Morning Must Reads: We Know What to Do about the Economy, We Just Lack the Political Will

On Sunday, economists Christina and David Romer urged more aggressive action by the Federal Reserve and by Congress to boost short-term growth, noting in particular that we have the tools necessary to lessen the extent of unemployment in the economy but lack the political will do what is needed.

[David Romer said:] 'We need long-term measures to reduce the deficit over time and short-term measures' — like infrastructure spending — 'to help the shortfall in demand.'

While welcoming President Obama's jobs plan (which has yet to pass congressional muster), [David Romer] said it 'falls far short of filling the jobs gap.'

'The American economy is fixable,' he concluded. 'But the real constraint is building the political will and public support.'

In his New York Times column this morning, Paul Krugman notes the reemergence of a double standard in which many conservatives consider military spending critical to job creation while openly denying that other kinds of government spending create jobs in the economy.

Paul Krugman, The New York TimesBombs, Bridges and Jobs:

But why would anyone prefer spending on destruction to spending on construction, prefer building weapons to building bridges?

John Maynard Keynes himself offered a partial answer 75 years ago, when he noted a curious 'preference for wholly "wasteful" forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict "business" principles.' Indeed. Spend money on some useful goal, like the promotion of new energy sources, and people start screaming, 'Solyndra! Waste!' Spend money on a weapons system we don’t need, and those voices are silent, because nobody expects F-22s to be a good business proposition.

To deal with this preference, Keynes whimsically suggested burying bottles full of cash in disused mines and letting the private sector dig them back up. In the same vein, I recently suggested that a fake threat of alien invasion, requiring vast anti-alien spending, might be just the thing to get the economy moving again.

Krugman argues that this double standard exists mainly because admitting that government action can boost employment in the short run means admitting that sometimes government can be the solution to our problems. That's a dangerous admission to the lobbying groups asking elected officials to sign pledges to not raise revenues under any circumstances, even if it is to do things like repair roads and bridges.

Krugman also points out that recognizing that public-sector spending can boost employment in the short run diminishes "the perceived importance of business confidence" in shaping economic growth.

A professor of business has an op-ed in this morning's Harrisburg Patriot-News arguing against unemployment insurance, aid to state and local governments, and infrastructure spending.

While it’s being billed as support for emergency first responders and teachers, it [$35 billion in aid to state and local governments] will enable states to keep less essential employees on the payroll ...

However, the last stimulus bill demonstrated that there aren’t many shovel-ready jobs that can be started immediately as projects still must proceed through various permitting issues. While infrastructure spending is vital for the economy, it is not a likely source of immediate stimulus ...

Preservation of the safety net is essential for people who find themselves unemployed through no fault of their own. But it’s important to recognize that safety-net spending does not stimulate the economy.

With unemployment high, state revenue collections remain weak. That, in combination with state budget cuts and the end of aid to state and local governments from the American Recovery and Reinvestment Act, has translated into job losses in the public sector, which in the last several months have reduced total employment in Pennsylvania. That's not a theory; that is in the data.

Unemployment insurance payments represent a significant, if not the only, source of income for thousands of people in Pennsylvania who continue to lose their jobs for reasons beyond their control each month. This is why transfers represent a greater share of personal income today than in recent history. Failing to extend unemployment insurance would mean the loss of income for thousands of people in Pennsylvania and around the country. That would result in less consumer spending, which would lead to yet more job losses because one person's spending is another's income. 

With private-sector forecasters predicting that the economy will not return to full employment until sometime in the next decade (see top of page 27), there is plenty of time to plan an execute increased spending on infrastructure.

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