Posted by: jnc4p | July 7, 2010 11:37 AM | Report abuse

Long-term deficit? Problem solved, as far as it can ever be. According to last week's CBO report, the long-term budget outlook is more or less in balance with revenues. There is no long-term deficit.

This current long-term budget balance depends on Congress not doing anything to upset it -- no extension of the Bush Tax Cuts, no loopholes to anybody else. To be sure, the CBO assumes that politicians keep their current word, and also the CBO couldn't analyze Obamacare more than 20 years out -- perhaps they even underestimate its savings.

What is the response to this? That we don't believe it, that we can't trust politicians to keep their word, that they will blow the long-term deficit up again? Well, don't ever vote for anybody who would make this argument: that's the person you cannot trust. Because long-term balance has been more or less accomplished! Vote for PAYGO -- long-term spending matches long-term revenues -- from here on out.

Posted by: Lee_A_Arnold | July 7, 2010 11:53 AM | Report abuse

The state of Ohio is a perfect illustration of Klein's flawed thinking.
With bi annual budgets that must be balanced the governor and his team have crafted a way to get by in 2010-one time federal stimulus dollars.

But now that chicken has come home to roost. For the next two year period the looming deficit is 8 BILLION. Where is that money to come from? Should the citizens of states that behaved with fiscal probity now be on the hook to bail out states that are spendthrifts?

This is just part of the never ending liberal treadmill. The transfer of money from productive, responsible people to non productive, irresponsible people is at the core of virtually every liberal "solution".

This is no different.

We have high hopes that our current embarrassment of a govenor will be ousted after one term and the people can once again gain control of state spending. The civil service unions will boo hoo, but hey, Mr Klein, it's not Greece is it?

Posted by: skipsailing28 | July 7, 2010 12:19 PM | Report abuse

umesh409,

I think you are spot on. What Brooks said, and Ezra ignored, is that aid to states is supportable "if" its coupled with requirements that states get their house in order. So if California can squeeze real concessions out of its public workforce labor unions, then Uncle Sam can help out. If not, then federal aid is merely a delaying tactic, and we will be right back where we started a year from now.

Posted by: WEW72 | July 7, 2010 12:27 PM | Report abuse

I don't disagree about giving tax breaks to American Based companies, however, there are two specific tax breaks that became the loopholes by which major corporations have bled 8 million jobs from this country and need to be closed down.

Right now both the Republicans are waving everything they can in front of you so you ignore the second half of the unemployment extension AND closing tax loopholes bill.

A study done by the Federal Reserve to see why tax incentives weren't performing as well as they historically have found that they were working fabulously at stimulating the economy, only it wasn't the American Economy that it was stimulating.

Originally set up to allow American Based companies that were paying tariffs and taxes on foreign materials needed for production of product in the US, (ie: You are an American Based Company making teak tables, you pay corporate taxes, your employees pay federal taxes, and the goods are taxed we won't tax you again for the goods received into an American based company from a foreign country), it's now being used to bring goods fully produced in foreign countrys with cheap labor back to the US to be received by an American company tax free.

This means the employment and economic stimulus shifts to the countries where the goods are made and American Corporations are making large profits. (Now don't think teak tables, think ipods, computers, telephones, clothing, etc, don't think mom and pop think IBM, GE, APPLE, HP, LOCKHEED MARTIN, THE IRS...)

This is the basis for a jobless recovery and the loss of over 8 million jobs to offshore production and 14+Bil dollars a year in tax and tariffs alone, not to mention your tax payers that can no longer pay into your tax system.

Mom and pop aren't going to bring back the 10 million jobs to bring us back to the employment levels of the Clinton era you need major corporations.

The other program was designed again to allow American Based companies to move their money without tax recourse to pay for these goods they were shipping from foreign countries. This has turned into a tax shelter for major corporations. This has cost us hundreds of billions in tax dollars.

I agree with Olympia Snowe, we can't go retroactively to charge these companies, but to close this loophole now with no grandfathering would allow any incentive program to flourish, right now it's like pouring water into a bucket with a hole in it.

Major Corporations that support gvmt don't want you to look at that, neither do the politicians whose campaigns are supported by it. But if you want a direct reason why there is 15 million unemployed with only 3 million jobs available thus creating a need for deficit spending...look there.

Posted by: smg71 | July 7, 2010 1:00 PM | Report abuse

There is no "need", whatsoever, for deficit spending, and there never has been. In fact, there is no EXCUSE for deficit spending.

Deficit spending is simply code for living on credit, robbing Peter to pay Paul; in short, fiscal irresponsibility. That kind of behavior inevitably leads to financial collapse, and the last thing we need right now is for the government to plunge headlong back into the bad old ways of thieving from the future to pay for spending sprees today.

Except, oops, it has already done so.

Posted by: jegiles | July 7, 2010 2:21 PM | Report abuse

The republican’s weren’t worried about the deficit when that big insurance company and their friends the Wall Street execs were giving themselves bonuses with taxpayer money!!! Next election – let Congress feel the sting of the unemployment lines!!! No more raping and pillaging the middle class!!! – How many years have you paid taxes? 30? 40? Your government bails out bankers and Wall Street execs using your tax dollars – but unemployment is allowed to expire? What happened to "by the people" or "for the people"? Or are the big campaign contributors the only "people" who count to congress? They are playing games AGAIN FOR THE THIRD TIME while you are wondering how to feed your kids? Figure it out! Malfeasance – Failure of a public official to perform their duties!!! Next Election MAKE YOURSELF MATTER BY VOTING!!! 10% unemployment carries 10% of the vote! Use it!! Fire them all next election or recall every Congress member NOW for Malfeasance – Failure of a public official to perform their duties!!! Next Election - Lets get people elected who actually represent all the People- this current congress represents only special interest groups!

