Larry Summers Calls for More Stimulus

Funny how all the economists leaving the Obama administration seem to be saying the same thing:

What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. Raising the share of payroll from 2 per cent to 3 per cent is desirable, too. These measures raise the prospect of sizeable improvement in economic performance over the next few years.

At the same time we should recognise that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10-year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.

It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand. The underlying rate of inflation is still trending downwards and the problems of insufficient borrowing and investing exceed any problems of overconfidence. The Dodd-Frank legislation is a broadly appropriate response to the challenge of preventing any recurrence of the events of 2008. It needs to be vigorously implemented. But under-, not overconfidence is the problem, and needs to be the focus of policy.

Policy in other dimensions should be informed by the shortage of demand that is a defining characteristic of our economy. The Obama administration is doing important work in promoting export growth by modernising export controls, promoting US products abroad and reaching and enforcing trade agreements. Much more could be done through changes in visa policy to promote exports of tourism as well as education and health services. Recent presidential directives regarding relaxation of inappropriate regulatory burdens should also be rigorously implemented.

Shovel-Ready Projects Watch

Man, if only we had a bunch of jobless construction workers:

Shrinking budgets are forcing PennDOT to make a tough choice. Do they fix bad bridges or bumpy roads first? It’s a no win situation…

New numbers from PennDOT show more bridges in our area are classified as “structurally deficient” in spite of a state bond approved in 2008 to fund bridge repair…

But the news is also bad for roads, 18 percent of all state highway miles in our area are classified as “poor condition.”

Of course there is an obvious opportunity for a win-win situation here. There’s high unemployment in the construction sector and interest rates on 10-year Treasury bills have never been lower. The problem here is the lack of money, which is absurd because the federal government can’t run out of money. We could very easily put a lot of people back to work if the federal government borrows money to pay for these projects.

[Source: John Craven]

Despite Democrats’ Best Efforts, the Public Agrees With Liberals On the Deficit

Two important polls came out this week showing Americans disagree with Republicans on the need for short-term spending cuts.

First, Gallup finds that only a small minority of Americans think the budget deficit a more important problem than jobs or the economy. Nicolas Mendoza explains:

A majority of Americans, fifty-five percent, have said that either the economy in general or unemployment in particular is the most important problem facing the country in 2011, according to an average of Gallup’s tracking poll results from January to May. Meanwhile, only thirteen percent of Americans have said that the federal budget deficit is the most important problem during a period where discussion of the deficit dominated the agenda in Washington.

Those who cited the deficit as the most important problem were more likely to be male, white and making over $75,000 a year. No more than one fifth of any of these demographics said that the deficit was the most important problem. Some groups have a startlingly low likelihood of caring most about the deficit; for example, only five percent of black Americans say that the deficit is the most important issue…

This shows that for all the handwringing in Washington about the deficit, Americans want to see full employment before we pivot to deficit reduction. Short-run spending cuts will increase unemployment.

A new Pew poll on the deficit found that the deficit reduction ideas Americans support come overwhelmingly from the Democratic side, and all the most unpopular ideas come overwhelmingly from the Republican side:

Now, I’m sure that if you polled another round of stimulus, that would also be very unpopular. But the fact is that with 9.1% unemployment and economic indicators increasingly flashing warning signs that the bottom is falling out of the recovery, the economy needs more stimulus from Congress and a higher inflation target from the Fed.

Elected Democrats should be looking at these poll numbers and asking themselves which is worse – a few weeks of bad news cycles because they popped the Beltway consensus on deficit hysteria, or a 10% unemployment rate come November 2012. It’s no contest. Right away, Obama should recess-appoint some Employment Hawks to the FOMC, and Treasury should use government-owned Fannie and Freddie to modify mortgages and clear the housing market.

Big Win for Small Biz on Interchange Fees

Annie Lowrey has the good news:

Yesterday, something rare happened in Washington. Main Street beat Wall Street. Consumers beat lobbyists. Small business defeated big banks. Despite weeks of hyperbolic ad campaigns and a lobbying blitzkrieg, the Senate reaffirmed its decision to limit the “swipe fees” that banks charge businesses for debit card transactions, starting on July 21. But it is not so clear that this unexpected victory will actually help consumers.

Currently, banks charge retailers swipe fees, also known as interchange fees, of about 44 cents per transaction, culled whenever an American pays with debit, some 40 billion times per year. Those fees are a moneymaker, earning the banks about $15 billion a year. But they are burdensome for retailers. Indeed, stores actually lose money on some debit-card transactions, and see their margins uncomfortably thinned on others. If you use debit to buy a 99-cent pack of gum at your corner store, that store very well might end up in the red for the transaction if it is kicking 44 cents back to your bank. Big retailers, like Wal-Mart, have the clout to negotiate the fees down with the banks themselves. But small stores do not.

Smaller merchants, therefore, have grown to despise the fees—especially as more and more people shifted from credit to debit, often spurred on by their banks’ generous debit reward programs. But businesses had trouble convincing Congress to intervene in this inside-baseball, retailer-versus-bank battle. And they had trouble convincing consumers that swipe fees were bad for them, too. The average customer probably never knew about the interchange charges, even though the average household pays about $427 a year for these invisible fees.

