A Tale of Two Battles
Macroeconomic data vs. earnings reports, and deficit-cutters vs. borrow-and-spend.
12:00 AM, Jul 31, 2010 • By IRWIN M. STELZER
The second battle is on the field of policy. The popular view in Europe is that austerity and deficit reduction are needed to restore business confidence and keep the recovery rolling along. The view of the Obama administration and, most notably, his principal economic adviser, Larry Summers, is that the recovery is fragile, and a second stimulus is needed, with deficit reduction a lesser priority just now.
Both sides make good arguments. The austerity advocates say that by cutting spending and the deficit the U.S. would keep interest rates down, increase business confidence that taxes will not rise, and encourage businesses to spend their $2 trillion cash hoard. The borrow-and-spend group, which for once sees the president’s economic and political advisers on the same side, say that now is not the time to rein in spending -- another stimulus now, deficit reduction later.
As with most arguments about economic theory, both parties cite the same data. The president says that without his $862 billion stimulus, the recession he inherited would have become a deep depression, and that the paltry growth in jobs, although not all he hoped for -- he had predicted a stimulus-induced decline in the unemployment rate to 8 percent -- is a lot better than the massive job losses occurring when he took office. This view received support from distinguished economists Alan Blinder and Mark Zandi in a recent study detailing the stimulative effects of the various anti-recession measures initiated by the Obama administration.
Opponents say that the $862 billion stimulus squeezed out private-sector spending, transferred resources from the more efficient private sector to the less efficient public sector, and built up deficits that will burden future generations with higher taxes that will curtail consumer spending. Consumers, in anticipation of the day of reckoning, are already being extra cautious, which is why the savings rate is inching up.
Democrats in Congress, ordinarily counted on to support the administration’s spending plans, are less inclined to study the economic runes than the polls. Since some 63 percent of Americans favor deficit reduction, even if that means a somewhat slower recovery, they are resisting some of the president’s new spending initiatives. If the Republicans make the gains in Congress now anticipated, the additional spending might nevertheless be approved by a lame duck Congress stocked with representatives with nothing more to lose by defying voters’ wishes.
These two battles -- macroeconomic data vs. earnings reports, and deficit-cutters vs. borrow-and-spend -- will continue to be fought until clearer signs emerge about the economic outlook, perhaps when the jobs report is released. Next up, a fight over whether to raise taxes on “the rich,” including the entrepreneurs who create most of the jobs, or leave the Bush tax cuts in place when they expire at year-end. The president wants to soak “the wealthiest” but some of his troops on his right flank, fearing that a tax increase will slow the economy, and worse still antagonize voters, are inclined to desert him in this battle. Or so they are saying on the stump.