{"id":271326,"date":"2010-02-01T12:24:28","date_gmt":"2010-02-01T17:24:28","guid":{"rendered":"tag:http:\/\/www.economist.com,2009:21004581"},"modified":"2010-02-01T12:24:28","modified_gmt":"2010-02-01T17:24:28","slug":"no-quick-end-to-joblessness","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/271326","title":{"rendered":"No quick end to joblessness"},"content":{"rendered":"

LAST week, I wrote<\/a>:<\/p>\n

\n

In a conference call that just concluded, Deputy Director of Office of Management and Budget Rob Nabors responded to a question on how the freeze might conflict with efforts to return the economy to full employment. Mr Nabors noted that in 2010, the adminstration was focused on putting Americans back to work. Then in 2011, when the economy is on a more stable footing, the president will turn his attention to working toward a sustainable budget situation.<\/p>\n

This is utter foolishness. Fiscal 2011 begins in October of this year. At that point, according to CBO, unemployment will be above 9.5%. At the beginning of fiscal 2012, according to CBO, unemployment will still be at or near 9%. This is an important point; one of the primary factors causing current high deficits is the revenue-reducing effect of a weak economy combined with the automatic increase in spending on social programmes associated with the weak economy. It’s very difficult to balance a budget while the economy is weak, because every contractionary policy move further reduces economic activity, thereby trimming revenues and putting upward pressure on automatic stabiliser spending.<\/p>\n<\/blockquote>\n

OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president’s Fiscal Year 2011 budget. Ms Romer explained the economic assumptions underlining the budget forecasts. She noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections.<\/p>\n

She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration’s forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.<\/p>\n

Meanwhile, here<\/a>‘s the historical context from Carmen Reinhart and Kenneth Rogoff:<\/p>\n

\n

As government debt levels explode in the aftermath of the financial crisis, there is \u2009growing uncertainty about how quickly to exit from today\u2019s extraordinary fiscal stimulus. Our research on the long history of financial crises suggests that choices are not easy, no matter how much one wants to believe the present illusion of normalcy in markets. Unless this time is different \u2013 which so far has not been the case \u2013 yesterday\u2019s financial crisis could easily morph into tomorrow\u2019s government debt crisis…<\/p>\n

We do not anticipate outright defaults in the largest crisis-hit countries, certainly nothing like the dramatic de facto defaults of the 1930s when the US and Britain abandoned the gold standard. Monetary institutions are more stable (assuming the US Congress leaves them that way). Fundamentally, the size of the shock is less. But debt burdens are racing to thresholds of (roughly) 90 per cent of gross domestic product and above. That level has historically been associated with notably lower growth.<\/p>\n

While the exact mechanism is not certain, we presume that at some point, interest rate premia react to unchecked deficits, forcing governments to tighten fiscal policy. Higher taxes have an especially deleterious effect on growth. We suspect that growth also slows as governments turn to financial repression to place debts at sub-market interest rates.<\/p>\n<\/blockquote>\n

The problem here is that budget balancing amid a weak economy is a bit like pushing on a string. The more you increase taxes and reduce spending, the weaker is the economy, which leads in turn to reduced revenues and increased spending on things like unemployment insurance. But as Ms Reinhart and Mr Rogoff point out, if you don’t address the deficit at all, then markets eventually get worried and interest rates rise, choking off recovery.<\/p>\n

The way you get around this is by taking credible steps to address long-term deficit issues while maintaining government support for the economy in the short run. This is what Mr Nabors claimed the Obama adminstration was after, but his statement is clearly undermined by adminstration forecasts suggesting the unemployment rate will be above 9.8% at the point at which the discretionary spending freeze sets in. Meanwhile, the freeze itself will do nothing to convince markets of the administration’s deficit-cutting resolve, given that it will result in only $250 billion in savings over the next ten years\u2014a drop in the debt bucket.<\/p>\n

We can look at this another way. Currently, America is looking at a budget deficit around 10% of output. Mr Orszag noted in the press conference that the administration would like to cut that to 3%. But their expectations are that the bulk of the improvement in the near-term deficit\u2014producing a decline in the deficit from 10% of GDP to 5% by 2015\u2014will come from economic recovery, and the resulting increase in tax revenues and decline in automatic stabiliser spending.<\/p>\n

Near-term deficit reduction is almost entirely about the strength of the economy. And nothing anywhere in the president’s policies will do anything meaningful about the long-term deficit, which is almost entirely about growth in spending on health care.<\/p>\n

The president has looked at the problem, correctly identified its nature, and proposed solutions which are irrelevant to harmful. I don’t doubt that they perceive political advantages, which may lead to policy improvements, to this strategy. But having sacrificed a narrative that makes sense, I struggle to understand what they’re gunning for.<\/p>\n","protected":false},"excerpt":{"rendered":"

LAST week, I wrote: In a conference call that just concluded, Deputy Director of Office of Management and Budget Rob Nabors responded to a question on how the freeze might conflict with efforts to return the economy to full employment. Mr Nabors noted that in 2010, the adminstration was focused on putting Americans back to […]<\/p>\n","protected":false},"author":4534,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-271326","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/271326","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=271326"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/271326\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=271326"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=271326"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=271326"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}