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Posted at 11:38 AM ET, 03/ 9/2011

Will we kill the recovery?

By Ezra Klein

There are economic risks we can’t easily control: an oil spike due to instability in the Middle East, say, or the bubble that is China’s real estate market bursting. There are policies we can put in place to mitigate these risks or respond to their aftermath, but we can’t totally eliminate them.

The same can’t be said for the risk of prematurely slashing federal spending, which is playing a crucial role propping up economic demand, or keeping monetary policy too tight. But as David Leonhardt writes today, “no branch of the federal government seems to be taking these risks seriously enough.” Republicans want to sharply cut back on federal spending this year -- an approach that will do little for the deficit but much to impede the recovery. Democrats seem content to let the idea that we need to sharply cut back on federal spending win the day, with their limited objection being that we shouldn’t be too aggressive about cutting spending on education and scientific research. And the Federal Reserve is, well, the Federal Reserve: It congratulates itself for pursuing a more expansionary policy than it’s attempted in decades even as it holds to a vastly less expansionary policy than the current moment demands.

And then there’s the economic uncertainty created by the GOP’s willingness to shut down the government or default on the debt if Democrats don’t sign onto harsh spending cuts that will reduce growth and employment through the rest of 2011. These various deadlines will either make the policy that averts them worse, as Republicans have more leverage against the Democrats, or if they actually come to pass, the resulting chaos will spike interest rates and drag the economy down.

So let’s say we get a little bit of column A and a little bit of column B. The price of oil jumps, the government pursues a contractionary fiscal policy for the rest of 2011 and we see a temporary shutdown but not a default. That’s more than enough to stifle our nascent recovery. And a substantial portion of it will be our fault.

By Ezra Klein  | March 9, 2011; 11:38 AM ET
Categories:  Economy  
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Comments

"The same can’t be said for the risk of prematurely slashing federal spending, which is playing a crucial role propping up economic demand...."

...especially true when one also takes into account the reductions in spending by state and local governments.

Posted by: Patrick_M | March 9, 2011 11:51 AM | Report abuse

It's a brilliant political strategy for the GOP in advance of 2012. Intentionally tank the recovery, build resentment, gain seats and maybe the Presidency. Is this too obvious? And if so, is that why nobody seems to be commenting on it?

Ezra, you've done a great job at calling a spade a spade with the Republican economic policy proposals the last few weeks, but I just can't see why the Republican congressional leadership deserves any benefit of the doubt here.

Posted by: HerooftheBeach | March 9, 2011 12:37 PM | Report abuse

Ezra, your statment is wrong on it's face.

"So let’s say we get a little bit of column A and a little bit of column B. The price of oil jumps, the government pursues a contractionary fiscal policy for the rest of 2011 and we see a temporary shutdown but not a default."

There is nothing contractionary about slowing the GROWTH of spending. That is all that will result. The budget itself and the budget deficit is growing, not contracting. Furthermore, the monetary policy is still accomodative and will remain so for the rest of the year.

The real interest rate is currently negative, and the Fed is currently buying 70% of all Treasury securities.

Only an absurdist fool like Leonhardt could argue that:

"And the Federal Reserve is, well, the Federal Reserve: It congratulates itself for pursuing a more expansionary policy than it’s attempted in decades even as it holds to a vastly less expansionary policy than the current moment demands."

Short of delivering money in wheelbarrows to every citizen, the Fed has shot it's bolt.

BTW I didn't even go into the fact that Federal policies designed to impair exploration and development of oil resources play greatly into the hands of $100 a barrel oil. If you wanted to spur economic growth and employment, opening up off-shore drilling and in Alaska would not only do that, but would act as a check on the speculative percentage in the price of oil.

(But I didn't say that because I didn't want to be accused of piling on! LOL)


Posted by: johnmarshall5446 | March 9, 2011 12:42 PM | Report abuse

Yes recovery will be killed, that seems more or less now certain. For a reason more than 2/3 Americans think that country is on the wrong path - Reuters poll.

