A Blue Pill for the Economy

I firmly fell into the “this is not going to be enough camp” when the initial Obama stimulus plan came hopping down the bunny trail  during Q1 2009.  You can read me here and here and as recently as here.    Krugman and Delong are still on the same page with me.  First, there’s Paul’s Vegematic Policy advocacy post to his blog here.  His feelings are not so hard to miss.  Brad even titled his missive The Obama Administration is not Making Much Sense these Days. No subtlety there either.  Here’s two points from Dr. Krugman that are just begging for elucidation.

Like Brad, I’m not too happy with the policy justifications we’re getting from the administration. It’s perfectly clear that the stimulus was too small; I think they know that too. But they’ve made a political judgment that (a) they can’t push another round through and (b) the thing to do right now is defend the policy they already have.

He didn’t really go much further on points a and b but I feel I must because you have to understand that they sent a half-baked, overly-optimistic, tax-incentive-laced-republican-palliative to do something that required strong medicine.  This is not judgment you can trust and change you can believe.  This is economics amateur hour and you don’t have to have a Nobel Prize or a classy MIT Phd to figure it out.  Let me just quote from Brad to put things into perspective.

If Tim Geithner is not making much sense, neither is Barack Obama. Keith Hennessy directs us to quotes:

“Dan Balz: The Take: Obama Stands to Be Judged on Economic Recovery: Obama, in Moscow yesterday, tried to modulate the impact of the vice president’s words that the administration had somehow miscalculated. “No, no, no, no, no,” he told NBC’s Chuck Todd. “Rather than say ‘misread,’ we had incomplete information.” To ABC’s Jake Tapper, he said, “There’s nothing that we would have done differently”…”

And in Dan Balz’s judgment:

“Scrambling for a macroeconomic message: It seems hard to square an assessment that the administration underestimated the severity of the recession and the assertion that the White House wouldn’t have done anything differently had it known how bad things really were…”

All in all, it looks like the unemployment rate in 2009 is going to average 1.2 percentage points above where the administration last December thought we would be. First quarter real GDP was $11.36 trillion year-2000 dollars–and second-quarter real GDP will be the same. Thus year-2009 real GDP is going to be close to $11.40 trillion–1.2% lower than the administration forecast that real GDP in the four quarters of 2009 would average $11.53 trillion.

It is interesting and important to note that the excess unemployment now forecast over 2009 relative to last December’s forecast is of the same magnitude–1.2%–as the deficiency in real GDP. In earlier decades this would not have been the case. In earlier decades the economy was ruled by Okun’s Law, and the rule-of-thumb was that the excess unemployment was 2/5 of the magnitude of the deficiency in production, not equal (see “labor hoarding by firms in American recessions, end of”). In earlier decades a 1.2 percentage point rise in unemployment would have meant a $420 billion shortfall in year-2009 nominal GDP, not a $170 billion shortfall.

If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion–$500 per citizen–aid-to-states-that-maintain-effort package through the congress this week. It would seem the right and the obvious thing to do.

We need an economic hard on right now to create jobs and there are some underlying fundamental changes going on in our mature economy that call for a prescription, not a mail order, phone-it in, feel good cream. Of course rubbing a little cream on it is going to get some kind of a reaction.  It just isn’t necessarily an effective one.  Problem is, they sold us on the cream and many folks bought it.  Now, they are stuck with the continuing flaccid result and a whole lot of skeptics that want to close their billfolds.  I mean, after you have just been given overpriced aspirin by a pharmacist, would you want to give him your repeat business?  Hell, no!

We have an administration with severe attention deficit disorder.  They know what the problems are, they say they’re after solutions, and what we get is some half-baked effort that just winds up costing every one money and grief.  From the economy, financial regulation, and universal health care, to foreign diplomacy and holding the Bush Administration accountable for decimating the Constitution, what we are getting is a whole lot of flitting and skipping around solutions packaged in phony town hall meetings and teleprompter bravado.  The problem is, however, we have a merciless, borderline depression still unfolding (albeit more slowly) and we don’t need policy dilettantism accompanied by an entourage firmly in the Amen Corner.  We need FDR’s vision of send them out to the corners of the world, figure out what works and then do it.  What we have gotten is “we have such great judgment, trust us to take care of it all, eventually!”

Once again, you do not need tax cuts when folks have no income.  If you’re a business, you need customers to get revenues to benefit from tax cuts.  If you’re a household, you need a job above everything else.  Tax breaks do not put customers in front of silent cash registers.  We have states that have balanced budget amendments that have run out of cash.  They can’t stimulate their economies because they have nothing to stimulate with and they must balance those budgets.  That means cutting spending and increasing taxes which means perpetuation of recession with a multiplier effect.

We have the automobile industry, the airline industry, the retail industry; all spinning from lack of customers, lack of financing, lack of everything!  They are unwinding slowly and I see no particular end in sight.  States are laying off teachers, police officers, fire fighters and public servants, and health care givers just as the demand for all the services by an unemployed public will be going up. When we get money in our pockets, most folks go to Walmart which buys the majority of its wares abroad.  That stimulus disappears out there into the ethos.  It does not stay in our towns and grow our economies. We still provide tax incentives to companies that take jobs overseas.  Why is it so difficult to get this?

People cannot fund their spending by credit card and borrowing against severely devalued assets. We’ve lost 10 years of  value and the associated compounding.  People will have to OVER-SAVE to make up for it.  That’s additional recessionary pressure!  This thing isn’t going to go quietly into the night with words of hope and wishful thinking.  This is not a process that a Rules Committee,  Superdelegates, and gamed caucuses can solve!  This is the reality of governing during incredibly tough times.

What part of these simple, simple, simple economic concepts does this administration NOT get?  Is legendary judgment worth more than 60 years of macroeconomic research that has built workable theory?  Is political surrender to a hapless minority worth more than jobs that feed and clothe people?  When will we stop getting these half-baked policies and their accompanying marketing and merchandising to assure us they are doing something?  When do we get the blue pill instead of the sugar pills?  Throw away the herbal creams, apologize, and write a real prescription before more Americans lose everything!

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