July 13, 2012
I don’t see much value of the car battery analogy Paul Krugman offers up in reaction to my FT op-ed. If a car is stopped because the battery is dead, then fine, replace the battery. Yet if the car is stalled because the fuel line is leaking, the gas is empty, the tires are deflated, or the road is washed out, then the new battery won’t help. It’s a little simplistic to declare that the battery is surely the “trivial and easy intervention” and stop there. First, we need a good differential diagnosis.
It’s similarly begging the economic question to declare that fiscal stimulus is the “trivial and easy intervention” that gets the economy going. Yes, perhaps, if the problem is truly a temporary and self-correcting decline in aggregate demand, which Krugman simply assumes to be the case but does not demonstrate. Keynesians say that demand failure is obviously the point since unemployment jumped sharply after 2008.
Yet the pre-2008 housing bubble (and the Dot.com bubble before it in the late 1990s) was masking an underlying and intensifying crisis of jobs and structural imbalances. In fact, I would suggest that the Fed turned on the liquidity spigots in the early 2000s and eased regulatory oversight in no small part to combat the weak job market. The deeper sources of jobless stagnation include: the loss of jobs and manufacturing investments overseas, the sharp decline of middle-class jobs for low-skilled (without a college degree), the paralysis of private investments in energy and other sectors because of a lack of a sound energy and infrastructure strategy, the soaring prices of primary commodities reflecting deeper structural problems that have been unaddressed by public policies, the ineffectual and often criminal banking sector, and more.
Trying to offset (or even to restart!) the housing bubble with fiscal stimulus (Krugman’s car battery analogy) uses precious public finance in useless temporary tax cuts, distracts our time and public attention, builds up the debt-GDP ratio, and squanders political capital, all keeping us away from the real challenges confronting the economy. The deeper problems cannot be solved with tax cuts, temporary or otherwise; or temporary transfer payments; or “shovel-ready” employment. Real solutions require long-term strategies, of which we’ve seen hardly any proposed since the start of the crisis four years ago. I am not, of course, arguing for a moment against automatic fiscal stabilizers, and Krugman and I obviously agree on the importance of public social support for the poor and displaced. Indeed, we need persistently higher spending on public investments as well as investments in people (human capital), financed by higher taxes on the rich and capital income.
Four years after the onset of the financial crisis we’re without a recovery or a long-term strategy. Krugman and I agree fully that the Republican alternatives are far worse: cruel, ineffective, and greedy. He and I fully agree that the Republicans have blocked any serious thinking about the longer-term structural issues. Yet short-term stimulus is no help here. We need to have long-term plans and strategies championed by progressive politicians.
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