I think Obama and Daly would realize the fundamental problem of playing 'placate the business' playbook. Obama's core failure here is his unwillingness to tell Americans unless Congress is ready to 'touch' entitlement, cutting tomorrow's growth today while cutting discretionary spending will not solve our problem.

Obama is 'still playing Washington Games' and is not coming clean to Americans. With his 'half smart' strategy he is willing to risk America's Recovery as well as his re-election chances.

Does not seem like there is any hope; considering even more bad folks and cynical politics on GOP side.

Posted by: umesh409 | March 9, 2011 12:53 PM | Report abuse

johnmarshall5446 writes "Federal policies designed to impair exploration and development of oil resources play greatly into the hands of $100 a barrel oil."

It seems hard to imagine that the US has sufficient oil resources exploitable at low enough prices to put a substantial dent in the world market. There's an oft-cited USEIA report on how much we could increase off-shore oil and gas production by opening up all currently closed areas, and it's not that impressive and entails a very long lead time.

http://www.eia.doe.gov/oiaf/aeo/otheranalysis/ongr.html

So many other places on the planet have so much more oil than we do that it seems unrealistic to believe that the world price of crude could be significantly affected by tweaking our own incremental contribution.

If you can direct me to analysis that suggests otherwise, I'd be grateful.

Posted by: DavidinCambridge | March 9, 2011 2:05 PM | Report abuse

We need revenue that "our elected" representatives just will not address and it's there!!
THINK ABOUT THE FOLLOWING, if possible with an open mind!!

Has either political party had the "guts" to considered or do any of the following???:

Eliminate tax deductions given to certain large corporation that have not paid any taxes in years. Like Bank Of America, Price WaterhouseCooper, ITT, Bechtel, Boeing, and GE for example.

Eliminate those Oil Subsidies for these large international oil companies.
These profitable companies pay almost no tax & get help from out tax dollar.

Eliminate all those tax & tariff reductions plus "breaks," that Congress voted large companies that are taking American jobs over seas. Also, just mirror the tariffs & taxes that countries like China, Japan, South Korea and the European Countries are putting on American goods & services.

Rein in the large Banks & Wall Street firms by reenacting The Glass-Steagall Act; it just might bring some order into our financial institutions and markets. Oh yes this worked until it was eliminated under President Clinton.
Of course these financial firms do not want this done.

Plus just so Congress shares in the pain, just eliminate the special health care & retirement plans that Congress voted itself. Social Security can be stabilized if Congress was part of it and stopped raiding it!!

So far all I see is cuts that would hurt the middle class ........ if this continues, there will be no middle class to "put the burden" on. Then what??

Whatever happened to that government by the people for the people?
It seems to have vanished........ guess we would need lobbyists to throw money at these career politicians!!

We now have a Cashrarocy, instead of a Democracy in this country.
The best government that the moneyed can buy!!

A BALANCED BUGET IS VERY POSSIBLE ........

Oh the uncollected taxes from the above sources are estimated to be about 14 trillion dollars!!

Posted by: bkarpus | March 9, 2011 2:16 PM | Report abuse

Actually, Ezra, the house of cards is falling very fast. Any there is nothing the Fed or your concern for a lack of spending can do about it. Only a truly concerted effort to address the debt, along with retrenchment of our world police status may help. This time, instead of the Japanese, perhaps the Arabs or the Chinese will own Pebble Beach or mid-town Manhattan. These daily posts are starting to get very old to justify something that everyone else knows is not working.

Posted by: Gooddogs | March 9, 2011 2:37 PM | Report abuse

Actually, Ezra, the house of cards is falling very fast. Any there is nothing the Fed or your concern for a lack of spending can do about it. Only a truly concerted effort to address the debt, along with retrenchment of our world police status may help. This time, instead of the Japanese, perhaps the Arabs or the Chinese will own Pebble Beach or mid-town Manhattan. These daily posts are starting to get very old to justify something that everyone else knows is not working.

