By James Kwak
Helene Cooper of the New York Times wrote a “news analysis” story saying that the challenge for President Obama is this:
“Is he willing to try to administer the disagreeable medicine that could help the economy mend over the long term, even if that means damaging his chances for re-election?”
The problem, she goes on to say in the next paragraph, is that the economy is in bad shape:
“The Federal Reserve’s finding on Tuesday that there is little prospect for rapid economic growth over the next two years was the latest in a summer of bad economic news.”
Now ordinarily I wouldn’t pick on the Times for something like this: it is just a newspaper, after all. But this case is a good example of right-wing talking points leaking into the mainstream media and then becoming part of the conventional wisdom, which is something that should be cut off as soon as possible.
This framing has a certain kind of narrative resonance: Is the young, “untested” leader of the free world willing to sacrifice himself for the good of the country? Is he, like Harry Potter, willing to face death to save the world from Lord Voldemort?
The problem is, it’s completely backwards. The “disagreeable medicine” Cooper suggests is budget cuts, including cuts in entitlement programs like Social Security. But that has nothing to do with the problem she presents at the beginning: slow economic growth. Anyone who is reading this blog already knows that budget cuts are contractionary in the short term. The “medicine” the economy needs now is more government spending, not less, and there’s nothing disagreeable with putting more people to work and building more stuff that people want.*
There is a somewhat valid debate about whether deficit-cutting is good in the medium and long term. There have been papers purporting to show that deficit-cutting can lead to higher economic growth, but those have confused deficit-cutting in a boom and deficit-cutting in a slump. (See Mike Konczal for a summary of that debate.) In other words, it could be a good idea to cut the deficit when the economy is strong (because then it could lower interest rates for the private sector), but not when it is weak (and certainly not when interest rates are already extremely low). A recent paper by economists at the IMF reaffirms that when you restrict your sample to episodes of deficit-cutting that are not confounded by concurrent economic conditions that the deficit-cutting is responding to, you find that deficit-cutting lowers economic growth.
So why is Helene Cooper ready to dispatch Frodo Baggins off to Mordor to toss the One Ring into Mt. Doom, when really all he needs to do is head back to the Shire and throw a huge party, putting unemployed caterers, bakers, and entertainers back to work? I think it’s because if right-wing politicians and commentators keep repeating that the deficit is hurting the economy (“job-killing deficits,” of course), then otherwise reasonable people start to believe it. See for example this priceless passage from the House Budget Resolution:
“Government at all levels is mired in debt. Mismanagement and overspending have left the nation on the brink of bankruptcy. Only recently, millions of American families saw their dreams destroyed in a financial disaster caused by misguided policies, perverse incentives, and irresponsible leadership. This crisis squandered the nation’s savings and crippled its economy.”
If you didn’t know better, reading that would make you think that the financial crisis and recession were caused by government debt.
So now we’re at the point where ordinary people are starting to believe this nonsense. And that means we need to stamp it out whenever possible.
* Arguably, tax cuts would work, too. I think that government spending is highly preferable for two reasons. First, spending is easy to undo after it is no longer necessary (or even before—see ARRA for Exhibit A), while tax cuts seem to be forever. Second, spending has a higher multiplier.