The Thoughtful Steven Pearlstein Has a Wrong Theory About Disagreement Over Economic Policy
It's wrong. But he has a theory. Steve Pearlstein:
Enough with the economic recovery: It's time to pay up: Just about now, you may be a bit confused about the economy. Some... see the beginnings of a sustainable recovery. Others note that most... recent growth... is... unsustainable. Some... worry about deflation. Others... warn of inflation just over the horizon. Some insist there is an urgent need for another shot of Keynesian fiscal stimulus.... Others warn that any more debt will cause markets to raise interest rates so high that it will eat up most of the proceeds from new borrowing. Some... expect that fast-growing developing countries such as China and Brazil will power the global recovery.... Others warn that fiscal austerity and slow growth in Europe threaten the recovery. Even the people who are supposed to really understand this stuff can't come to consensus on where things are headed and what we should do next. And I have a hunch why that is:
At this point, there are no good solutions -- only a choice among painful and distasteful ones. The controlling reality is that the global economic system is rebalancing itself after years in which the United States... live[d] beyond its means... the bill for that is finally coming due.... The only question now is what form that payment is going to take. Will it be an extended period of subpar growth and high unemployment, inflation that erodes the purchasing power of our income and the value of our assets, a deflationary spiral that grinds down wages and salaries and increases our debt burden -- or, as I suspect, some combination of all three? One reason for all the disagreement is that any decisions about the form of payment will have a big effect on how the burden is distributed -- between debtors and creditors, importers and exporters, those with lots of wealth and those with little, workers with market power and those without. What has been disappointing is that those in the position of economic leadership have not been more candid about the reality of this predicament and the limits of what government can or should do about it.
Ben Bernanke... refused to acknowledge that by keeping interest rates at zero "for the foreseeable future," they have begun to generate new bubbles... and overheated the economies of developing countries...
But if developing countries want to reduce their financial asset prices (in their domestic currencies), they can do so easily: let their currencies appreciate. That surplus countries don't want to do their share of the adjustment to bring global rebalancing about is no reason for deficit countries (like the United States) to take on the burden by boosting their own unemployment rates.
One economist whose warnings the Fed failed to heed back then was Raghuram Rajan.... Raghuram is sounding the alarm again, warning that while a weak U.S. economy still requires the Fed to hold interest rates relatively low, keeping them at zero is both dangerous and unnecessary, generating little extra output in the United States while creating hot money flows abroad...
Once again: that there is inflation in Brazil and China is not an argument for higher unemployment in the United States.
Equally disappointing in recent months has been the performance of the Obama White House, where it seems the political advisers have taken control of economic policy.... [T]his was the time for the president to focus the country on rebuilding the foundations for long-term economic growth... neither the politics nor the economics support the idea of spending large sums, directly or through tax breaks, just to shave a percentage point off this year's unemployment rate...
And this I find completely incomprehensible. The United States can, right now, borrow at unbelievably good terms. When you can borrow on good terms you should: the market is then telling you to pull forward in time your expenditures and push your revenues back in time.
And then Pearlstein immediately contradicts himself, without, apparently, noticing:
...But with plenty of slack in the economy and interest rates at historic lows, this is the ideal time to borrow and invest heavily in public infrastructure that has been badly neglected over the past 30 years... roads and bridges... airports and air traffic control systems, urban transit, high-speed rail, schools and university facilities, national laboratories, national parks, "smart" electric grids, broadband networks, green generating plants, and health information networks... projects can have huge long-run economic payoffs while tangibly improving the lives of all Americans... government spending today's voters can get excited about while also leaving a valuable legacy for future generations... creating some jobs at a time when millions of people are unemployed, so much the better...
The criticism of Obama seems particularly misplaced. There are lots of people inside the White House who want to do large-scale public infrastructure investment. The judgment--and it seems a correct judgment--is that there aren't 60 votes in the Senate for anything that increases this year's or next year's deficit. That Obama has not succeeded in changing that all by himself is disappointing, but not blameworthy.