Posted by: Gooddogs | March 9, 2011 2:45 PM | Report abuse

David:

Sorry, you simply don't know what you're talking about.

It entails a long lead time, because we never actually start drilling!

Why don't you use the same argument toward alternative energy? We're supposed to heavily invest today in technologies that are absurdly behind fossil fuels both in utility and cost, because we'll "need them tomorrow", and we're told technological advances "will happen along the way".

As far as the US, we actually have one of the world's largest oil resources in the Midwest, in Colorado shale. It is estimated to have anywhere from 800 billion to 1.5 trillion equivalent barrels. It's dirty, and relatively expensive, but why not apply the alternative energy argument and start experimenting with it to see what advances we can make?

Posted by: johnmarshall5446 | March 9, 2011 2:49 PM | Report abuse

Read up on the latest crop of millionaires. Just about all of them are in the House, and are newly elected.

They will never do what is right for the country. NEVER.

Posted by: taroya | March 9, 2011 2:54 PM | Report abuse

johnmarshall, THE ENTIRE UNITED STATES HAS LESS THAN 10% OF THE WORLD'S OIL.

That is a fact, and has been a fact for a very long time now.

Not so long ago, the world claimed that we would never put a man on the moon.

The only reason we don't have better alternative energy is because of idiots like you. You are not American, you support Saudi Arabia and all of its policies with your attitude. You do it gladly.

Why don't you try supporting your own country for a change of pace?

Posted by: taroya | March 9, 2011 2:58 PM | Report abuse

Americans need to stop being such cheap skates and pay more taxes. Yes more taxes. Taxes are at their lowest in sixty years. Taxed Enough Already? Not if we can't keep good roads to drive on and move product from here to there,or good schools to make smart productive employees. Do we want a great country or not?

Posted by: SETinVA | March 9, 2011 3:11 PM | Report abuse

taroya:

There's no point in arguing with you. You simply don't know what you're talking about.

Instead of stating incorrect facts, why don't you simply look up shale oil? Also, we have literally no idea what is available offshore, because we can't even drill exploratory wells to find out in most areas.

Posted by: johnmarshall5446 | March 9, 2011 3:29 PM | Report abuse

I wonder how many Republicans actually hope their slash and burn tactics harm other Americans. It is so bizarre to hear Fox News anchors cheering bad economic news. I just can't understand them.

Posted by: danw1 | March 9, 2011 3:53 PM | Report abuse

The consequences of a federal default on its debt is far worse than "higher interest rates". Think Lehman on a cosmic scale.

Posted by: quarkgluonsoup | March 9, 2011 4:39 PM | Report abuse

Let's not loose perspective here. The maximum cuts anyone is talking about in the Federal budget is $61 billion. That's just not significant in a $14+ trillion economy. Spending (or not spending) $61 billion will have virtually no impact on the economy this year. What it DOES do is signal to the markets whether we are serious (or not) about tackling the deficit. A down-payment, so-to-speak, on the really tough cuts ahead.

Yesterday, the most serious issue facing the economy was lack of demand and liquidity in the financial markets. The government and Fed were right to step in. But those problems are either behind us or receding. The NEXT issue is going to be the level of debt and the interest that must be paid to support that debt. It's about time we recognized this change, and started acting on it.

Posted by: Steve-2 | March 9, 2011 4:43 PM | Report abuse


Klein meet Myerson. Explain to him the nature of the economic recovery we are running the risk of killing.

Posted by: edbyronadams | March 9, 2011 4:55 PM | Report abuse

Steve:

Stop talking common sense. You'll only stand out in the crowd! LOL

Posted by: johnmarshall5446 | March 9, 2011 5:05 PM | Report abuse

"What it DOES do is signal to the markets whether we are serious (or not) about tackling the deficit. A down-payment, so-to-speak, on the really tough cuts ahead."

Let's unpack this logic.

