How fiscal ideology trumped job creation

By Felix Salmon
June 8, 2011

Ben Bernanke was hardly shy about straying into fiscal territory yesterday:

If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk.

And I don’t think it’s a coincidence that today sees the publication of Zachary Goldfarb’s big 2,200-word profile of Tim Geithner, banging the same drum, and contrasting it explicitly with the need for further economic stimulus.

Geithner’s efforts inside the White House have shaped how Obama confronts this defining moment. At stake in the months ahead are the size of government, the generosity of the nation’s safety net, the taxes people will pay and the debt that will weigh on future generations…

By early last year, Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009.

Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said.

Peter Orszag, Obama’s budget director, wanted the president to start proposing ways to bring spending in line with tax revenue.

Although Geithner was not as outspoken, he agreed with Orszag on the need to begin reining in the debt.

The way that Goldfarb puts it, it’s pretty clear that Geithner’s actions have resulted in less stimulus and a weaker social safety net. I’m particularly interested in the “rancor” within the White House on this question, given that I thought there was a consensus on the issue, in terms of what the best policy should be: pay for a second stimulus now with the proceeds of a credible long-term deficit-reduction strategy. The message I’ve been getting — and I’ll admit that my ears are not well attuned to Washington nuance — is that we’d all love a second stimulus on such terms, but that it’s a political impossibility given the make-up of Congress, and that therefore there’s no point in even trying.

But now it seems that Geithner, for one, is actually quite vehemently opposed to any second stimulus, even in the context of long-term fiscal reform.

Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In this debate, Romer is right and Geithner is wrong. For one thing, economic growth isn’t necessarily the only or even the best way to create jobs, as this chart from Jared Bernstein shows:


There’s a risk, if you concentrate too much on economic growth and too little on job creation, that you’ll just build an economy with increasing returns to capital and decreasing returns to labor, where productivity gains get dividended out to plutocrats rather than resulting in new employment opportunities. And even if you agree that economic growth is a great way to create jobs, it’s not at all obvious that deficit reduction is a better way to jumpstart growth than stimulus. Quite the opposite, in fact. Which is why I have a lot of sympathy with Andrew Stern here:

Andrew Stern, former president of the Service Employees International Union, said in an interview that Geithner looks at the world “from his experience, which is predominantly a Wall Street, Treasury, fiscal and monetary policy point of view.”

Geithner cut his teeth in a world of bond vigilantes, an era when James Carville said that he would like to be reincarnated as the bond market, because then he could intimidate everybody. And after that, Geithner dealt with a series of international sovereign-debt crises where countries found themselves hammered by enormous bond spreads.

But right now the 10-year bond is yielding less than 3% even after the debt ceiling has already been reached and the government is in frantic moving-money-around mode to try to avoid drastic cuts or even default. Clearly it’s not high long-term interest rates which are holding back economic growth. And although it’s all well and good for Geithner to talk about building a credible long-term fiscal strategy, where I part ways with him is the idea that such a strategy is incompatible with short-term stimulus. Indeed, I think we need a short-term stimulus to get enough Americans working again that tax revenues can rebound healthily and make a serious dent in the deficit.

It’s clear at this point that such a stimulus is not going to happen. The result is going to be devastating for millions of needlessly-unemployed Americans — and also for the fiscal health of the country as a whole. Geithner, it seems, deserves to shoulder a large part of the blame for that.


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>>Geithner, it seems, deserves to shoulder a large part of the blame for that.>>

Geithner works for Obama. It was Obama’s call.

Geithner is Mellon, but Obama is Hoover. We need FDR.

The GOP is completely insane and much worse, but that doesn’t excuse the administration.

Posted by 3oosion | Report as abusive

3oosion: you may have your history wrong. 04/nicholas-kristof-gets-his-history.htm l

Is your idea of the fiscal policy to create jobs “fiscal ideology”, or just those of people who disagree with you?

Posted by dWj | Report as abusive

3oosion is right. Felix is right. And you link to some jackass who brags about his lack of education.

Geithner is the little boy who seeks the approval of the Lords of the Market while on tennis dates with them. Honestly, I hope he gets his $100M in comp someday. Someone ought to get rich for all the damage Geithner has done to literally tens of millions of Americans.

