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Home Publications Blogs Beat the Press Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda

Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda

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Monday, 25 March 2013 04:06

Nope, I'm not kidding. In his column today, Hiatt complained that no one seems to be moving forward on his deficit reduction agenda. He then told readers:

"What could shake them out of their own devices? One possibility, a fiscal hawk in the Obama administration told me almost wistfully, would be a 'minor market event.' A stock market plunge, an interest rate spike, a race to the exits by America’s foreign lenders — just enough to spook Congress.

"But as long as the Federal Reserve is gobbling up U.S. debt to keep interest rates low, such a mishap seems unlikely."

Yes, it must be awful when you have a view of the economy that the economy refuses to corroborate. (In fairness, Hiatt, does add that such a market event could spin out of control, so "it is not really to be wished for.")

As usual, Hiatt is upset that President Obama is not pushing hard enough for cuts to Social Security and Medicare. While he does give Obama credit for proposing some cuts to Medicare (what happened to the chained CPI?), what really has him upset is that President Obama doesn't talk about inflicting pain:

"On the White House Web site, you can see his $400 billion in health-spending cuts, including a few tens of billions in short-term Medicare reform — paltry, but more than the Republicans, with all their supposed courage on entitlements, have proposed for the near term. ....

"But Obama promised better. Over and over, he vowed to face up to the 'hard choices,' including regarding 'our entitlement obligations.'

“Now he reassures Americans that the nation’s fiscal problems can be solved with no pain. Middle-class taxes will never rise. A carbon tax is not to be mentioned. Pre-kindergarten education can be provided to all without increasing the deficit 'by a single dime.' The only tax loopholes that need closing are distortions 'that nobody really defends on their own,' as he told ABC’s George Stephanopoulos. Entitlement reform can be modest."

Of course if Hiatt had access to economic data he would know that President Obama's policies are already causing the middle class to feel plenty of pain. The economy is still down almost 9 million jobs from its trend growth path. Workers have received none of the gains from economic growth over the last decade. Barring a major change in economic policy, this situation will not improve much over the rest of the decade. 

Of course the needed change in policy is the opposite of what Hiatt is pushing. We need larger deficits to generate the demand needed to boost the economy. That is because the private sector doesn't generate demand just because we want it to. There is no source of private sector demand to replace the $1 trillion in annual construction and consumption demand that we lost when the $8 trillion housing bubble collapsed.

As we teach students in intro economics, GDP = consumption + investment + government spending + net exports. There is not a plausible story where consumption will increase much beyond its already high share of disposable income. Investment is near its historic average as a share of GDP, despite large amounts of excess capacity. Net exports will not increase until the dollar falls substantially and/or our trading partners experience much more rapid growth. That leaves the government -- even if you don't like it.

This collapse in private sector demand is the reason we have large deficits. The deficits were small going into the downturn. The rise in deficits was a direct result of reduced tax collections and countercyclical spending. 

alt

Hiatt would know this if he had access to budget documents, but it is hard to get information on the budget in the nation's capitol.

Comments (13)Add Comment
Key to Economic Recovery Discovered: Unleash Animal Spirits of Moral Savagery
written by Last Mover, March 25, 2013 7:26
It's wonderful to see that Fred Hiatt has come around to the Keynesian way of thinking, using animal spirits to inflict pain and spook Congress into acting to reduce the debt.

The beauty of Hiatt's proposal is to fire a warning shot across the bow of the coming economic armageddon, like a small price signal that warns of a coming price collapse. Apparently Hiatt has extensive training in how economics works at the margin to make such a call.

It does happen on occasion, for example to children who get burnt by playing with matches, then rationally conclude not to jump into roaring fires that would toast them to tinders.

Thanks for the insight Mr Hiatt. Americans need more economic intellectuals like you to remind the 26 million unemployed and underemployed why they are not working. Because Congress has not been spooked into a cure with sufficient infliction of pain to remind them that whatever doesn't kill them will make them stronger.
Hiatt's Children's Crusade
written by Ellen1910, March 25, 2013 8:39
You can almost feel it -- a defeat recognized more in sadness than in anger.

There is no point in mentioning the four year old Obama quotations. They weren't made for the purpose of supporting a legislative policy; they were made for the purpose of taking some wind out of Republican sails and of reassuring independent voters that Obama was a moderate middle-of-the-roader whom they needn't fear.

Hiatt hoped they were otherwise, but they weren't. His gentle chastisement of the President is proof that he recognizes his crusade has all but petered out.

The $1 Trillion Demand Deficit
written by Ellen1910, March 25, 2013 9:12

My question: In the absence of Dean's oft characterized housing bubble of the early noughts, would this demand deficit have showed up back then? Would the Bush recovery job growth have been even weaker than it was without the effects of the housing bubble?

I have no doubt that government spending (R&D, infrastructure, education, more generous social security payments, etc.) could have substituted for the lost demand that preventing the housing bubble would have caused. But an active government wasn't in the cards.

Given our then (and current and foreseeable) politics should we recognize that whether the outcome is the result of economics or politics, the $1 trillion demand deficit is structural and isn't about to be filled anytime soon?
Structural problem?
written by David, March 25, 2013 10:13
Ellen1910: if you mean by "structural" an inefficient and wasteful healthcare sector, and a bloated finance sector, yes. They are a huge burden on the current economy.
Natural Rate of Unemployment
written by Ellen1910, March 25, 2013 12:33
I was using the term "structural" in a non-technical (non-labor economics) sense. Perhaps, I should have said that since some twenty years ago the natural rate of unemployment has, in the absence of bubbles or large increases in public spending, proved to be much higher than we would want.