On the one hand, the cuts are trivial--meaningless in the context of the federal debt and the overall economy. On the other hand, by doing something so trivial, we send a signal that serious things will happen ... at some future undetermined time. And it is "the markets" to whom this signal is sent, so it will be the investors who will get excited and prosper, as opposed to actually growing the economy itself.

The reality is that doing trivial things only signals that you are doing trivial things and, if anything, are ignoring the real forces that have built this debt over the past decade. Bush tax cuts, unfunded Medicare Part D, two unfunded wars, and an economic meltdown courtesy of Wall Street and its casino "markets" in derivatives, credit default swaps, etc.

The real signal that is being sent is simply that Washington doesn't care about closing the deficit gap, they care about dismantling programs that the wealthy interests in this country do not support, and they care about continuing to keep American wealth off the hook when it comes to paying taxes. Yes, the markets may get excited about that.

Posted by: Patrick_M | March 9, 2011 5:30 PM | Report abuse

So Patrick_M, do you believe the deficit is a problem, or not? And if so, what would you do?

Posted by: Steve-2 | March 9, 2011 5:37 PM | Report abuse

"Will we kill the recovery?" Obama beat us to it..

Posted by: wewinyoulose1 | March 9, 2011 5:46 PM | Report abuse

Me, I would:

1. Take $20 billion out of the Defense budget
2. Eliminate crop price supports, especially those going to support ethenol
3. Add 5 cents/gallon to the gas tax, and
4. reduce discretionary spending by whatever remains to reach the $61 billion goal set by the Republicans.

Trivial this may seem to you, but a journy of a thousand miles starts with filling the gas tank, or something like that.

Posted by: Steve-2 | March 9, 2011 5:48 PM | Report abuse

"Will we kill the recovery?
By Ezra Klein"

Better to have continued short-term pain then live with a life-time of continued weakness in the American economy.

Why is Klein so short-sighted?

Posted by: the5wins | March 9, 2011 6:03 PM | Report abuse

"So Patrick_M, do you believe the deficit is a problem, or not? And if so, what would you do?"

...sigh. YES, I believe the deficit is a problem.

I would undertake serious, systemic reforms to control the growth in the costs of health care, to rein in the costs of Medicare and Medicaid.

I would overhaul the Department of Defense and reduce our militray expenditures to what it actually cost to ... you know ... DEFEND the USA from attack.

I would at the very least go back to the Clinton era tax rates, and preferably make a set of additional progressive brackets at the top end, while closing loopholes.

I would do everything possible to stimulate economic growth from the bottom up by putting people to work, rebuilding the middle class and thereby building demand, and I'd tell me fellow citizens to give up on the "zombie idea" that cutting taxes on wealth leads to wealth trickling down to the rest of the society.

Posted by: Patrick_M | March 9, 2011 6:04 PM | Report abuse

Well, Patrick_M. I agree with most of your plan. Except that part about additional taxes for the rich. I don't believe in trickle-down. I don't know anybody that does. What I do believe is that a system that allows a person to keep what they earn generally results in the the best standard of living for the most people. That's worked here. That's worked in China over the past 20 years (half a billion people out of poverty). Other systems, not so good.

Admitedly, our current tax system is a mess of loopholes that benefit narrow, special interests. Let's not stop at the Clinton era tax rates. Let's go back further, to the Reagan era, the last time we really "cleaned up" the tax code, eliminating loopholes and reducing rates for everyone. I'm middle class, and I remember the years that followed, the 80s and the 90s, as being pretty good years (OK, well, things got kinda crazy there in the late 90s, but the rest of it was good).

Posted by: Steve-2 | March 9, 2011 7:37 PM | Report abuse

A year from now, two years from now, three years from now, when the economy is still sluggish and growing at 2.5-3.0%, Klein will still be making the same argument. Can't cut spending now; we'll wreck the recovery. Unfortunately, at the current pace, we're adding 10% of GDP to the debt every year, interest payments are increasing, and at some point Uncle Sam loses credibility in the bond markets, and long term interest rates will soar. We're already pretty much completely dependent on foreign national banks to buy our bonds; the Fed is busy monetizing the rest.

