Political Economy: Lizza on Summers; Krugman and Yglesias on Lizza

Paul Krugman:

The story of the stimulus: Christy Romer’s math looked similar to mine: even given what we knew last December, the straight economics said that we should have a stimulus much bigger than the Obama administration’s initial proposal. And given what happened to that proposal in the Senate — we actually ended up with only about $600 billion of actual stimulus — what we eventually got was half of what seemed appropriate in December. And the actual news on the economy since then has been worse than was expected back then, so that the stimulus now looks way short of what we need.

Maybe that was all that could have been done, politically. But it does not sound, from the Lizza article, as if either the economic team or the political team thought much about the risks of finding themselves where we are now — with the economy still failing to deliver job growth despite the stimulus — even though those risks were completely apparent at the time.

One missing part of the story is why Senators Nelson and Collins and Snowe and Voinovich and Lincoln and company could not have been educated then--and why they cannot be educated now to vote for good policies.

A second missing part of the story is why the TARP money has not had a greater effect on production and employment. It has had a substantial effect on interest rate spreads, bank balance sheets, and even asset prices--but the recovery of private-sector investment spending which is the desired payoff has not come.

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UPDATE: Matthew Yglesias asks an important, related question:

Matthew Yglesias: Accepting the Loss: The more we learn about how we wound up with a too-small stimulus, the more I wonder about the slightly odd aversion of American presidents to accepting legislative defeats. After all, in our system of government it’s just a fact: you can only enact the legislation that congress is prepared to enact. Given that we don’t expect presidents to have views that are identical to those of the median legislator, and especially given the rise of the de facto supermajority rule in the Senate, it should be expected that the policy preferences of the White House will substantially diverge from those of the pivotal members of congress.

So would it be so terrible for the President to just say, “I’m glad congress passed this bill and I’m signing it because I think it would help the economy, but the considered judgment of the Council on Economic Advisers and the rest of the staff is that we could use hundreds of billions of dollars of stimulus over and above what Ben Nelson and Susan Collins were prepared to vote for”?

Why is it felt necessary for the president to pretend to believe that what congress will pass is the same as what the country needs? It seems to me to create a weird confusion about who’s responsible for what. We’ve got Paul Krugman blogging about “Obama’s Anzio” instead of “Kent Conrad’s Anzio” or whatever. It’s just not the case that the White House gets to make domestic policy unilaterally.

There appear to be two reasons:

1. The White House fears that Kent Conrad will be mad if it says "the bill is not ideal because of Senator Conrad" and will be less likely to play ball in the future. The White House believes that it has to say that "Senator Conrad's amendments improved the bill" and pretend that they did so.

2. The White House fears that the press will jump on a president whom it decides "cannot dominate congress" and paint him as weak--and that that will make him even weaker than he already is.

Why these two reasons apply I leave to our national psychoanalysts...

Comments

[Gary A:]

Again, a larger stimulus would have been seen as inflationary. And yet, the stimulus is always temporary, because we have deflationary pressures. The clunker program has put the auto industry in a funk ever since. People are not buying except with incentives or sales.

This is the problem, the consumer is over leveraged and tapped out. Unemployment is a leading indicator, as Pimco says, not a lagging one as Summers would hope. Jobs are gone forever and the consumer is trapped.

So then, the economic team and Summers bailed out the crony banking system, but did nothing to deleverage the engine of US and world economic growth, the consumer. This is pure insanity. And Obama was force to listen to Geithner and Summers, criminal and traitorous minds.

Oct 07 02:28 PM

[JeffDB:]

I think this paragraph is telling:

"A second missing part of the story is why the TARP money has not had a greater effect on production and employment. It has had a substantial effect on interest rate spreads, bank balance sheets, and even asset prices--but the recovery of private-sector investment spending which is the desired payoff has not come."

If the hundreds of billions in stimulus money -- almost 3 times our entire national budget in the early 1970s -- did not produce the predicted desirable results, why should we think the answer to our continuing problems is to throw more money down that failed rat hole?

