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.

Fareed Zakaria Strikes Out

Fareed Zakaria's a super-sharp person, and a very good writer.  Most of the time, I agree with what he has to say.  But in this week's Time, he has a column that I think really misses the point  (password protected).  The gist of it is that liberals shouldn't be disappointed with Obama because he is essentially a pragmatist who is willing to make tough choices for the sake of getting things done.

The line that strikes me is when Zakaria accuses Obama's base of "making the best the enemy of the good."  But I think he misses the distinction between good "pragmatic" policy and bad pragmatic policy.  Essentially, no one faults Obama for compromising (besides Tea Party nuts who can't see reality and realize that the President is an ideological moderate who thrives on compromise).  Obama's critics on the left don't suggest that the issue is his willingness to compromise-- the issue is his acceptance of bad ideas.  The latest case of this was the debate over the debt ceiling.  To start with, as Robert Rubin pointed out in a recent interview (I THINK it was in Business Week, but I'm not sure), the debt ceiling ideally wouldn't exist, but, given that it does, would not be a political issue.  Instead, Obama not only allowed the fringe of the Republican Party to hold the nation's credit hostage, but also came to a deal that is, at heart, bad for the economy.  The "best" deal would have combined significant short-term stimulus with a long-term project aimed at increasing revenue and cutting health care costs.  A good deal might have put social security on the table.  An acceptable deal might have cut $2 of spending for every $1 of tax hikes.  Instead, we got a deal that makes no effort at health care cost control, raises no revenue, and slashes spending in the short term in an economy that suffers from... a short-run lack of demand.

In other words, it's frankly terrible policy.  Those who worked with Bill Clinton say that he would go into a debate looking to find the "best" answer (and he had a very competent technical staff to do that).  Once he arrived at that answer, he compromised and might have whittled away at it, but still gotten to an acceptable result.  Obama begins by getting to a best answer (using many of the same experts Clinton had at his disposal), proceeds to weigh what the counter-proposal might be, splits the difference, and then capitulates in negotiations.  The result is terrible policy that encourages ideological extremists to hold the country hostage.  And it's threatening to turn Obama's presidency into a failure, even with know-nothings like Rick Perry, Michelle Bachmann and Tim Pawlenty real challengers for the presidency (I think Mitt Romney is smart enough to realize that, regardless of what he has to say on the stump, the Tea Party's dream government is nothing short of disastrous policy).

I'm sick of the Obama Administration

The Republicans stopped making sense a good decade ago.  The Obama Administration decided that was such a good look, they'd try it too.  Since everyone on Obama's economic team who knew their stuff was gone, now they're stuck with Gene Sperling.  His response to why interest rates on US debt are really, really low:

Gene Sperling makes a fool of himself

Here's the transcript:

“well I think there’s a lot of factors that go into the interest rates right now.  But there’s certain things you know that are just sound….any country anywhere that has its debt increasing as a percentage of its income creates doubts about its sustainability.  That’s gotta discourage some people from feeling as good as the long-term investments…”

I have no clue what any of that means...