Economic Thoughts for the Week

There are two topics I feel like should be addressed coming out of the news.  One is a piece of news and the other is an interesting opinion piece.

I'll start with the news: President Obama nominated Alan Krueger to head his Council of Economic Advisers , replacing Austan Goolsbee at the helm.  Krueger's a good appointment, given the constraints-- he's a well-known labor economist from Princeton who's more or less a mainstream, middle of the road thinker when it comes to macro.  Which, of course, means Republicans will denounce him as Karl Marx's bastard son (even as George W. Bush and Reagan's CEA chairmen, Greg Mankiw, and Marty Feldstein, praised him).  Even though I like Krueger, the politics dictate that not much will be done on the jobs front-- we might get some tax incentives to create jobs, but we're not going to get the kind of massive action we need to get the economy on a sustainable recovery track.

The second interesting article comes from Bush II's speechwriter, David Frum, suggesting the three big mistakes Obama made.  As has usually been the case with Frum lately, his arguments are pretty spot-on in substance, but he's pretty awful at apportioning blame.  So, in order, the mistakes Frum cited.  First, he suggests that Obama left writing the stimulus to Congressional Democrats, and got an ineffective stimulus.  I'd argue that, yes, Obama can be blamed for the stimulus, but not because it was Democrats who wrote it, but because what he suggested was too small and was designed to be able to win Republican votes.  As mistaken parts of the stimulus, Frum points out $15 billion for Pell grants, $9 billion for rural and community development, and a $20 billion renewable energy tax credit.  All of which are pretty much direct stimulus, aside from maybe the Pell grants, which allow the extremely poor to go to college.  That's not really direct stimulus, but it's certainly not a waste of money, as it's an investment in the future.  Then he attacked aid to state and local governments, which is probably the most direct job-saving there is.  States (stupidly) can't borrow to meet budget shortfalls from bad economic times, so without federal funds, the depressed economy would have meant millions of teachers and firefighters would have had to be fired in response to the recession.  Then, the last thing Frum argues is that the tax cuts from the stimulus were ineffective.  Well, yeah.  But it's not Congressional Democrats who are desperate for taxes, under all circumstances (Nonsense from the Fox News types aside, we collected under 15% of GDP in taxes the last two years, despite GDP being depressed.  That's the least we've collected at the federal level since 1949 and 1950, before Medicare or Medicaid existed).  So, while it can be argued that Obama was insufficiently proactive with the stimulus, the problem isn't what Frum listed, but the insufficient size of the stimulus, and the compromises made in it to appease Republicans.

Second, Frum argues that Obama didn't "mobilize the Fed to support his fiscal stimulus" or get his nominees confirmed to the Fed board.  Which is just silly.  The Fed is an independent agency.  And Obama nominated very, very qualified people to the Fed board, most notably MIT economist Peter Diamond.  But confirming Peter Diamond isn't Obama's job, it's Congress's.  I suppose he could have recess-appointed Diamond, and you can fault him for not doing that, but Frum essentially acknowledges that Republicans are nuts for obstructing monetary stimulus and refusing to appoint extremely qualified people to the Fed board... then faults Obama for somehow not forcing a party that considers him Hitler reincarnated to confirm those nominees.  Again, on substance, Frum is right, but choosing this as a "big mistake" on OBAMA'S part is kind of bizarre...

Third, Frum argues that Obama planned his presidency around the best-case scenario.  In that regard, he's spot on.  Obama's habitually bet on outcomes that were unlikely, and assumed that the best would happen instead of preparing for the worst.  His stimulus was too small, and, crucially, rather than acknowledging that it was too small at the time, Obama pretended that it was just the right size.  In essence, instead of doing the maximum and hoping that it was too much, he did the minimum and didn't prepare for scenarios in which that would be insufficient.  In that regard, Frum captures the biggest habitual problem of Obama's presidency.