Posted by: agh1 | July 7, 2010 2:29 PM | Report abuse

Jegiles: "There is no "need", whatsoever, for deficit spending, and there never has been. In fact, there is no EXCUSE for deficit spending."

This is incorrect. England was using deficit spending successfully in the 1700's, and the full reasoning was understood by the year 1829:

http://delong.typepad.com/sdj/2010/06/is-macroeconomics-hard.html

Posted by: Lee_A_Arnold | July 7, 2010 4:44 PM | Report abuse

"I'm not convinced that many other stimulus policies could get into the system very quickly, so I think monetary policy is a better bet."

Except conventional monetary policy isn't working at all right now. The only monetary policy that has a prayer at the moment is fairly massive quantitative easing. If that is what you mean, you should say it. Because more conventional monetary policy at the zero bound is advocacy for doing nothing.

Posted by: zosima | July 7, 2010 10:48 PM | Report abuse

skipsailing28: "For the next two year period the looming deficit is 8 BILLION. Where is that money to come from? Should the citizens of states that behaved with fiscal probity now be on the hook to bail out states that are spendthrifts?"

At least some of the money comes from growth which will be more substantial when the recovery gains steam. Much of the current deficit problem is from the economic collapse, so the first priority is to get the economy back on track. The rest can be dealt with later.

As for responsible v. spendthrift states, David Leonhardt in the NY Times had a good idea for allocating future federal funds to states that had responsible long-term fiscal plans.

"The transfer of money from productive, responsible people to non productive, irresponsible people is at the core of virtually every liberal 'solution'."

Again with the "responsible" people against the "non productive" ones. Plenty of people are desperately looking for jobs, but the jobs just aren't out there. I've read that research has shown that unemployment benefits have only a minimal impact on the "natural" unemployment rate. If it were so attractive to be unproductive and have benefits showered on you, you'd see much higher unemployment rates than we have today, and a much less angry public. But people are angry because they can't find jobs--and the private sector isn't producing them on its own right now.

Posted by: dasimon | July 8, 2010 12:16 AM | Report abuse

My position is that the long-term deficit is not a policy tool.

The deficit in the far future will depend mainly on the state of the economy in the far future. As I stated in my testimony to the deficit commission, a deficit caused by high unemployment can be cured only by getting rid of the unemployment.

Postwar history plainly supports this view.

Cutting Social Security or Medicare now, with effect in the future, will have no beneficial effects. Especially it will not lower interest rates, which are after all already very low. This much should be obvious to anyone.

For this reason, I strongly oppose the current drift toward making Social Security into the sacrificial lamb of "long-term deficit reduction."

Further, CBO's projections for future deficits are (as I also summarized in my testimony) a mish-mash of inconsistent assumptions. Basing any policy whatever on those estimates makes no sense.

I could cite a solid community of professional economists who share these views, but the issue should be thought through on the merits, and not on the basis of which names happen to hold which opinions.

James Galbraith
The University of Texas at Austin

Posted by: Galbraith1 | July 8, 2010 1:11 AM | Report abuse

@Lee_A_Arnold; With all due respect to John Stuart Mill, he was looking at the wrong side of the problem.

Certainly, excess demand for financial assets can occur as part of a recession, but it is not a cause. Excess demand for financial assets happens AFTER a recession begins, as people lose confidence and retreat to stable assets, changing their risk-preference to strongly prefer stability instead of profit. In good times, most people don't do that; it doesn't make sense, because even a little inflation will erode their assets.

What actually causes the market slump in the first place is massive, widespread capital misallocation. Why is capital misallocated? Because investors and banks have received false price signals. And from where do these false signals proceed? From the central bank; that is to say, government intervention in the market.

Deficit spending can certainly be used to evade economic damage for a short time, but evading it now only makes it worse in the future. You can't get wealth for nothing, and everything has to be paid for eventually. Deficit spending merely transforms some of the economic damage into debt and shoves it off for a future generation to suffer from, with interest. It would be better to grit our teeth and take our lumps now.

Posted by: jegiles | July 8, 2010 8:06 AM | Report abuse

"Readers know that I trend toward short-term stimulus and long-term deficit reduction. In particular, I'd like to see rapid extension of unemployment benefits and fairly generous aid for state and local government. I'm not convinced that many other stimulus policies could get into the system very quickly, so I think monetary policy is a better bet."

Ezra, i don't get this line of reasoning. both support for the states and extending unemployment benefits would essentially extend parts of the 09 stimulus, right? Take them away, and unemployment increases. If we keep them--as we should--why would unemployment decline? The measures you call for seem necessary but insufficient; adding loose monetary policy to them would be "pushing a string," as the saying goes. We have massive infrastructure needs, an economy disastrously dependent on dirty, finite fuel sources, rock bottom interest rates, and millions of un- and underemployed. Green stimulus, now! http://www.grist.org/article/food-feed-the-economy-or-starve-it-the-answers-clear
You may respond that a robust stimulus isn't politically feasible; but that's different from what you argue above.

Posted by: TomPhilpott | July 8, 2010 3:44 PM | Report abuse

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