Posted by Dollared | Report as abusive

We spent $800B on porkulus and unemployment went from 7% to 10%. So the solution to job creation is more porkulus? what is wrong with you people?

Posted by JackWhite | Report as abusive

Geithner is O’bama’s millstone compliments of Wall Street to make sure O doesn’t get too fast and loose with the fiscal machinations. By the way, anybody see any irony in Dimon’s fiscal regulation constriction lecture to Bernanke in light of D’s complicity in the recent spillover/breach/failure The Dam. Can we put his head on a stick in front of JP Morgan yet?

Posted by Woltmann | Report as abusive

I would agree with 3oosion, except that I would say that Obama’s big problem is he’s tried to hard to find centrist solution when the current crop of conservatives don’t believe in negotiation or compromise. I think he’s doing it because he thought he could put a tamper on extremist politico but I think in the true bully/bullied scenario his attempts only emboldened the wackos. Now we’re stuck in this quagmire and so far from any reasoned approach that America (and the West) is doomed to at least a partial repeat of Sep08.

@JackWhite – when you consider that $350B of that $800B was tax cuts, it’s only $450B over two years that was increased spending. $450B is about 3% the size of the US economy (so 1.5% two years running)… 1.5% growth artificially pumped in to the economy is not going to immediately turn around a 6% annualized decline in the economy during the recession that lasted 18 months. It’s more important to know WHY it didn’t work than that it didn’t work pal

Posted by CDN_Rebel | Report as abusive

@CDN_Rebel, I was about to write a reply to Jack in a similar vein. Where are those promised Republican jobs from the tax cuts for the rich?

How can GE be paying negative taxes when they are hiring overseas? That is a pretty ironic joke for the unemployed as Immelt leads the jobs effort by suggesting lower corporate taxes to stimulate unemployment to “free up” money! Free up to further subsidize their offshore efforts?

Flat tax with no credits or loopholes and some emergency job benefits making would help. No Corporation should be getting credits unless they hire Americans on American soil.

Corporatocracy trumps job creation.

Posted by hsvkitty | Report as abusive

Assuming keynesianism and a positive multiplier, sure. But there are also empirics for reduced regulation, abolition of minimum wage, roll back of union cartlelization, and lower taxes. Look at the state-by-state breakdowns, or the US vs. Korea/Singapore/Brazil …

Posted by caveatBettor | Report as abusive

The next financial crisis should be dealt with through a massive jobs program that creates national infrastructure that does not exist anywhere else and hit imports from low-wage countries with tariffs to pay for it all.

If you want to do even more, allow people to borrow at 0% from the IRS to pay off secured debts.

I could go on and on with stimulus ideas. The problem is there are billions of workers outside the US willing to work for much less and do much more.

Posted by M.C.McBride | Report as abusive

hsvkitty you have it right when you say, “corporatocracy trumps job creation.” Only campaign finance reform can rectify that. Unfortunately the Supreme Court killed any further attempts at curtailing the corporation’s right to free speech and the influence their “speech” manifests. The results are a generation whose standard of living is poorer than that of their parents. Tax breaks that promised job creation have simply gone into the pockets of the rich, concentrating wealth into an imbalance that on the whole, drives the average standard of living down. The “recovery” money used to save our financial institutions just made the problem worse while the Tea Party’s response, if enacted, would cause a depression. The only counterpart to corporate power has been the voice of labor and we all know what is happening there. So the only way to achieve the distribution of wealth needed for a healthy economy is to hope that the evidence of what we are doing becomes clear before another generation is lost to policies based on micro, rather than macro economics.

Posted by LEEDAP | Report as abusive

I like the chart. “What happened?” The top 1% creamed off all the wealth from productivity gains while driving wages to second-world levels by deliberately keeping unemployment high. Mission accomplished, and on a thorougly bipartisan basis, too.

Posted by lambertstrether | Report as abusive

lamberts, wages are not yet at second-world levels. Not even remotely close.

Might get there in a decade, though hopefully that will largely be the result of second-world countries rising.

Posted by TFF | Report as abusive