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