Deficit reduction has taken center stage

Economist Mark Thoma: 

I think it's too soon to be talking about deficit reduction given the state of the economy, and particularly the state of labor markets, but there's no reason to let the people who do want to talk about it dominate the conversation.

We do need a plan to bring the deficit down in the long-run, but right now we need more, not less deficit spending, and there are job creation proposals currently under consideration by Congress that rely upon the ability to increase the deficit in the short-run (e.g. see here for Dean Baker's negative reaction to one recent proposal from the administration).

If we could talk about the long-run deficit problem without making it less likely that we will enact further job creation measures now, there would be no problem with the deficit discussions. But that's not the case. Even though the long-run problem -- health care costs -- is largely independent of short-run stimulus measures, i.e. the short-run stimulus measures contribute very little to the long-run problem, all of the discussion about the long-run problem make it much less likely that Congress will use deficit spending in an attempt to create jobs. People are confused about the nature of the problem, and Republicans opposed to more stimulus (or just saying no for political reasons) have no incentive at all to clear up the confusion.

So we really ought to be talking about short-run measures to increase deficit spending and create jobs, but Republicans have been successful at turning the conversation to the long-run, and the administration has played right into this strategy.

Stan Collender takes a look at recent Republican strategy on the long-run deficit issue:

GOP Doesn't Do Fiscal Responsibility, by Stan Collender: The following all happened just this week:

Item 1.  The Conrad-Gregg commission, which needed 60 votes in the Senate, was defeated 53-46.  The amendment creating the commission would have been adopted 60-39 if all of the GOP senators who co-sponsored the amendment voted for it.  Instead, seven of the Republican co-sponsors withdrew their co-sponsorship the week before the vote and then voted against it.

Item 2. All Senate Republicans voted against re-establishing the pay-as-you go rules, which would have required that, with certain exceptions, any new mandatory spending or revenue legislation not increase the deficit.  The rules were adopted with only Democratic support.

Item 3.  With the Conrad-Gregg commission killed, congressional Republicans have been heavily critical of the commission the Obama administration may create by presidential order to consider ways to reduce the deficit.  There are growing indications that the GOP House and Senate leadership, each of which would get to appoint three of their own members to the commission, may refuse to name any in the hope that the panel's deliberations will be stopped dead in its tracks without them or that the Democrats will proceed on their own. The stated reason for the GOP opposition is that there's no guarantee that a presidential commission's recommendations will be taken up by Congress even though there's even less of a chance if it's not created.

Item 4.  Republican Chairman Michael Steele is saying so often that Republicans are against cuts in Medicare that it's starting to sound like a mantra.  Add to that their stated opposition to revenue increases (see #1 above), military spending reductions, homeland security reductions, and the extremely low possibility that, if Medicare is too hot to handle, they'll go anywhere near Social Security, and the deficit reduction math becomes totally impossible.

What's most infuriating about this is that the GOP is even blocking what used to be the easiest thing for everyone to agree to do -- budget process changes.  In fact, the saying among budget aficionados in Washington used to be that when Congress couldn't or wouldn't do anything about the budget, it did something about the budget process.  Now, however, because of GOP opposition, even budget process changes that wouldn't impose any immediate changes in spending or revenues, are becoming, or have already become, impossible to adopt.

You can't get people all worked up about the deficit, and then block every attempt to deal with it, especially when your party has been behind some of those proposals in the past. Or so you would think. However, up until Obama met with Republicans yesterday, I would have expected the strategy behind the Republican opposition that Stan Collender describes to work no matter how transparent it is. It always worked before. But in listening to people talk about Obama's meeting with the Republicans, I am beginning to think that his appearance, and particularly his rebuttal, was more notable than people realize -- that Obama began to change the conversation in a way that identifies and portrays Republicans as the obstructionists they are. Am I nuts to think that?

Update: Brad DeLong:

Can Someone Please Tell Me How This Is Supposed to Be Good Policy?: There is about a 30% chance that the U.S. economy is about to start growing rapidly, with unemployment declining by a percentage point or two each year. There is about a 40% chance that we are about to start a recovery like or a little bit better than the "jobless recoveries" that have followed the last two (much shallower) recessions, with unemployment staying where it is or trending down slowly. And there is about a 30% chance that the unemployment rate is going to pause--and then start rising again in a double-dip recession.

The tools to fight a further rise in unemployment are threefold:

• Banking policy--have the Treasury buy or guarantee risky financial assets in enormous amounts in order to boost asset prices and get businesses back into a position where they can profitably obtain financing for expansion.

• Monetary policy--have the Federal Reserve goose asset prices by taking steps that lower real interest rates somewhere along the yield curve.

• Fiscal policy--have the government spend money, either by hiring people directly or by buying things from private companies that then hire people directly.

The populist anger and fallout from the last set of banking policy interventions has taken the first of these off the table.

The current complexion of the Federal Open Market Committee has taken the second of these off the table.

And now Barack Obama is taking the third of these off the table.

Will someone please tell me how this is supposed to be good policy? ...

Posted via email from Jim Nichols