If we don't reduce the deficit now, when do we? The economy has been in "recovery" for what, close to two years now? We can undergo some pain now, or almost unimaginable misery down the road.

Posted by: publius29 | March 9, 2011 7:45 PM | Report abuse

Well, thank you for the Socialist/Communist perspective Ezra Klein.


By the way, have you taken my advice and actually taken an economics class? Econ 101?


Ezra Klein, an economic illiterate, is going to instruct Americans on Marxist economics.

Thanks, but no thanks Ezra.

Posted by: FormerDemocrat | March 9, 2011 8:01 PM | Report abuse

"I don't know anybody that does. What I do believe is that a system that allows a person to keep what they earn generally results in the the best standard of living for the most people."

I believe that too, Steve. I don't want America to be over-taxed. I am not suggesting that we return to a 90% rate on the top bracket, like we had under that famed socialist, Dwight David Eisenhower (who presided over some pretty fine economic times compared what we have experienced lately).

But I assume that you'd agree that tax rates should be progressive? And (if so) it is difficult to argue that a billionaire should pay precisely the same rate as an upper middle class couple making $250k per year.

There is a reasonable middle ground when it comes to taxing wealth. We can stand some additional bracketing at the top.

My main point is that nipping away at marginal discretionary spending has absolutely nothing to do with real deficit reduction. It is a complete waste of time, and it is a diversionary tactic that keeps us from dealing with the deficit's true causes. The real purpose is simply to dismantle and defund the various little programs that the Republican constituency does not like, while preserving the deficit busting tax cuts, wasteful military spending, and the sky-high profits in the for-profit health care industry which actually account for the deficit gap.

Posted by: Patrick_M | March 9, 2011 8:10 PM | Report abuse

(I know, TLDR.)

I'm with SETinVA. I would be glad to pay more taxes. I cheered then-Governor Mark Warner when he raised the sales tax half a point to a shocking 5% (horrors!), which then helped pay for much of Virginia's budget. (True, sales tax hurts the poor more proportionally than the rich -- but if you can't get enough revenue from the wealthy to run a government, you have to find it somewhere.) Payroll tax, income tax, inheritance tax, property tax... whatever. Just raise it.

We all love to place those who lived during WWII on a pedestal -- and they deserve it, because they all took part in shared sacrifice. Whether it was soldiers overseas, women in the factories, kids collecting tin cans for the war effort, or people just serving their community's needs, everyone pitched in.

But now it's every man, woman, and child for themselves. We all want to collect Social Security, benefit from Medicare, seek and destroy terrorists' hideouts, improve our local schools (but not those of the *&@!#s in other parts of the state), develop new energy sources (green, oil, gas, whatever), and impose our individual social and/or religious beliefs on the other 309 million Americans, but no one wants to pay for it.

We use any excuse to defund government programs. If the Dow is down, oh no! Time to cut taxes because we're all broke! When the Dow rises, phew! Now we can cut taxes since we don't need all those pesky entitlements anymore. The Republicans lead the way and the gutless Democrats follow because some polling data shows that people don't like paying taxes. We don't like paying cell phone bills either, but we're not about to cut our data plans to save 30 bucks a month.

Enough. Every hard piece of data shows that the spending cuts proposed -- though monumental in The Real World -- are miniscule in the states' and federal budgets. And in nearly every state, those cuts are causing serious problems, not just to the roads (potholes, waaaah!), but to the most vulnerable: children whose schools can't help them, the mentally disabled who are losing the assistance they need to survive in the outside world, and the innocent destined to become prisoners because their court-appointed attorney is too overworked to help them. But I digress.

Touch my Medicare. Mess with my Social Security. Raise my retirement age. (I'm a typical American, so I don't know how to save enough to retire at 67, anyway.) Raise my taxes. That's the only way to have any significant effect on the deficit without causing serious damage to the welfare (get it?) of this country.

