What Is To Be Done?

The issue of the hour is the economy. Today’s big news story was the release of the final report of the National Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson. The Commission’s recommendations include something to please, and to offend, pretty much everyone. Congressman Paul Ryan, probably the Republicans’ most authoritative spokesman on such matters, apparently will not support the report in its totality, in part because it assumes the continuation of Obamacare.
The broader question is what economic policies conservatives should support, both in the short term and in the long run. Debate rages over whether the Fed’s next round of quantitative easing, QE2, is a good idea. Many conservatives consider it inflationary, but there is a respectable conservative case to be made for the Fed’s action. In the National Review, David Beckworth articulates “The Conservative Case for QE2.” And if you want more, check this out.
A good friend and email correspondent who is far more knowledgeable about these matters than I am agrees that QE2 is sound policy, because deflation currently poses a serious danger. This risk results from “huge debt overhangs that cannot be serviced, huge depressed asset values in housing that have not been fully recognized, zero bound short term interest rates, low forward rates, negative nominal yields on recent TIPS issue, depressed capital formation, high persistent unemployment and the relatively low velocity of money.” Oh, and one more thing: “Commercial real estate is another time bomb; it lags behavior in residential. Hundreds of small banks with huge exposure to commercial real estate are threatened. There have been 180 failures to date.”
I confess that for me, the formative years, when it comes to economic policy, were the late 1970s and the 1980s. I am beginning to feel like one of those elderly Democrats for whom it is always 1932. Bruce Bartlett is a conservative, but one who is equally likely to infuriate Democrats and Republicans. He argues that Mike Pence–who is probably typical of most in the Republican leadership in Congress–is “not ready for prime time.” Bartlett says that for Pence–as for me, I’m afraid–it is always 1980:

Pence’s speech [to the Detroit Economic Club on November 29] was … a hackneyed rehash of every simplistic idea ever floated on Larry Kudlow’s TV show, which appears to be the only source of information Pence has on the economy. I don’t know how else to explain his obsession with inflation, a strong dollar, Fed bashing, tax cuts and the gold standard. Pence could have given the same identical speech in 1980 and barely needed to change a word. In the Pence/Kudlow world it is always 1980–stagflation is the primary problem and tight money and tax cuts are the cures.
The problem is that stagflation isn’t the problem today. We have stagnation all right, but the “flation” we are suffering from today doesn’t stand for inflation, but deflation. But because it is always 1980, right wingers are incapable of seeing that monetary policy functions very, very differently in an inflationary and a deflationary environment. They seem utterly incapable of comprehending constraints like the zero-bound problem, which sets a floor on how low interest rates can go. They are also incapable of seeing the exchange value of the dollar except in macho terms, which demands that the dollar be strong at all times. That makes about as much sense as saying the price of oil or any other commodity should always be strong. That’s obviously nuts, but the dollar is no different. It must be allowed to adjust freely for changes in supply and demand or the result will be imbalances–too much will be imported if the dollar is overvalued, too little exported, thus increasing American’s international indebtedness. Indeed, it was right wing saint Milton Friedman who taught economists the truth of this mechanism.

If there is a consensus today among conservatives, it is perhaps that a payroll tax holiday is, in the short term, the most effective way to give employment a boost. The Commission’s report suggests that Congress consider a one-year period during which employees are excused from payroll taxes. This would cost $50 billion to $100 billion in lost revenue, but according to the Commission it would result in “significant short-term economic growth and job creation.” The same email correspondent quoted above writes:

So, let me get this straight…..we can get “significant short-term economic growth and job creation[ ]” by cutting the payroll tax? Does that mean that the payroll tax….upwards of 15% for 80% or so of taxpayers on total income….AFTER income tax…..so it’s a surtax…..has DEPRESSED “significant short-term economic growth and job creation”?? I would say resoundingly yes. So why not make it permanent?…fund Social Security benefits out of general revenues (which is what happens anyway).

I think the most significant implication of all of this is that conservatives need to look beyond the economic remedies that we have favored since the 1980s. Today’s conditions are different, and while certain policies certainly won’t change–we favor lower rather than higher taxes, and less rather than more regulation–both fiscal and, especially, monetary policy need to be attuned to today’s conditions, which likely are unprecedented in our economic history.
One last point: some economic policies are just plain stupid, like the Obama administration’s announcement that it has reversed itself and now will ban drilling for oil in the eastern Gulf of Mexico and off the Atlantic coast through the year 2017. Of course, the administration can only ban drilling in the areas we control. Any number of foreign oil companies are drilling and will continue to drill in the eastern Gulf region.
Virginia’s Governor Bob McDonnell said:

The cost of today’s decision will be seen in major lost job opportunities, surrendered economic growth and increased dependence on foreign sources of energy, from nations often hostile to American interests.

Thomas Pyle, President of the Institute for Energy Research, added:

It is now abundantly clear that the Administration and Interior Secretary Ken Salazar will stop at nothing – lost jobs, tax revenue or a threat to national security – to enforce their vendetta against domestic energy production. Despite promises made to Senator Landrieu and the thousands whose livelihood depends on energy development, they continue to pursue an “all or nothing” approach to alternative energy that will do nothing more than weaken our economy, increase our dependence on foreign oil and eliminate thousands of well paying, secure American jobs.

One thing all conservatives can agree on is that we need an administration in Washington that will not go out of its way to depress our gross domestic product and force our workers into unemployment, as the Obama administration is doing.

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