Ev Ehrlich's Everyday Economics


In Your Head, You Know He’s Right

Forget the other stuff, like his invocations of people at kitchen tables and what a great people we are. The President seems at his worst to me when he tries to empathize with the oppression of working people. His temperament and presentation make him a lousy populist.

Because, otherwise, he’s right.

For supporters such as am I, this is the sorrow and the pity. You can applaud his style or cringe about it, but on every substantive point the President made in his Thursday night speech, he was more right than are his critics, and sizably so.

The most important of these points was the subtextual one, the central question confronting economic policy. That is, what’s the problem, why aren’t we growing and creating employment again? One side blames crushing regulation and the looming deficit crunch. The other – to which I subscribe – holds that the problem is the absence of demand.

To my thinking, the problem is obviously not massive future deficits – the bargain basement rates on long-term Treasury bonds speak to that, and even though deficits are a crisis waiting to happen, they’re not the issue today. Nor is the problem the crushing
burden of regulation. My colleague Jeff Eisenach, who disagrees, pointed me to a paper in which he played a leading role, which argues that unemployment insurance can be shows to reduce hours worked. Larry Summers writes that unemployment insurance induces people to defer going back to work, so much so that its elimination would lower unemployment by half a percentage point. Those are big numbers and well might be the best case about regulation and job creation. But what I take away from them is that reasonable reforms will have a big payoff, even if not fix the economy. And if Michelle Bachmann’s best example of crushing regulation is a restaurant owner who needs to downsize from 60 to 50 this summer because of an insurance mandate that might take place in 2014, it’s time for a reality check.

The focus on regulation and government’s role in the economy being the central obstacle to growth is a bedtime story, and its shame is twofold. The first is that it’s being propogated by people who chillingly either know better (and don’t want effective policy to be made) or who don’t know better (but say things that get crowds to cheer much as pigeons step on treadles for rewards). The second is that there are plenty of opportunities out there to improve regulation – off the top of my head, eliminating the ban on short-selling stocks, blowing off net neutrality, making auto fleet economy standards tradable -- and they’re all diminished by the wholesale assault on “bureaucratic socialism that can't find the baby in the bathwater.

The economy’s problem is insufficient demand. The best way to solve this problem is to help shore up households’ balance sheets by letting them refinance their mortgages at a federal window. That’s better than spending, better than tax cuts, better than all of it. That Fannie and Freddie have to be brought into this is an odd and regrettable choice, but whatever. Banks are not going to refinance a family that owes 120 percent of their home’s value, particularly when the mortgage holder is getting 6.5 percent annually. Their Moms made them venal, not stupid.

Federal refinancing of mortgages would require the Treasury to hold trillions of household assets – at least for a while (I’d hope that we could combine creating thee assets with some kind of break-up of Fannie and Freddie, but more on that later). No one likes trillions of anything. But this is the solution to the problem – it frees up purchasing power, capitalizes on dirt-cheap funding, and helps stabilize the downward spiral in the housing market. And it solves the problem because it addresses the problem – weak demand.

A second thing the President’s right about is the role of the public sector. Forget the gratuitous language about how “we’re all in this together” of “that’s not America.” The substantive point is that rational public sector investment is a predicate for private investment, always has been and always will. The sad paradox is that the critics who see public investment as wasteful posted their criticisms using a computer with microelectronics on a broadband network all brought into being early-on by the government, drove to work on federal highways, probably attended land grant colleges, and one day will have their lives improved or extended by a therapy involving monoclonal antibodies, rejection-proof stents, or SSRI drugs, all of which came out of the National Institutes of Health. I remember a discussion I had with a farm state Senator back when I was in the Administration who questioned why we had the National Weather Service when he could turn on the television and find out what the forecast was. I bit my lip.

There are ample opportunities for the federal government to continue its productive role in the economy’s development. The first and obvious one begins with the National Broadband Plan the Administration has already put forward but done little to implement. I’ve heard people deride it as “Data Stamps,” but the better analogy is to the highway system. Extending broadband coverage – by working with states and localities to extend mixed wireline and wireless coverage and to ensure the network connects to schools, health care providers, and local governments has important social value.

A study released by Deloitte last week about the economic benefits of extended 4G networks is beyond compelling. In their view, investment in extending 4G networks could lead over three-quarter of a million additional jobs before we consider the services providing on those networks and the opportunities those networks allow – the business creation, efficiency gains, and the like. Companies are investing billions annually in an effort to build these networks, but there’s a benefit to be had by accelerating their efforts.

Infrastructure itself is another of these areas, and as a Founding Father of the infrastructure bank concept, it’s exciting to see it move forward. And it was encouraging to hear the President talk about the Bank as being a place where public and private money can come together and that its operations would be immune to earmarks. Because, beyond the general problem of underfunding infrastructure investments, the Bank was dreamed up to rationalize the disparate and often bad choices the individual modal programs now make, and to find a way to bring eager private risk capital into the sector without compromising important public policy goals. (What does that mean? Try this.)

The President’s also more right than wrong about progressive taxation. The argument that we’re taxing “job creators” is a remarkable one – it argues that income at the top of the spectrum leads jobs to be created in a way that income at the bottom doesn’t. In fact, if I was worried about disincentives to work, I’d focus tax cuts on the bottom of the income distribution, perhaps by expanding the zero bracket, since that’s where eliminating the disincentive to work or otherwise improve one’s self would do the most good.

(On the other hand, I felt for Mitt Romney when he says “Corporations are people, too, my friend,” and gets pilloried. His poorly-expressed idea is that corporations are a way in which people – stockholders – gather to get things done. We’d be better off figuring out how to tax those underlying people rather than the corporations they form, just as we’d be better off preserving the First Amendment rights of those “underlying” people and not extending them to the corporations they form.)

I could cherry-pick the other parts of the President’s speech in which, whatever else you want to say, he’s right, but let me focus on two of them to conclude. The first was this remarkably straight-forward sentence, which seemed to go entirely unnoticed:

We should have no more regulation than the health, safety, and security of the American people require.

If there was ever a first sentence towards finding a workable consensus on this issue, that was it. Sure, it begs lots of questions, like the best approach to achieve that simple end. But it’s a sensible response to both tails of the spectrum – those who see government’s existence as the primary if not sole obstacle to progress and those who never saw a market that worked without supervision. And as a corollary to that, if regulation is going to go beyond that standard – like systemic risk regulation, or net neutrality, or greenhouse gas limitations, then it ought to come out of law, not bureaucratic whim. (And yes, I even think that’s a reasonable standard regarding climate change – any solution EPA comes up on its own for the vast problem of carbon dioxide is going to be half-vast.)

And the other high point was the President’s straightforward admission that Medicare, unchanged, is – allow me to use the phrase – a monstrous lie. There is no budget problem in America; there is a Medicare problem – how is it going to work and how will we pay for it?

Again, avoiding this basic reality creates two problems. The first, of course, is that you can’t solve the problem so long as you avoid it. But the second is that the things we need the public sector to do – the highways and the land grant colleges and the Internets and the spectrum availability and tomorrow’s monoclonal antibodies – are going to be the victims as we slash everything else because we’re unwilling to act on what the root cause of the problem is.

We could replay the last three years and parse out where the President’s been strong and weak. If that amuses you, go ahead. And we could speculate about how he’s positioning himself for his date with Romney (can I get a bet during the Perry bubble?) next year. Or discuss the President’s successes or failings as a leader.

But when you listen to him and cut away the crap, in your head, you know he’s right.


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