I’m glad Bernie finally realizes that we need to do more to help the economic recovery, but I still detect muddled thinking.
Bernie goes with the “pox on both your houses” approach to the politics, but it’s just not true that both sides have equally strong arguments about what’s wrong with the economy. Republicans say it’s structural unemployment, policy uncertainty, crowding out, and fear of future tax rates that are holding back recovery. I’d like to challenge Bernie to find any data supporting any of those claims. There just isn’t any.
The Democrats say it’s lack of demand – the dropoff in nominal spending in the economy means businesses aren’t hiring since they don’t have enough customers. You can actually measure that. It’s what businesses are saying is the problem. About 75% of our unemployment problem is cyclical. That means if the government steps in and spends the same amount of money that households and businesses are hoarding, that will soak up most of the unemployment.
There’s a paradigm here that I don’t think Bernie’s understanding:
Imagine a line with two opposite poles. On the one side is Expansion and on the other side is Contraction. To create more jobs, policy needs to move toward the expansion side – a larger deficit, more spending and looser money. To get fewer jobs, you move toward contraction – a smaller deficit, less spending and tighter money.
You can’t create jobs by reducing the deficit.
The economic conditions we have now are nothing like the ones we had in the 90s when we had to reduce the deficit to get better interest rates. They are nothing like the stagflation we had in the 70’s.
All the evidence suggests we are much too far toward the Contraction side. State and local budget cuts cancelled out the federal stimulus, and the Fed – even though it’s done a lot – could be doing a lot more. So if Bernie’s worried about a Depression, it’s not good enough to pretend not to know which party is right. He can research this and see who has stronger arguments.