Oct 07 03:16 PM

[Codes:]

Questioning why a politician can't be educated to make a good policy decision is just fantastic. Especially since your analysis of what is needed is not in line with some very notable economists.

Yes, I know the mainstream media has designated anyone not on the mega stimulus bus as a nut. But I think in retrospect that many of these so called nuts had written detailed analysis on the pending crisis in 2007 and 2008. Reinhart and Rogoff are two such voices.

Personally, I have more years and more experience in this industry than you and I feel that we're going to far into the debt spiral, and in the process risking everything on the "double down" strategy.

Just call me crazy...guess I need some educating.

Oct 07 04:43 PM

[claremont:]

The Lizza New Yorker article was a complete fluff piece. It was a pathetic excuse for "reporting" or "current events coverage" from a prestigious magazine that should set its standards higher. It was completely uncritical and the reporter specifically avoided any of the distasteful or awkward parts of the administration's financial policy.

No mention of the Fed's $300,000,000,000 Treasury monetization program?

No mention of Rahm Emmanuel pulling in $16m in 2 years as and investment banker? They mention Summers working for DE Shaw... but don't mention his $5m paycheck?

DeLong is a partisan hack who has nothing interesting to say about the financial crisis other than "Spend more money! Pile another $1,000,000,000,000 or 2 of debt onto an economy that just went belly up because of too much debt! Republicans suck!" Obama has surrounded himself with a bunch of people who were blindsided by the crisis and have no explanation, or worse, like Geithner, are in Wall St's pocket. The financial, securities, and insurance industry were major contributors to Obama and the DNC but you will never see a partisan like DeLong, Krugman, or Yglesias go into depth on this. They have nothing useful to say. This reporter is either completely ignorant of economics or was told to write a fluff piece making the administration look good, probably both.

Oct 07 07:04 PM

[W.E. Heasley:]

Claremont:

You hit the nail on the head!

Regardless of the size (DeLong is stuck on the size matters argument) the design of the stimulus with its zillion earmarks all based on political pork barrel and social engineering is a Spruce Goose.

The education of legislators? Who wrote the Stimulus Plan? It wasn't the legislators. Much of the stimulus plan was written outside of the halls of congress. What's up with that?

Its not the size! Its the design! Just like the Spruce Goose, this Winged Pig of a stimulus plan won't fly.

Further, DeLong never seems to point out that simultaneously deploying QE and Keynesian Government Deficit Spending in an existing environment of hyper-debt is a dicey proposition at best. One must remember that QE and Keynesian Government Deficit Spending are theories developed in low or zero government debt.

Finally, simultaneously deploying QE and Keynesian Government Deficit Spending has only been attempted once in a modern advanced economy: Japan 2002-2006. Japan remains in an economic malaise.


On Oct 07 07:04 PM claremont wrote:

> The Lizza New Yorker article was a complete fluff piece. It was a
> pathetic excuse for "reporting" or "current events coverage" from
> a prestigious magazine that should set its standards higher. It was
> completely uncritical and the reporter specifically avoided any of
> the distasteful or awkward parts of the administration's financial
> policy.
>
> No mention of the Fed's $300,000,000,000 Treasury monetization program?
>
>
> No mention of Rahm Emmanuel pulling in $16m in 2 years as and investment
> banker? They mention Summers working for DE Shaw... but don't mention
> his $5m paycheck?
>
> DeLong is a partisan hack who has nothing interesting to say about
> the financial crisis other than "Spend more money! Pile another $1,000,000,000,000
> or 2 of debt onto an economy that just went belly up because of too
> much debt! Republicans suck!" Obama has surrounded himself with a
> bunch of people who were blindsided by the crisis and have no explanation,
> or worse, like Geithner, are in Wall St's pocket. The financial,
> securities, and insurance industry were major contributors to Obama
> and the DNC but you will never see a partisan like DeLong, Krugman,
> or Yglesias go into depth on this. They have nothing useful to say.
> This reporter is either completely ignorant of economics or was told
> to write a fluff piece making the administration look good, probably
> both.

Oct 07 10:16 PM