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How to End This Depression

Susan Walsh/AP Images
President Obama on a tour of the Master Lock factory in Milwaukee with the company’s senior vice-president, Bon Rice, February 2012

The depression we’re in is essentially gratuitous: we don’t need to be suffering so much pain and destroying so many lives. We could end it both more easily and more quickly than anyone imagines—anyone, that is, except those who have actually studied the economics of depressed economies and the historical evidence on how policies work in such economies.

The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending. Never mind all the talk of how we have a long-run problem that can’t have a short-run solution—this may sound sophisticated, but it isn’t. With a boost in spending, we could be back to more or less full employment faster than anyone imagines.

But don’t we have to worry about long-run budget deficits? Keynes wrote that “the boom, not the slump, is the time for austerity.” Now, as I argue in my forthcoming book*—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.

Meanwhile, the strong measures that would all go a long way toward lifting us out of this depression should include, among other policies, increased federal aid to state and local governments, which would restore the jobs of many public employees; a more aggressive approach by the Federal Reserve to quantitative easing (that is, purchasing bonds in an attempt to reduce long-term interest rates); and less timid efforts by the Obama administration to reduce homeowner debt.

But some readers will wonder, isn’t a recovery program along the lines I’ve described just out of the question as a political matter? And isn’t advocating such a program a waste of time? My answers to these two questions are: not necessarily, and definitely not. The chances of a real turn in policy, away from the austerity mania of the last few years and toward a renewed focus on job creation, are much better than conventional wisdom would have you believe. And recent experience also teaches us a crucial political lesson: it’s much better to stand up for what you believe, to make the case for what really should be done, than to try to seem moderate and reasonable by essentially accepting your opponents’ arguments. Compromise, if you must, on the policy—but never on the truth.

Let me start by talking about the possibility of a decisive change in policy direction.

Nothing Succeeds Like Success

Pundits are always making confident statements about what the American electorate wants and believes, and such presumed public views are often used to wave away any suggestion of major policy changes, at least from the left. America is a “center-right country,” we’re told, and that rules out any major initia- tives involving new government spending.

And to be fair, there are lines, both to the left and to the right, that policy probably can’t cross without inviting electoral disaster. George W. Bush discovered that when he tried to privatize Social Security after the 2004 election: the public hated the idea, and his attempted juggernaut on the issue quickly stalled. A comparably liberal-leaning proposal—say, a plan to introduce true “socialized medicine,” making the whole health care system a government program like the Veterans Health Administration—would presumably meet the same fate. But when it comes to the kind of policy measures I have advocated—measures that would mainly try to boost the economy rather than try to transform it—public opinion is surely less coherent and less decisive than everyday commentary would have you believe.

Pundits and, I’m sorry to say, White House political operatives like to tell elaborate tales about what is supposedly going on in voters’ minds. Back in 2011 The Washington Post’s Greg Sargent summarized the arguments Obama aides were using to justify a focus on spending cuts rather than job creation:

A big deal would reassure independents who fear the country is out of control; position Obama as the adult who made Washington work again; allow the President to tell Dems he put entitlements on sounder financial footing; and clear the decks to enact other priorities later.

Any political scientist who has actually studied electoral behavior will scoff at the idea that voters engage in anything like this sort of complicated reasoning. And political scientists in general have scorn for what Slate’s Matthew Yglesias calls the pundit’s fallacy, the belief on the part of all too many political commentators that their pet issues are, miraculously, the very same issues that matter most to the electorate.

Most real voters are busy with their jobs, their children, and their lives in general. They have neither the time nor the inclination to study policy issues closely, let alone engage in opinion-page-style parsing of political nuances. What they notice, and vote on, is whether the economy is getting better or worse; statistical analyses say that the rate of economic growth in the three quarters or so before the election is by far the most important determinant of electoral outcomes.

