links for 2009-07-20
David Cay Johnston Has a Regular Column at the Nation

Needed: Fiscal Policy Rectification of Names

Clive Crook appears to oppose a second stimulus package, but only because he does not call things by their right names. The exploding costs of government health care programs cause large structural deficits in the long run, and are at the moment exerting a contractionary drag on the economy. A larger short-term deficit would provide an effective stimulus to the economy and boost production and employment.

But if you don't distinguish between these two--if you call them both "fiscal policy" and pretend they are the same thing, as Crook does--then you get yourself completely confused. What we need right now is a larger federal deficit in the short-run and better plans to control health spending in the long run. A smaller short-run deficit now will not help control health spending in the long run. The successful control of health spending in the long run will not boost aggregate demand (much) now. The short-term stimulus deficit and the long-term debt growth projections are two different things--not the same thing.

A while ago I wrote that one of the big problems in American governance was that Washington's political class was stupider than the pigs in the Orwell novel Animal Farm. The fundamental slogan of Animalism--"four legs good, two legs bad"--is no more complicated than "cyclical deficit good, structural deficit bad," and if pigs can understand the first why can't members of congress, anchor persons, and op-ed writers understand the second?

Clive Crook:

A rocky road for the fiscal stimulus: Most forecasters agree that output and jobs would have dropped further without the stimulus.... But the centrality of confidence in the economy does complicate the argument.... [T]he role of fiscal policy is ambiguous. The stimulus this year and especially next directly injects demand, which is all to the good. But the stunning scale of the intervention adds to growing alarm about an approaching fiscal crunch. On present policies, the public debt is on a path of explosive growth. The danger is that when it comes to confidence, what the stimulus gives, the debt projections take away.

Fears about public debt are worsening so much that they make the debate about a second stimulus moot. As a matter of practical politics, it cannot be done – not for the moment, at any rate, certainly not with the exuberant marketing of January. Politics more than economics guided the design of the first stimulus, after all. Democrats preferred public spending because they wanted to widen government’s role and repudiate the Republicans’ instinct to cut taxes regardless of the circumstances. But the politics have shifted. The debt projections are genuinely scary. For now, another daring boost is politically impossible...

The best thing for confidence would have been an even bigger short-term stimulus married to a credible plan to bring the deficit under control. It is not too late for the second part...

This genuinely puzzles me: if something is economically advisable, and if all the people who understand the issuye say that it is economically advisable, it generally becomes politically possible. It remains politically impossible only if people who think it is economically advisable do not say so. Why not? It is a mystery.