Profound Insight on Fiscal Stimulus

From the Stand-up Economist:

If I had to pick an animal to describe the US economy right now I'd have to go with the hamster. But like a really tired hamster that has been running around its cage for like seven years. Right now it's exhausted.

As a micro-economist I would say that the hamster needs some rest. Macro-economists, of course, look at the hamster and think that it needs some methamphetamines.

Now, I'm sure that they are right. Over the past month I've learned that the three most terrifying words in the English language are, "macro-economists agree that".

I'm sure they are right about the hamster needing methamphetamines. But all I'm saying is that in two years that is going to be one ugly hamster.

Conspiracies, vast and imaginary

Bill Clinton apparently believes that the "vast right-wing conspiracy" that undermined his presidency (Did Republicans smuggle buxom interns into the White house?) is diminished but not dead.

This vast right-wing conspiracy theory is just as dopey as the vast left-wing conspiracy theory that remains very popular on Fox News. Isn't it about time that America's leaders came to to accept that some people will inevitably oppose their policies, dislike them personally, or find some other reason to make their lives as difficult as possible? It is a mystery to me why American politicians feel that they ought to be handled with kid gloves.

In the UK (also New Zealand, Australia, Canada and India) the Prime Minister is required to front up in parliament on a weekly basis and answer the best verbal assault that the opposition parties can muster. This forces the leaders of these countries to develop nice thick skins. It also removes any illusions they might have about entitlement to deferential treatment.

By contrast, American leaders, who generally avoid unscripted situations whenever possible, are complete wusses. Perhaps weekly 'President's Questions' in Congress toughen up the denizens of the White House so they don't feel the need to cry like little girls when people don't treat them nice.

The Wisdom of Reich

Former Secretary of Labor and commentator extraordinaire, Robert Reich, has been raised an interesting question:

So how can the Dow Jones Industrial Average be flirting with 10,000 when consumers, who make up 70 percent of the economy, have had to cut way back on buying because they have no money? Jobs continue to disappear. One out of six Americans is either unemployed or underemployed. Homes can no longer function as piggy banks because they’re worth almost a third less than they were two years ago. And for the first time in more than a decade, Americans are now having to pay down their debts and start to save.

Even more curious, how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed “takeover” of health care, autos, housing, energy, and finance? Their anguished cries of “socialism” are almost drowning out all their cheering over the surging Dow.

So, if all this Keynesian policy is so bad for the economy, why are investors so bullish? Mr Reich's argument is the Keynesian stimulus is working for corporate America (if not for ordinary Americans).

However, there are several plausible (non-Keynesian) explanations:

1. The bull run is really just a bounce back from the panic selling that occurred earlier in the year. Even if the economic outlook remains bleak, it's much less bleak than it was. Relief that the world isn't going to end isn't inconsistent with concern about the future.
2. US corporations are poised to benefit from a rebound in the world economy and a sinking dollar. There is nothing inconsistent about being bearish on the US economy and bullish on multi-nationals.
3. The market may think that many of the Obama administration's more ambitious proposals aren't actually going to pass. Cap-and-trade is already on the rocks, getting health reform through the Senate is far from certain and the volume of concern about the deficit increases every day. If investors think the Keynesian surge is already abating they may be more comfortable buying stocks.
4. It is clear that the government will find a reason to bailout just about any large corporation that runs into trouble. This policy of socializing losses is likely to promote corporate risk taking on a fairly epic scale. More risk means higher profit potential, which in turn means higher stock prices (arguably this is a form of state subsidy, but has little to do with boosting aggregate demand).

Obama not liberal enough?

It appears that some liberal Democrats are so incensed by President Obama's unreasonably centrist tendencies and willingness to compromise with Republicans that there is talk of Obama facing a primary challenge before the 2012 election.

It's no wonder that so many in the liberal base are falling out of love with the president. So much so that there is even faint talk of an insurrection if Obama doesn't straighten up and fly left. Recently, during an appearance on a cable TV show, Washington Post columnist Gene Robinson discussed the political costs for Obama if the public option is dropped from the health care bill. They included the possibility of a primary challenge in the 2012 presidential election. Said Robinson, "You don't want to see the progressive caucus in a foul mood."

A interesting question is whether the Obama re-election team would consider a primary challenge from the left a bad thing. If you were trying to get a relatively liberal president re-elected, a wild eyed progressive challenger playing up how crazily centrist and bipartisan your guy was might actually be an asset.

The only scenario in which this might be negative is if the president is so weak in 2012 that a primary challenger actually has a chance of winning the nomination. In that case President Obama might be forced to publicly tack left in order to win the primary, which might be the thing that costs him the general election.

'94 Nostelgia

Brad DeLong has written a pretty interesting piece on his reminiscences of the health care battles of the mid nineties. As Mr DeLong tells it, there was never any hope of getting a Democratic plan through the Senate. Key Democratic Senators weren't going to let a "hick from Arkansas" push through health reform. Even a reform they might otherwise support (charming).

All hope actually rested on an eventual compromise coauthored with Bob Dole. Apparently, this plan was sabotaged by "Gingrich and company", who allegedly made opposition to any Clinton health plan a condition of supporting Mr Dole's presidential aspirations. The moral according to Mr DeLong is:

I have drawn what I think are appropriate lessons from it. First, Democratic senators do themselves no good either in the next world or in this when they block sensible initiatives from Democratic presidents. (But what lessons are Democrats Landrieu, Nelson, and Lincoln drawing?) Second, Republican senators do themselves no good either in this world or in the next when they block sensible initiatives from Democratic presidents. (But what lessons are Republicans Grassley, Voinovich, and Hatch drawing?)

I don't know how accurate Mr DeLong's recollections are, however his conclusions are a little iffy.

On the subject of Democratic Senators Mr DeLong may have at least half a point. All elected Democrat's have a vested interest in making the President appear successful. Perceptions of how the President is doing will inevitably hang over every race in the coming mid-term elections. On the other hand, getting the President's bills passed is hardly a guarantee of electoral success. The Democrats may well have lost control of Congress in 1994 even if they had passed health care reform.

Regardless, the situation in 2010 will be very different from 1994. The 1994 election was a decisive swing against a decades long Democratic majority that resulted in Republicans picking up many marginal or even liberal leaning seats. The 2010 election will probably be more like 1996, 1998 and 2000 when the Democrats picked up seats as the Republican tide ebbed. This time around disgust with the Bush administration resulted in a Democratic flood in 2008. With the focus of anti-Republican feeling long gone, this tide too will begin ebb. The marginal Democrats who survive 2010 may well be the ones who recognize that the President is rather more liberal than their constituents and vote accordingly.

On the subject of Republican Senators, my guess is that they are drawing conclusions exactly opposite to what Mr DeLong would prefer. By Mr DeLong's own admission, the real political winners in the health care struggles of the early nineties were the Republicans who led the charge against 'Hillarycare'.