What this says—a lesson that the Obama team unfortunately failed to learn until very late in the game—is that the economic strategy that works best politically isn’t the strategy that finds approval with focus groups, let alone with the editorial page of The Washington Post; it’s the strategy that actually delivers results. Whoever is sitting in the White House next year will best serve his own political interests by doing the right thing from an economic point of view, which means doing whatever it takes to end the depression we’re in. If expansionary fiscal and monetary policies coupled with debt relief are the way to get this economy moving, then those policies will be politically smart as well as in the national interest.

But is there any chance of actually getting them enacted as legislation?

Political Possibilities

It’s not at all clear what the political landscape will look like after the election. But there do seem to be three main possibilities: President Obama is reelected and Democrats also regain control of Congress; Mitt Romney wins the presidential election and Republicans add a Senate majority to their control of the House; the president is reelected but faces at least one hostile house of Congress. What can be done in each of these cases?

The first case—Obama triumphant—obviously makes it easiest to imagine America doing what it takes to restore full employment. In effect, the Obama administration would get an opportunity at a do-over, taking the strong steps it failed to take in 2009. Since Obama is unlikely to have a filibuster-proof majority in the Senate, taking these strong steps would require making use of reconciliation, the procedure that the Democrats used to pass health care reform and that Bush used to pass both of his tax cuts. So be it. If nervous advisers warn about the political fallout, Obama should remember the hard-learned lesson of his first term: the best economic strategy from a political point of view is the one that delivers tangible progress.

A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any government action along the lines I’ve advocated. It’s not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard’s N. Gregory Mankiw and Columbia’s Glenn Hubbard, are committed Republicans but also quite Keynesian in their views about macroeconomics. Indeed, early in the crisis Mankiw argued for a sharp rise in the Fed’s target for inflation, a proposal that was and is anathema to most of his party. His proposal caused the predictable uproar, and he went silent on the issue. But we can at least hope that Romney’s inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic, Keynesian nature.

Of course, a great nation should not have to depend on the hope that a politician is in fact a complete fraud who doesn’t believe any of the things he claims to believe. And such a hope is certainly not a reason to vote for that politician. Still, making the case for job creation may not be a wasted effort, even if Republicans take it all this November.

Finally, what about the fairly likely case in which Obama is returned to office but a Democratic Congress is not? What should Obama do, and what are the prospects for action? My answer is that the president, other Democrats, and every Keynesian-minded economist with a public profile should make the case for job creation forcefully and often, and keep pressure on those in Congress who are blocking job-creation efforts.

This is not the way the Obama administration operated for its first two and a half years. We now have a number of reports on the internal decision-making processes of the administration from 2009 to 2011, and they all suggest that the president’s political advisers urged him never to ask for things he might not get, on the grounds that it might make him look weak. Moreover, economic advisers like Christina Romer who urged more spending on job creation were overruled on the grounds that the public didn’t believe in such measures and was worried about the deficit.

The result of this caution was, however, that as even the president bought into deficit obsession and calls for austerity, the whole national discourse shifted away from job creation. Meanwhile, the economy remained weak—and the public had no reason not to blame the president, since he wasn’t staking out a position clearly different from that of the GOP.

In September 2011 the White House finally changed tack, offering a job-creation proposal that fell far short of what was needed, but was nonetheless much bigger than expected. There was no chance that the plan would actually pass the Republican-led House of Representatives, and Noam Scheiber of The New Republic tells us that White House political operatives “began to worry that the size of the package would be a liability and urged the wonks to scale it back.” This time, however, Obama sided with the economists—and in the process proved that the political operatives didn’t know their own business. Public reaction was generally favorable, while Republicans were put on the spot for their obstruction.

And early this year, with the debate having shifted perceptibly toward a renewed focus on jobs, Republicans were on the defensive. As a result, the Obama administration was able to get a significant fraction of what it wanted—an extension of the payroll tax credit, not an ideal stimulus but nonetheless a measure that puts cash in workers’ pockets, and maintenance for a shorter period of extended unemployment benefits—without making any major concessions.

  1. *

    End This Depression Now! (Norton, 2012). 

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