Rentiers vs. Debtors

Paul Krugman says what’s really holding back the recovery is the fight between creditors and debtors. The reason the recovery can’t take off is that there’s a consensus in Washington on bleeding out debtors rather than making the creditors take a haircut. That’s why the banks that made the bad loans in the first place got bailed out, but principal write-downs for borrowers are nowhere on the agenda:

What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense…

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief…

No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.

And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers…creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.

Read the whole thing. Then head over to Mike Konczal’s place for more.

Charlie Dent Still Does Not Know What Is Wrong With the Economy

Can we finally dispense with the notion that Charlie Dent has any clue what to do about jobs?

Here’s Dent on the terrible jobs report:

“Certainly, I am disappointed the May employment figures reveal the economy is still struggling to recover. Sadly, I am not surprised by this news. Employers are naturally reluctant to hire new workers while the President continues to call for tax increases, stands in the way of domestic energy production and turns a blind eye to a growing list of onerous federal regulations.

“It is long past time to unleash the private sector, get serious about tax reform, open markets for American producers and stop bureaucrats from stifling job creation across the country. The anti-business agenda of this Administration must end. The President can no longer be both pro-jobs and anti-employer.”

Let’s take these in order. Dent says fear of future tax rates is holding back hiring.

Joel Slemrod, former senior economic advisor to Ronald Reagan, disagrees:

High GDP countries are high tax countries,” said Joel Slemrod, an economist at the University of Michigan’s Ross School of Business. “That doesn’t mean high taxes cause the high GDP.” […] Slemrod, who served as senior staff economist for President Ronald Reagan’s Council of Economic Advisers, said raising taxes today would be risky because the economy remains fragile. But given the economy’s performance in the 1990s, returning marginal rates to their Clinton-era levels in 2013, as Obama proposes, wouldn’t be, he said. “It’s just hard to say that’s the kiss of death for economic growth,” Slemrod said.

The United States is a very low tax country. Our economy has performed very well during periods with high marginal tax rates. Clinton-era tax rates did not hold back the economy during the 90’s. That is not why businesses aren’t spending.

New oil drilling isn’t going to do anything to bring down gas prices. Dent is also offering a false choice between creating jobs and protecting the environment.

Other than the Affordable Care Act and the Dodd-Frank financial reform law, there just hasn’t been a significant increase in regulations. The Affordable Care Act regulations don’t take effect until 2014. As for the financial sector, to put it bluntly, if Dodd-Frank doesn’t reduce financial sector jobs and profits as a percentage of the economy, we should take that as a sign it’s not working. The financial sector absolutely needs to shrink as a share of the economy.

That is not what is happening. For an anti-business administration, it’s pretty weird that corporate profits are soaring to pre-crisis records.

But it’s not at all clear that the private sector is ready to be “unleashed” or is showing any signs of being ready to replace the spending the economy is losing to government layoffs. Quite the opposite. Business owners are saying they don’t want to expand because they don’t have the customers:

Businesses don’t think interest rates are the problem, and there’s no sign of government spending crowding out private borrowing:

It’s certainly not “bureaucrats” who are stifling job creation. Government employment is shrinking:

Mostly at the local level:

Now, this is what the Republicans are saying they want to happen. Government is shrinking. And they have been very explicit about how they think this game works: pay cuts for all. All of these laid off public sector workers will say to your private sector boss: “I will do this job for less money.” The Dent way clears the labor market by making everyone take a pay cut. We already had 10 years of wage gains slower than the Great Depression. How much more do the House Republicans want to push down wages?

Austerity is not creating jobs in the UK, and there is no reason to believe it will create jobs here. It doesn’t work.

The economy clearly needs more stimulus. More state and local aid, a bigger payroll tax holiday and infrastructure spending from Congress, financed by the Fed. If Dent cares about manufacturing jobs, the best thing that could happen is for the Fed to get more money into the economy.

It’s increasingly obvious that Dent devotes most of his time to his true passion, Homeland Security issues, and has taken very little time to learn about the economy beyond what he hears from financial sector lobbyists and the talking points he receives from John Boehner’s office.

How China Views Our Deficit

Ryan Avent says our Chinese overlords think the deficit should take a back seat to job creation, and Republicans need to stop screwing around and raise the debt ceiling:

One thing seems clear: America’s government is making its economic road harder than it needs to be. Debt problems loom, but there is no immediate fiscal crisis and no need for drastic short-term cuts. When debt issues came up during my trip to China, officials had a consistent message: China is a patient investor. It wants America to take steps toward fiscal sustainability, but it’s happy to have this happen over a 5- to 10-year period. By cutting drastically now, America is undermining its economy for no good reason.

Treasury yields tell the tale; they continue to tumble. The yield on the 10-year Treasury fell below 3% on today’s bad economic news. Treasury yields have fallen on reduced American economic prospects, but they’ve also moved down as part of a broad flight to safety. Trouble in Europe and a slowdown in Asia have made the safe haven of American government debt more attractive. Which makes the tussle over America’s debt ceiling look even more unnecessarily dangerous. The other consistent message from Chinese officials on debt matters was that any failure to make good on American obligations would be catastrophic. Even a very short disruption in payments, of a week or two, would be totally unacceptable.