Paul Krugman was on Morning Joe yesterday, where he was peppered with questions about why he and other liberal economists aren't obsessed with long-term debt as a more pressing, or at least equally pressing, problem compared to mass unemployment. Joe Scarborough wrote a follow-up editorial implying that Krugman's opinion is isolated among economists without citing any actual economists. In response, Joe Weisenthal created a list of economists of varying backgrounds and political persuasions who agree with Krugman.
The segment focused on the idea that the only way to do stimulus is if we also do long-term cuts at the same time.
Some quotes to give a feel:
Joe Scarborough, 8m20s: "Medicare, Medicaid, health care costs, the defense budget, long-term drivers of a long-term debt... I say you can do two things at the same time."
Ed Rendel, 12m23s, 15m49s: "I don't think any of these things are mutually exclusive... I think we can [invest in infrastructure] while at the same time taking care of the long-term... Simpson-Bowles said we can do both. We can stretch out our debt reduction over a course of time and at the same time do some things that will spur the economy."
Joe Scarborough: "Won't that send a good message to the markets if we say, 'Hey listen, here's the deal. We are going to take care of what we have to do in the short term to get people back to work, but in the long term we are taking care of the long-term structure'?"
This is often referred to as a "barbell strategy" (from a Peter Orzag column). Do stimulus, do long-term deficit reduction, but only if you can do them together. As mentioned by the panelists, this is part of several bipartisan debt reduction strategies. Here's Domenici-Rivlin's Restoring America's Future Plan: "First, we must recover from the deep recession that has thrown millions out of work... Second, we must take immediate steps to reduce the unsustainable debt... These two challenges must be addressed at the same time, not sequentially."
It's weird that nobody on Morning Joe seems to understand the obvious problems with this strategy, so let's make a list.
1. There is no solid economic argument for this. There may be political arguments, as in that's the only way to build a coalition to get legislation through a partisan Congress, but they are just that, political. There's no decent economic argument for why if stimulus is a good idea, and long-term deficit reduction is a good idea, that you need to do both at the same time.
Scarborough's argument that "this would send a good message to the markets" implies that interest rates are a constraint, when instead they've been at ultra-low rates. It also seems to imply that additional stimulus would send the markets into a panic. It is true that if we passed a stimulus program interest rates could rise, but this would reflect the market thinking things were getting better, not worse.
2. The political argument for this is also weak, if only because it was the operative strategy over the past several years and didn't work. President Obama just tried to get some $225 billion dollars in stimulus in the fiscal cliff and looked to be willing to accept cuts in the inflation adjustments for Social Security as part of the package. Republicans turned this down. This stimulus was first proposed a year earlier in his American Jobs Act, which, as he told Congress, would be paid for by offsetting long-term budgets. This was dead on arrival.
And it is easy to see why. You can probably get some agreement on the content of a stimulus package, but to get a agreement on long-term deficit reduction, you would need the GOP to accept some new revenues or clarify what it wants on social insurance. It won't do the first outside constructed scenarios like the fiscal cliff and the latter has yet to happen.
3. As for the short term, alleviating unemployment is the most responsible budget action even though it increases the short-term deficit. Austerity is likely to give us a higher debt-to-GDP problem if it causes a double-dip recession. Our current deficit is so large because so many people are not working; more economic activity would mean more things to tax and fewer stablizers like unemployment insurance to pay for.
As Delong and Summers argue, additional fiscal stimulus in a depressed economy can largely offset its own costs. Or as John Maynard Keynes said in 1933, "It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself."
4. As for the part of the budget that won't take care of itself, President Obama fought an ugly and costly battle to bend the cost curve of health care, in which he was accused of everything from creating death panels to looting benefits of seniors in order to pass them out to his army of Takers. Since he's already paid that price, why wouldn't he wait and see how well Medicare cost saving techniques work?
Maybe it's just me, but I find the "if you want to see full employment again, immediately dismantle some social insurance" to be like a form of ransom. Meanwhile millions of people are suffering needlessly as a result of the lack of action.