Three posts on 2/6/13. The first was “Stimulating Happiness, Revisited:”
Oddly, however, I don’t see many people making the obvious point about the relevance of this research to current policy. I tried to say something about this a couple of years back, but let’s try it again.
As Brad DeLong keeps trying to get across, the right way to think about fiscal policy right now isn’t “eek! deficits!” but to look at tradeoffs. If we spend more now, what are the future costs?
Now, actually there may not even be any future costs; there’s a pretty good case to be made that spending more now, to stimulate the economy, would actually improve the long-run fiscal picture. But even if we leave this aside, the economic case for spending now, austerity only sometime after the economy has recovered, is compelling. Most of us put that case in terms of two reasons:
1. A dollar of government spending now does not come at the expense of private spending, because we have vast unemployed resources and monetary policy is up against the zero lower bound; later, that won’t be the case. So the payoff at the margin to government spending is much higher now than the payoff to government spending at the margin will be a decade from now; the boom, not the slump, is the time for austerity. (Yes, the tradeoff could and should involve taxes as well as spending).
2. Real interest rates are very low, indeed negative at the moment; so the opportunity cost of spending now, even if you look only at the fiscal side and ignore possible hysteresis effects on future revenues, is low.
These factors alone would justify a policy of spend now, pay later. But what does happiness economics have to say? Well, in its current incarnation it says that money matters– but so do other things, notably (per Bernanke) ” a sense of control over one’s life”. And nothing says “lack of control” like being unemployed and not being able to find a job.
How big a deal is this? According to recent estimates, the “non-income” welfare costs of unemployment are five times as large as the cost of lost income.
And here’s the thing: spending cuts now raise unemployment, whereas spending cuts in an economy not at the zero bound would not. So the huge happiness effects of unemployment offer another reason to spend now — and quantitatively this is arguably the biggest argument for stimulus and against austerity.
Next up was “The Non-Decisive Decade:”
Yesterday the CBO came out with its updated budget outlook — and the release was met with a collective yawn. Why? Basically, because the projections over the next decade just didn’t show the kind of fiscal disaster everyone in DC wants to believe in. That’s not to say that the outlook is completely benign — CBO still thinks we’ll end the decade with high debt by historical standards, especially under the “alternative fiscal scenario” that assumes that some cuts that are supposed to happen under current law won’t. (I’m still waiting for the wonks at CBPP and elsewhere to do a full analysis; as best I can tell, a truly realistic scenario would lie in between the baseline and the alternative). But there’s nothing there lending comfort to the Greece, Greece I tell you crowd.
And there’s one especially telling point. CBO does show rising deficits by the end of the decade — but not, it turns out, mainly because of rising entitlement spending. Here’s their chart:
The big driver here is CBO’s assumption that interest costs on federal debt will rise sharply. And that’s not mainly because of rising debt; it’s because of an assumed rise in interest rates.
Why is this important? Well, one of the lines used by people determined to panic about the deficit is to say that relatively optimistic projections are based on the assumption that the economy will recover smoothly, and that there won’t be any setbacks. What people saying this fail to realize is that if recovery falters, it’s also more or less certain that interest rates will stay low, offsetting much of the deficit impact.
Anyway, the numbers continue to refuse to justify panic. But that won’t stop the Very Serious People.
The last post of the day was “Things Serious People Believe:”
Duncan Black is struck by a Meet the Press transcript in which Bob Woodward declares that
if you stabilize the debt in some reasonable way, we’re going to have growth. The unemployment rate should come down.
The confidence fairy lives!
It’s not just Woodward — and it’s certainly not just Republicans. I made a note for myself last year when Steny Hoyer declared that a deficit reduction agreement would
provide the biggest single stimulus to the economy we could achieve. Setting our economy back on a sustainable, predictable fiscal path will help us create jobs by restoring certainty for businesses and enabling them to plan for a future without the brinksmanship that has characterized this Congress. Without certainty, businesses can only focus on the short-term, which leads to missed opportunities for growth and fewer investments that have wider economic benefits. There is over $2 trillion in cash being held on corporate balance sheets just waiting for the right time – just waiting for a restoration of confidence – to put that money back to use growing the American economy. A comprehensive agreement on our fiscal future would, I believe, restore the atmosphere of fiscal calm needed for businesses to unleash their capital to great effect.
What is the evidence that fiscal uncertainty — as opposed to overall lack of demand — is the reason corporations are sitting on cash? There isn’t any.
This is, of course, just another illustration of the amazing way in which conventional wisdom has become dominated by fantasies that make DC insiders feel good about their preferred efforts — Bowles/ Simpson is the universal elixir — despite a complete lack of evidence for these fantasies. And what’s even more amazing is that I suspect that Woodward, for example, had no idea that he was saying anything questionable; it was just part of what everyone in his circle knows.