Government Spending Goes From Hero To Goat

WASHINGTON -- It wasn't so very long ago that many economists and even some White House officials were talking about the need for more government spending to address the continued unemployment crisis and preclude a double-dip recession.

The idea, backed up by solid economic theory and decades of evidence, was that if the government spent more money, then at least in the short-run it would create jobs and stimulate growth.

But in today's Washington, expressing that idea is enough to get you labeled an unserious person. White House and Republican leaders both insist that spending cuts are what the economy needs right now. Their disagreements are over whose cuts make more sense and who's really willing to make the necessary "tough choices."

The laws of supply and demand haven't changed. Nothing has happened to suddenly put Keynesian economic theory in doubt. There is still an entirely plausible argument to be made that government spending cuts are absolutely the last thing this economy needs. So why has the conventional wisdom done a 180?

The answer is that politics has trumped economics.

It's not that economic conditions have changed that drastically. Sure, the economy and job growth have both been on an upward trajectory -- but so slowly that progress is self-evidently fragile and reversible.

One big change, of course, is that the House is led by Republicans, with the Tea Partiers among them screaming for blood. Practically speaking, the political debate is over how much of the government Democrats can salvage.

But another reason is that President Obama never successfully articulated the value of government spending in the first place, and never prepared the public for the very real possibility that the initial stimulus would turn out to be insufficient. So it wasn't too hard for the White House to ditch that position for a more politically pragmatic one, even if it is the economic equivalent of calling white black and black white.

Luke Mitchell, the deputy editor of Popular Science and an observer of economic policy, wrote in an email that the new narrative in Washington appears to be "that everybody knows that something must be cut. And that struck me as extremely odd, given that just a generation ago even Richard Nixon knew that 'we are all Keynesians now.'

"It's as if people suddenly forget the world is heliocentric," Mitchell wrote (referring to the fact that the earth revolves around the sun). "An entire concept, one taught in every introductory economics course, has simply disappeared from our discourse."

"The basic Keynesian position is actually one that is held pretty widely in the economics profession," said Dean Baker, co-director of the Center for Economic and Policy Research. "Spending boosts the economy; that's not what we were arguing over, and it's not as if there's been any evidence going the other way."

The reason it's not talked about anymore is that "the Republicans took control of the debate," Baker said. "And [President] Obama, he just blew it in a really huge way."

Progressive economist and New York Times columnist Paul Krugman, in despair, blogged on Monday that Obama "has effectively given up on the idea that the government can do anything to create jobs in a depressed economy. In effect, although without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again."

"The uncontested premise at the moment is that the federal government's spending is 'unsustainable,'" said University of Texas professor James Galbraith, one of a handful of progressives still willing to shout Keynesian economics from the rooftops.

"A wave of programmed conformity has swept over the Washington community on this question," he told The Huffington Post. "The substance of this issue has been placed on an index of forbidden thought. And anybody who expresses those thoughts is excommunicated.

"It's exactly the same phenomenon that led to the acceptance of the war in Iraq," Galbraith said. "Those who hold a different view are by definition ruled out of the discourse, and the fact that they are right will only be accepted later, when it no longer matters."

What happened to all the people who were pushing for stimulus as recently as a few months ago? University of California Berkeley economist Brad DeLong said he thinks many centrist Republican economists "decided they should shut up because they decided their positions had become unpopular and they didn't want to burn their bridges."

Within the Obama White House, DeLong speculated that the turnabout could be due in part to the Rahm Emanuel-inspired credo that "it's very important to talk only about what we're winning on, and if we're not winning on it -- and can't win on it -- then we should simply shut up."

Alternately, he said, White House policymakers may also be convinced that unemployment really is going to be down to a more tolerable 8 percent in 2012 and that it is time to shift gears.

But that idea "is based on hope of a relatively optimistic scenario coming to pass, and as we all know, hope is not a plan," DeLong said. "There is still a threat of a double-dip. All kinds of other things could go wrong."

Another theory is that the White House is just trying to box the Republicans in politically, stealing their most effective argument with voters, and hoping they'll look like the grownups as the Tea Partiers drive the GOP to more and more extreme positions.

All that said, it's not entirely fair to say the White House has done an about-face on the issue -- because its current approach to economic theory can be inconsistent and even contradictory at times.

In his State of the Union address, for instance, Obama seemed to be calling for a decrease in spending in almost exactly the same areas that he was calling for an increase in spending.

Austan Goolsbee, the head of Obama's Council of Economic Advisers, last week told an audience heavy on deficit hawks that too much focus on the deficit can lead politicians to lose sight of what's required in the short run. "The most important thing is to get growth," he said, warning that poorly-chosen or excessive spending cuts could instead endanger the recovery.

But at the same time, Goolsbee defended Obama's proposed cuts as necessary and wise.

Goolsbee also criticized what he described as the GOP's single-minded campaign against "out-of-control government spending," saying there's little chance of a serious discussion about the budget "if in your mind it all has to be based in how much cutting has to be done."

But then days later his boss bragged that his proposed budget "freezes domestic discretionary spending over the next five years, which would cut the deficit by more than $400 billion over the next decade, and bring annual domestic spending to its lowest share of the economy since Dwight Eisenhower."

The Huffington Post's Sam Stein asked newly-minted White House Press Secretary Jay Carney to address the issue at Wednesday's press briefing. "[T]here are reasonable, well-respected people, not just economists, who say that now is not the time to tighten your belt, that while you're at the end of a recession you shouldn't be making these cuts even if you are investing elsewhere. Is that -- what is wrong with that logic?" Stein asked.

Carney's response was not a model of clarity: "Well, Sam, I would point you to our logic, to the president's logic, which is that we need to live within our means. We need to reduce spending. We need to demonstrate our seriousness about that, but we also need to invest where it's essential. And we feel that we need to be careful about cuts so that we don't threaten the recovery, that we don't threaten growth, that we don't threaten our national security. But we obviously agree with others that spending cuts are necessary."

And blogging for The Huffington Post, Richard (RJ) Eskow, a senior fellow with The Campaign for America's Future, mocked Jack Lew, the director of the White House Office of Management and Budget, for his statement that "[w]e have to live within our means so we can invest in the future."

Eskow wrote that the "cut for growth" argument simply doesn't make sense. "[I]n decades of private-sector work, I never heard an executive say that a company can or should 'invest' and 'cut' at the same time," he wrote.

What do businesses usually do when they want to invest? They borrow. They're especially happy to borrow at times like these, when money is so cheap. Economically and managerially, the "cut-to-invest" concept is financial mumbo-jumbo. Sure, sometimes you need to cut. And sometimes you need to invest. But they're separate issues and separate decisions, each of which requires its own justifications.

This is a perfect time for government to engage in short-term stimulus spending to get the economy moving, and to create jobs for people who will then start paying taxes ... which reduces the deficits.


Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to his RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.