I have never understood why Dean thinks that avoiding the capital investment bubble of the late '90s or the construction bubble of the early '00s would have been better for the average worker a large number of whom wouldn't have had jobs.
Fire the Wistful Hawk
written by Allan Lane, March 25, 2013 1:28
The most troubling aspect of Hiatt's remarks is that there might actually be a wistful deficit hawk in the Obama Administration hoping for a minor meltdown. Now our task is to find that hawk and fire him or her. No wonder Obama is saying stupid government-needs-belt-tightening-like-a-family things about government budget policy. He is listening to wistful hawks!
"Structural" as opposed to cyclical? Yes.
written by A Populist, March 25, 2013 1:55
The "natural" level of Unemployment is affected strongly by government policy.

One way to increase Demand to the point where unemployment gets near the 4% low we saw a few years ago: Increase the minimum wage dramatically. Since those at the bottom spend all of their income, this would result in a large and sustainable increase in net Demand.

This would also have the benefit of greatly increasing revenue to fund SS and Medicare, even without lifting the cap. Then, we could start talking about lowering the Medicare eligibility age gradually, until it hits zero.

In the long run, having more income will allow those at the low end, to save money, to work fewer hours, and retire - another factor helping balance supply and demand in the labor market, to keep wages up.

The economy clearly has excess capacity. A minimum wage could cure that problem - and quickly, without adding to the debt.

Much better than running up more government debt for more stimulus, and subsidizing Walmart by giving it's workers food stamps. I am not against stimulus, by any means, but a higher minimum wage is a better way to go, and much more feasible politically.

If the Democrats gave a real bully pulpit sales pitch for a dramatically higher minimum wage, it would either pass, or result in big Democratic gains in the next election cycles.

However, I am not at all certain that Obama wants that to happen.



A New Pearl Harbor
written by Scott Supak, March 25, 2013 2:13
I wonder if Hiatt is aware that he's echoing the PNAC's statement from "Rebuilding America's Defenses: Strategies, Forces, and Resources For a New Century" from 2000, wherein they ruminated on what it would take to achieve American "hegemony" and "full-spectrum" military dominance in the world, especially the middle east: "Further, the process of transformation, even if it brings revolutionary change, is likely to be a long one, absent some catastrophic and catalyzing event––like a new Pearl Harbor"

Disaster Capitalism.
Net Capital Investment nears zero
written by John Yard, March 25, 2013 2:30
In regard to the statement 'Investment is near its historic average as a share of GDP, despite large amounts of excess capacity' I do not believe this is correct.

If you go to FRED, plot Gross Domestic Investment minus
Consumption of Fixed Capital, vs GDP, the result is dramatic declines over the last 40 years approaching near zero net investment today. Others ( Ed Yardeni ) have gotten similar results.

Corporations have record profits , and record cash, at least in part by refusing to take on new projects. No new projects means low(er) growth in the future . Feast now, famine tomorrow.
Look at investment in equipment and software
written by Dean, March 25, 2013 2:39
John,

I was focused on equipment and software -- we have a glut of structures because of bubble in non-residential construction in 2005-2008.
Or Who Gets to Feel the Pain
written by sherparick, March 25, 2013 2:43
Real Wages for those below the top 5% (really top 1%), fell again last year. http://middleclasspoliticaleco...-one.html. Using constant 1982-83 dollars the weekly salary was the princely sum of $294.83 in 2012, down from $297.79 in 2010. Back in 1972, it had been $341.73 (by the way, you do see why so many of did not like the 1970s). But besides 8 million unemployed and another 14 million underemployed or discourage, Ol' Fred does not feel we have suffered enough.
At least Hiatt allows for the possibility of higher taxes
written by Robert Weiler, March 26, 2013 3:27
Which is more than most deficit scolds who propose to magically close the deficit by doling out huge tax cuts to the very wealthy. Obama does deserve a large share of the blame as well. He had a golden oppotunity to put the country back on track by allowing the Bush II tax cuts to expire in their entirety. Once expired he would have had tremendous leverage to get a more progressive tax code installed for the long term with some short term stimulus. But as has been so often the case, faced with certain victory, Obama folded. BTW, the Democrats have a golden opportunity to run in the mid terms on a platform of radical tax simplification to take the issue away from the GOP. In particular, they could propose to tax all income at the same rates regardless of source closing the carried interest, dividend, and capital gains loopholes as well as most other loopholes. That would allow for a somewhat lower top marginal rate and more revenue. Of course, they won't.
no need to lie about Fred
written by The Steel General, March 30, 2013 12:00
Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda

Now, now, be accurate, Freddie might WANT that, but he didn't actually SAY that. He went out of his way to say "And if a market event began, keeping it minor might be beyond anyone’s capacity. It could have terrible effects on jobs and prosperity. It isn’t really to be wished for."

I am sure Freddie is a standard issue a-hole and I can't shake the feeling that he wished for economic Armageddon just to say 'I told you so', but lying about him weakens your otherwise credible case.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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