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2020-11-15
Project Syndicate: 2020-11-15: Obama Fiscal Policy
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Ten years and ten months ago, in his January 2010 State of the Union
address, United States President Barack Obama announced that it
was time for austerity: “Families across the country are tightening
their belts and making tough decisions. The federal government
should do the same…. We are prepared to freeze government
spending for three years…. Like any cash-strapped family, we will
work within a budget to invest in what we need and sacrifi ce what we
don’t…”—and that the need for austerity was so great that he would
to block any attempts by the Democratic-majority Congress to use
physical policy to boost employment and production: “And if I have
to enforce this discipline by veto, I will…” <https://
obamawhitehouse.archives.gov/the-press-offi ce/remarks-president-
state-union-address>.
Some in the Obama administration tried, immediately afterwards, to
convince me that this was Dingbat Kabuki Theater on Obama’s part:
that the administration could and intended to continue to use fi scal
policy to reduce unemployment via tax cuts and via spending on
categories Obama exempted from his freeze—“national security,
Medicare, Medicaid, and Social Security”. But rhetorical flourishes
have powerful effects on what arguments can and cannot command
broad ascent in the public sphere: if our arguments could not
convince even Barack Obam
a
that, given high unemployment and
extremely low interest rates, the debt-burden cost of borrow-and-
spend was trivial and the benefi ts massive, why should anybody else
pay attention to us? And so it proved in the 2010s.
In the U.S., the prime-age employment rate had stood at 82
%
in the
middle of 2000 and at 80
%
at the start of 2007. It was only 75.3
%
when Barack Obama gave his 2010 State of the Union Address. It
was only 75.6
%
when he gave his Second Inaugural Address in
January 2013. It was only 77.4
%
—less than halfway back to its
year-2007 level, and only one-third of the way back to its year-2000
level—in December 2015, when Janet Yellen’s Federal Reserve
decided that the economy was about to start running “too hot” unless
jobs. Today there is an extra tranche of one-twentieth of prime-age
Americans who want but do not have jobs and who could be doing
some of the very many paid-employment things useful for them and
us that we are currently left undone.
Sane national policy would have the federal government spend as
much money as needed to generate the demand that would make it
worthwhile for employers to hire this one-twentieth tranche. Sane
national policy would be to postpone worries about what we can
afford, postpone them until the day—if that day ever comes—that the
world’s savers no longer regard U.S. government debt as a special
and excessively valuable asset. As John Maynard Keynes said in the
House of Lords during World War II, we need not be constrained by
extra worries about what we can afford: “What we can do, we can
afford”.
And right now we do not even have to worry how to arrange the
fi nancing side so that we can afford it: the fi nancing side has
arranged itself.
the Federal Reserve began to raise interest rates. It was not until
August 2019 that the prime-age employment rate got back to its pre-
Great Recession year-2007 level. And even then the level of national
income was still 8.3
%
below its year-2000 to year-2007 growth
trend: relative to trend, the proportion of the real income gap between
what incomes and production were when Obama gave his 2010 State
of the Union Address that was ever recouped was ZERO.
In 2012 Larry Summers and I feared that, without strong and
aggressive policy action, the economy would never recover to its
pre-2007 trend as far as productivity and incomes were concerned.
We were right. We feared that, without strong and aggressive policy
action, the economy would never recover to its pre-2007 trend as far
as prime-age employment was concerned. We were, thankfully,
wrong—although employment recovery took not the four years of
the standard previous post-WWII business cycle, but rather twelve.
In 2012 Larry Summers and I tried to set out what was for us
elementary arithmetic: Savers were, when we did the accounting in
terms of what was the proper perspective from the government’s
point of view, denominated in shares of national income, lending to
the U.S. government at rates that meant that they were willing to pay
the government to keep their wealth save. Government borrowing
and national debt were not a cost to the government—something that
required it to divert resources to debt service—but a benefi t. There
might well come a day when savers lost their taste for holding U.S.
government debt and policies to not expand but contract the U.S.
debt were appropriate, but that day was not 2012. We had little if any
impact.
I bring up this now-ancient history today because it looks,
increasingly, like we are about to do it again. Due to the coronavirus
plague, prime-age employment is now at 76
%
, little higher than it
was in 2010. In a normal moment, one-fi fth of prime-age Americans
are happy not having and either doing other things or searching for
