Obama's 1937: Eating The Present
Posted on Mon Feb 14, 2011 at 08:18:03 AM EST
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“The debate in Washington is not whether to cut or to spend,” said a senior administration official on Sunday, speaking on condition of anonymity to brief reporters on the budget in advance of Mr. Obama’s Monday announcement of the spending plan. “We both agree we should cut. The question is how we cut and what we cut.” - NYTimes
Today Paul Krugman writes that the appropriate slogan for the GOP budget slashing plans is Eating The Future:
On Friday, House Republicans unveiled their proposal for immediate cuts in federal spending. Uncharacteristically, they failed to accompany the release with a catchy slogan. So I’d like to propose one: Eat the Future.
[. . .] The new House majority promised to deliver $100 billion in spending cuts — and its members face the prospect of Tea Party primary challenges if they fail to deliver big cuts. Yet the public opposes cuts in programs it likes — and it likes almost everything. What’s a politician to do?
The answer, once you think about it, is obvious: sacrifice the future. Focus the cuts on programs whose benefits aren’t immediate; basically, eat America’s seed corn. There will be a huge price to pay, eventually — but for now, you can keep the base happy.
In the budget proposal unveiled by the Obama Administration, the following cuts are some of those proposed:
Among the losers are programs that Mr. Obama has supported, even expanded, in the past: Popular programs for home-heating aid to poor families and for community services block grants would be cut in half, and a multi-state Great Lakes cleanup project would lose a quarter of its money compared to 2010.
Pell grants for needy college students would be eliminated for summer classes, and graduate students would start accruing interest immediately on federal loans, though they would not have to pay until after they graduate; both changes are intended to help save $100 billion over 10 years to offset the costs of maintaining Pell grants for 9 million students, according to administration officials.
Of course, this is just the beginning of the negotiation, and the past 2 years evidence that Republicans are much more likely to get their way in the final result.
But let's leave aside the issue of what is cut and by how much. Is this the time to cut government spending? In my view, it is not. The economy, even if one accepts the dubious idea that we are finally in a recovery, still is fragile at best. Unemployment remains sticky. The mortgage crisis still remains unaddressed in a meaningful and effective way.
After two years of inadequate policies, is this really the time to declare victory over the recession? Of course not. 1937 is instructive. In January 2010, Krugman wrote:
Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.
But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.
Are we on more solid footing than we were a year ago? In my opinion, we aren't, but even if you think we are, is cutting spending a prudent policy now? No, it is not. Krugman wrote in 2010:
As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.
And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.
[. . .] Which brings us to the still grim fundamentals of the economic situation. During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore. What’s left? [. . . W]ill policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.
The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of [2010], then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.
In fact, December 2010 did bring "further action," The Deal. But it was precisely the wrong type of action as it provided inefficient stimulus (tax cuts) while, given the political realities of the Beltway, leading to a cut in effective stimulus, government spending.
It also exacerbates one of our biggest problems, gaping income inequality.
I fear that 2011 will be Obama's 1937.
Speaking for me only
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