Republicans and Jobs

Brief notes worth remembering:

Paul Krugman, shortly after the midterm election:

So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.

GOP stalwart Bruce Bartlett, a veteran of the Reagan and Poppy Bush administrations, as well as former aide to Reps. Jack Kemp and Ron Paul:

It is starting to look like 1937 all over again. As the table below indicates, the economy made a significant recovery after hitting bottom in 1932, when real gross domestic product fell 13 percent. The contraction moderated considerably in 1933, and in 1934 growth was robust, with real G.D.P. rising 11 percent. Growth was also strong in 1935 and 1936, which brought the unemployment rate down more than half from its peak and relieved the devastating deflation that was at the root of the economy’s problems.

By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy.

On the fiscal side, Roosevelt was under pressure from his Treasury secretary, Henry Morgenthau, to balance the budget. Like many conservatives today, Mr. Morgenthau worried obsessively about business confidence and was convinced that balancing the budget would be expansionary. In the words of the historian John Morton Blum, Mr. Morgenthau said he believed recovery “depended on the willingness of business to increase investments, and this in turn was a function of business confidence,” adding, “In his view only a balanced budget could sustain that confidence.”

Roosevelt ordered a very big cut in federal spending in early 1937, and it fell to $7.6 billion in 1937 and $6.8 billion in 1938 from $8.2 billion in 1936, a 17 percent reduction over two years.

At the same time, taxes increased sharply because of the introduction of the payroll tax. Federal revenues rose to $5.4 billion in 1937 and $6.7 billion in 1938, from $3.9 billion in 1936, an increase of 72 percent. As a consequence, the federal deficit fell from 5.5 percent of G.D.P. in 1936 to a mere 0.5 percent in 1938. The deficit was just $89 million in 1938.

At the same time, the Federal Reserve was alarmed by inflation rates that were high by historical standards, as well as by the large amount of reserves in the banking system, which could potentially fuel a further rise in inflation. Using powers recently granted by the Banking Act of 1935, the Fed doubled reserve requirements from August 1936 to May 1937. Higher reserve requirements restricted the amount of money banks could lend and caused them to tighten credit.

This combination of fiscal and monetary tightening – which conservatives advocate today – brought on a sharp recession beginning in May 1937 and ending in June 1938, according to the National Bureau of Economic Research. Real G.D.P. fell 3.4 percent in 1938, and the unemployment rate rose to 12.5 percent from 9.2 percent in 1937.

And then there is this, from John S. Irons of the Economic Policy Institute:

The agreement to raise the debt ceiling just announced by policymakers in Washington not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs. The spending cuts in 2012 and the failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012, relative to current budget policy.

On debt and deficits

James Fallows of The Atlantic calls it, “The Chart That Should Accompany All Discussions of the Debt Ceiling“:

It’s based on data from the Congressional Budget Office and the Center on Budget and Policy Priorities. Its significance is not partisan (who’s “to blame” for the deficit) but intellectual. It demonstrates the utter incoherence of being very concerned about a structural federal deficit but ruling out of consideration the policy that was largest single contributor to that deficit, namely the Bush-era tax cuts.

An additional significance of the chart: it identifies policy changes, the things over which Congress and Administration have some control, as opposed to largely external shocks — like the repercussions of the 9/11 attacks or the deep worldwide recession following the 2008 financial crisis. Those external events make a big difference in the deficit, and they are the major reason why deficits have increased faster in absolute terms during Obama’s first two years than during the last two under Bush. (In a recession, tax revenues plunge, and government spending goes up – partly because of automatic programs like unemployment insurance, and partly in a deliberate attempt to keep the recession from getting worse.) If you want, you could even put the spending for wars in Iraq and Afghanistan in this category: those were policy choices, but right or wrong they came in response to an external shock.

Hell, or, A Conversation with Brooks and Collins

I have a new vision of Hell, which is sitting around the “conversation pit” getting stoned with New York Times columnists David Brooks and Gail Collins. Apparently, the two get together and talk about issues for the newspaper’s Opinionator blog every Wednesday. To borrow a phrase from Supreme Court Nominee and current Solicitor General Elena Kagan, I wish they wouldn’t.

This week, the Dullard Duo took on one of the vital economic questions of the times: Deficit reduction or job creation?

Gail Collins: David, I was very interested in your column attacking the idea of a second stimulus. In fact, I was so interested that I almost put down my copy of this week’s New York Magazine, which has a big profile of you and your “charming, levelheaded optimism.” I agree totally with that assessment, although I part company with the author when it comes to your suits, which are certainly not shapeless.

The article also says that because of your book deadlines, you are only getting four hours of sleep a night. So I feel terrible asking you to converse about anything, let alone the economy.

David Brooks: My suits are absolutely shapeless. They are sartorial cumulus clouds. Given my body, shapeless is the best option, believe me. Other than that, I thought the profiler was admirably gentle and forgiving.

I’d like to say things could only get better from there, but … yeah. I’d also like to say it would be enlightening to hear an actual recording of this conversation in order to pick up some of the nuance, but, again … er … yeah.