But, the truth for Democrats is--even with little more than 100 days between now and Election Day--the 2010 mid-term "story" does not have to play out this way.
University of Oregon Economics Professor Mark Thoma (one of my favorites) on "The Cost of Convenient Optimism," and commenting on Ezra Klein's words from Monday....
The Cost of Convenient Optimism
By Mark Thoma | Jul 26, 2010 |
One of the many things that puzzles me about the Obama administration's economic policy is why they continue to rely upon best case scenarios to set policy. The initial stimulus was not big enough, and part of the reason was an overly optimistic forecast for the trajectory of the economy. The recession turned out to be much worse than forecast, but since policy did not allow any buffer for the forecast to be wrong, the stimulus package -- - which wasn't big enough to begin with for a variety of reasons -- turned out to be even more inadequate.
Over the past 24 hours, both he and Paul Krugman, among others, have made note of Ezra Klein's latest from the Voices blog over at the WaPo...
What went wrong with stimulus, by Ezra Klein: The original stimulus package should've been bigger. Rep. David Obey, chairman of the House Appropriations Committee, says the Treasury Department originally asked for $1.4 trillion. Sen. Kent Conrad, chairman of the Senate Budget Committee, wanted $1.2 trillion. What we got was a shade under $800 billion, and something more like $700 billion when you took out the AMT patch that was jammed into the package. So we knew it was too small then, and the recession it was designed to fight turned out to be larger than we'd predicted. ...
This was a mistake, of course. But the mistake may not just have been the size of the stimulus package. I wonder if it wasn't fed by a belief that there'd be other chances. If all we needed was the $700 billion package, then great. But if unemployment remained high and the recovery had trouble taking hold, surely there would be the votes for further stimulus and relief spending. No one in the political system could possibly look at 10 percent unemployment and walk away from it, right?
Wrong. Ten percent unemployment and a terrible recession ended up discrediting the people trying to do more for the economy, as their previous intervention was deemed a failure. That, in turn, empowered the people attempting to do less for the economy. So rather than a modestly sized stimulus leaving the door open for more stimulus if needed, its modest size was used to discredit the idea of more stimulus when it became needed.
From economist Brad DeLong's deeper dive on all of this, on Tuesday: "David Altig Says That Our Cyclical Unemployment Has Started to Turn Structural."
David Altig Says That Our Cyclical Unemployment Has Started to Turn Structural
July 27, 2010
This is bad news: very bad news:
macroblog: A curious unemployment picture gets more curious:Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade. Tuesday's report indicates that the anomaly only deepened in the first two months of the second quarter.
And, speaking of Paul Krugman and, "Permanently High Unemployment:"
Permanently High Unemployment
New York Times Blog
July 26, 2010, 4:42 pm
Brad DeLong, commenting on Greg Mankiw, writes:
Mankiw's broader point is that since we have seen nothing like this before except for the Great Depression, we should be humble and risk averse-and hence have the government stand back and wash its hands of the situation.
However, even a minor and hasty acquaintance with the Great Depression teaches that the belief that the government should stand back and wash its hands because the self-regulating market quickly returns to full-employment equilibrium is the most arrogant belief possible.
And even a minor and hasty acquaintance with the Great Depression teaches that having the government stand back and wash its hands is the most risky strategy conceivable.
Quite. I really don't think people appreciate the huge dangers posed by a weak response to 9 1/2 percent unemployment, and the highest rate of long-term unemployment ever recorded:
CHART -- Median Duration of Unemployment (UEMPMED) (St. Louis Fed)
Krugman continues on to talk of his latest read: Larry Ball on hysteresis in unemployment (pdf) -- the tendency of high unemployment to become permanent. He notes that...
"...Ball provides compelling evidence that weak policy responses to high unemployment tend to raise the level of structural unemployment, so that inflation tends to rise at much higher unemployment rates than before. And the kind of unemployment we're experiencing now, with many workers jobless for very long periods, is precisely the kind of unemployment likely to leave workers permanently unemployable."
And there are already indications that this is happening...
In his closing, he also talks of the NAIRU, the non-accelerating-inflation rate of unemployment, and the "Beveridge Curve" (see DeLong's commentary on Mankiw and Altig, above). And he notes that an overly cautious, "prudent" response to our nation's unemployment could lead us into "...a long-term jobs catastrophe.
As I've noted in many other posts, even the administration's top economists have come together on this building consensus of elevated unemployment rates for many years to come, despite optimistic statements of hope to the contrary.
...policymakers who should have led the charge for more stimulus tended to believe the most optimistic scenarios for economic recovery. Under the most optimistic outlook, the one policymakers and administration officials wanted to believe in because it avoided hard choices, the recovery was always just around the corner. There was no need for more stimulus, just a bit more patience. At every step it was easier for fiscal policymakers to take a wait an see approach, to rely upon the most optimistic reading of incoming data rather than to actually seriously engage in an attempt to give the economy more help. The administration joined in pushing the "we are poised for recovery" line because it seemed like good politics and good economics to try to create a sense of optimism. When the economy did start to recover, they could build upon this story of how the stimulus package saved the day.
But what if the economy, and employment in particular, didn't start to recover before the election, what then? The administration suddenly finds itself in a predicament. There's not enough time before the election to actually implement a new stimulus program and expect to see results, so they are stuck with the economy they have, an economy they promised would be boosted by the stimulus programs (my own view is forget about the election and do what's right, an immediate and aggressive job creation package, but that's not going to happen)...
...Maybe the administration will get lucky and the economy will take off like they hope, but recent data are not very supportive of that outcome.
I agree 110% with Thoma's comment: "...my own view is forget about the election and do what's right, an immediate and aggressive job creation package, but that's not going to happen..."
So, okay, maybe the outlook for getting a second stimulus pushed through Capitol Hill is next to nil. Nonetheless, politically -- just making a sincere effort to accomplish that could achieve many goals for the Party, not the least of which being an uphill fight that resonates with the masses -- it's a rare bit of theater that even I could believe in! More importantly, I'd suspect that it could do more to energize the Democratic base in the lead-up to November than just about any other (pragmatically-based) strategy.
IMHO, on many levels, there's something to be said here for fighting the good fight!