Please raise my taxes. I pay federal, state, county, gas, cigarette, income, and property tax (hope I'm not forgetting anything), and I would rather pay more than gut valuable programs and put more people out of work. I would rather do my share.

Posted by: dagrubb824 | March 9, 2011 8:42 PM | Report abuse

I certainly hope that Barack does not get "Cartered".

To be "Cartered" is to be blamed for an economy that was not your fault and then lose an election to a candidate with more bluster than substance.

If the economy does not pick up, the Republicans will reclaim the entire government in a mere 4 years.

Posted by: avraamjack | March 9, 2011 8:48 PM | Report abuse

This is absolutely ridiculous! Last month (February 2011) the federal deficit was $233 BILLION. That means in one month alone the federal government spend $233 BILLION more than it took in. And the Republicans and Democrats are fighting over spending cuts of $61 BILLION for an ENTIRE YEAR????

If this was a company or a household, they would be belly up at this point. And that's exactly where we are headed - as soon as the rest of the world realizes that we will never pay back our debts and that the dollar is essentially worthless. The joke is on you America - we have been totally screwed by the Republicans and Democrats in order to save their Bankster buddies.

Posted by: cselby1 | March 9, 2011 8:53 PM | Report abuse

Good Grief EZRA,
The bills are outnumbering the willingness to py them already.

Preppers Depression understand that shoving the depression ends the fatty Fed sooner, hence deletes spending levels.
China won't lend , so they can't spend.

Posted by: dottydo | March 9, 2011 10:21 PM | Report abuse

"Sorry, you simply don't know what you're talking about."

That's too bad, johnmarshall. I guess all those years I spent getting a doctorate in fuels engineering was a total waste. We really need to do something about our educational system that produces so many ignorant PhDs. A topic for another discussion, I guess.

"Why don't you use the same argument toward alternative energy? We're supposed to heavily invest today in technologies that are absurdly behind fossil fuels both in utility and cost, because we'll "need them tomorrow", and we're told technological advances "will happen along the way"."

I didn't say anything about alternative energy, all I was doing was calling into question your assertion that "if you wanted to spur economic growth and employment, opening up off-shore drilling and in Alaska would not only do that, but would act as a check on the speculative percentage in the price of oil".

I repeat, I haven't seen anything that would suggest opening up off-shore drilling and Alaska would produce enough oil to have any effect on world oil prices soon or a significant effect ever.

"As far as the US, we actually have one of the world's largest oil resources in the Midwest, in Colorado shale. It is estimated to have anywhere from 800 billion to 1.5 trillion equivalent barrels. It's dirty, and relatively expensive, but why not apply the alternative energy argument and start experimenting with it to see what advances we can make?"

My expectation when I entered the doctoral program at MIT was that I would get a job in Rifle or Parachute (or one that would interact closely with those sites) researching how we could economically extract oil from shale. Then Ronald Reagan got elected and cut the R&D funding from billions to zero. Of course, Exxon followed suit, and until recently little has been done to crack this difficult problem. You are correct that there is enough oil locked in shale to affect the world price of oil...IF it could be extracted cheaply. But (a) that's not what you said, you only mentioned off-shore drilling and Alaska, and (b) so far, it can't be. As the popular expression goes, "oil shale is the energy source of the future and always will be."

For the record, I'm in favor of a wide range of short, medium and long term efforts focusing on a wide range of energy technologies, first among them conservation, which sadly most Republicans mock (remember the tire gauges?). Also moving away from oil toward more natural gas, more nuclear, more small-scale geo-thermal, AND oil shale. In-situ coal gasification has even more potential than oil shale. It's too late for me, but let's expand R&D efforts in ALL these areas and loose the chains of dependency on foreign oil.

Posted by: DavidinCambridge | March 10, 2011 10:25 AM | Report abuse

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