The Post Reinhart-Rogoff World: Fiscal Policy Without Fear
It appears that the Reinhart-Rogoff battles have flamed out. Even the inventors of the 90 percent debt cliff are now anxious to portray themselves of cautious supporters of expansionary fiscal policy. This should mean that sober policy types everywhere can turn to the immediate problem of reducing unemployment with more expansionary fiscal policy.
Unfortunately this does not appear likely to happen. Even though the case against fiscal policy has been blown to smithereens, there is little impulse in the United States or Europe to change course. The counter-argument appears to have two sides. First, growth has picked up so that we don’t really need it. Second, we really wouldn’t know what to spend money on in any case.
Neither of these arguments deserves to be taken seriously on its merits. But they nonetheless must be taken seriously because of the prominence of the people who say them.
The argument that the economy is picking up in the United States stems from the April job report that showed a slightly better than projected 165,000 jobs. (In the United Kingdom, celebrations broke out over the fact that GDP grew at a 1.2 percent annual rate in the first quarter.) These reports provide a rather flimsy basis for optimism.
If we accept the 165,000 number at face value it means the economy is generating roughly 65,000 jobs a month more than is needed to keep the unemployment rate constant. Given that the economy is still down almost 9 million jobs from its trend growth path, we can look to have made up this shortfall early in the next decade at this pace.
Furthermore there are good reasons that job growth may prove slower going forward. Excluding inventory fluctuations the economy grew at just a 1.5 percent annual rate in the fourth quarter. It has grown at less than a 1.8 percent rate over the last year. This is well below the pace that would ordinarily be needed to keep the unemployment rate from rising.
Investment has slowed sharply in recent months and federal government cutbacks are just now being felt. It is absurd to think that the economy has enough momentum to make any substantial dent in unemployment in the foreseeable future. Any analyst who can look beyond a single report should know this.
In other words if we want to have a real impact on unemployment in the new future the government will have to take action. The calls for patience on this issue are truly infuriating. Invariably such calls come from people who have jobs, generally very well paying jobs.
The prolonged periods of unemployment that millions are enduring are in fact a crisis for the people affected. They are ruining the lives of the unemployed and their families. In fact, there was a disturbing study highlighted in the New York Times last week about the surge in suicides among baby boomers approaching retirement age. For these people this stretch of high unemployment is not a short-term problem that we have to tough out.
This brings us to the second complaint, that we don’t know how to spend money to create jobs. This argument is every bit as far from the mark as the first one. For beginners, we have just cut well over $100 billion from annual spending by state and local governments. This has hit everything from pre-school education to police and fire service. If the federal government restored the funding, many of these cuts could be quickly reversed.
It would be desirable to spend money in areas that would have lasting benefits even if many of the items would have longer lead times. At the top of this list would be funding for the retrofitting of homes and businesses to make them more energy efficient. The Obama administration had funding in the original stimulus for this purpose, but most of the spending and credits have expired. There is still much to be done, these should be brought back.
We also can do much more to improve infrastructure, especially to build 21st Century train and urban transit systems. And, we can enhance funding for research and education in a wide variety of areas.
We should also be taking measures to directly address the problem of long-term unemployment. Recent research has revealed the extent of discrimination against the long-term unemployed. In a labor market where there are dozens of applicants for every job opening employers don’t feel they have to consider anyone who has been out of work for a substantial period of time.
This should not be a partisan issue; we all can recognize that the long-term unemployed need a hand to get back on their feet. Kevin Hassett, a prominent conservative economist and top advisor to Governor Romney in his presidential campaign, recently argued for employment programs specifically targeting the long-term unemployed.
Hassett wisely proposed a set of competing approaches, involving both public jobs and incentives for private employers. There are enough long-term unemployed that we can afford to experiment with different approaches and see which produces the best results.
There are many more ways to spend money that will put people back to work, but the key is to get such spending back on the political agenda. We allowed policy to be waylaid by a misplaced obsession with deficits. Now that everyone in the debate recognizes this mistake, it is time to focus on getting the country working again.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.