President Obama's Jobs Address: Nice Start, But ...

The President's address to both Houses of Congress Thursday night signals welcome recognition that the nation is in serious danger of entering into a ‘double dip' recessionary period, much as it did in response to fiscal austerity measures amidst the great depression of the 1930s. The address also signals welcome recognition that monetary policy alone - as brilliantly improvised over the past several years by Ben Bernanke's Fed - is not of itself sufficient, even if it is necessary, to pull a debt-deflationary economy back into robust job-generative growth. What is needed, as the President apparently now realizes, is seriously stimulative fiscal policy. The federal government itself must lever its massive size and fill the still gaping hole in job- and investment-producing aggregate demand. Small players - individuals and firms - cannot step into this gap because none of them alone can restore growth and thus justify their prospective expenditures, as I'll explain in more detail in a moment. For the same reason, it is crucial to note, stimulative fiscal policy right now should *not* be primarily *tax-based.* For individuals and firms are apt to hoard tax savings just as they're already hoarding cash. Instead, what all parties await right now is a reliable backdrop of sustained and significant demand such as only the government can generate. We accordingly require an at least five-to-seven year commitment, right now. Fortunately, what is needed can easily be *done* right now, as at least $2 trillion worth of efficiency- and job-generating public infrastructure is in desperate need of repair, all while yields on Treasuries -- i.e., federal borrowing costs -- are lower than virtually ever before. And all while labor and other costs are as low as can be. The President should demand at least $2 trillion in direct public infrastructure investment, rather than a mere $450 or so billion in stimulus spending half of which takes the form of yet further tax cuts as called for last night. A quarter of a loaf - or really, an eighth -- might be better than none, but it just as likely might not. For chump-change measures, especially such as rely significantly on tax cuts, pose the real risk of affording more ammunition to venal cynics. I refer to those who even now claim that stimulus can't work - people like those who will be running against the President and his party in coming months, and obstructing the best he'll propose in the same period. (More on how to deal with these treacherous types in a moment.) Their false and dangerous claim must be distinguished from the more accurate claim that small potato pseudo-stimulus that relies mainly on tax cuts does not work very well. But when the President contents himself with 'stimulus' of the latter sort, he effectively invites the conflation. As adverising executives might put it, he does an inadequate job of 'product differentiation.' Let's step back for a moment and remind ourselves why the two things - real stimulus and tax-based pseudo-stimulus - are different, and why the President should push for the genuine article. The US, recall, remains mired in its worst economic slump since that of the 1930s. In one sense, this is hardly surprising. For the US has recently suffered its worst credit-fueled asset-price bubbles and bursts since the late 1920s. In another sense, however, continuing slump is indeed surprising – as are our recent asset-price bubbles and bursts themselves. For one would have thought we'd have learned from the 1920s and ‘30s experience and avoided the avoidable slump that has followed our likewise avoidable asset-price bubbles and bursts of the past decade or so. Shouldn't we have reached ‘the end of [this] history' by now? It is critical, if we are to leave slump and future credit-fueled asset-price bubbles behind, to understand the relation between the two and the mechanics of both. Short, medium, and long term solutions to our current travails and future challenges must be informed by a deep-structural understanding of the same. What is the ‘deep structure' in question? By far the most important aspect of our current travails that has gone underappreciated is this: Booms and busts, bubbles and bursts are, at their most basic level, classic collective action problems. The hallmark of such problems is that multiple individually rational actions aggregate into collectively calamitous outcomes. No individual can by herself or himself bring a halt to inflation or hyperinflation, for example – whether the latter involve consumer prices or, as in recent years, real estate and associated financial asset prices. So the rational thing for each individual to do is to buy now before prices grow higher. And each individual's acting thus rationally of course worsens the problem in aggregate. Individually rational actions taken in the face of anticipated inflation or hyperinflation render the anticipation itself self-fulfilling. The same is true of deflations and deeper depressions, which just are those ‘inflations in reverse' that always follow inflations like those we have recently experienced in financial asset and real estate markets. Here the individually rational thing for consumers and firms to do is to refrain from spending and cut costs by laying-off labor, respectively. And the aggregate outcome of those individually rational actions just is that ‘downward spiral' or slump that we're currently living with. Many hyperinflations, it bears emphasis – especially asset-price inflations like those we have recently suffered – are further fueled and accelerated by ‘leverage': by credit and corresponding debt. Hence the term ‘credit-fueled asset-price bubble,' a.k.a. ‘debt bubble.' Over-levering too is a collective action problem. For since debt is typically fixed-rate or low-rate while asset-price inflations are cases of accelerating variable capital gain rates, it is individually rational to borrow in order to ‘leg the spread' between low-cost debt and high-yield asset price gains – in a word, to speculate. And of course everyone's acting thus individually rationally once again brings on collective calamity. If inflation is acceleration, credit is always its chief accelerant. But just as credit and corresponding debt worsen inflations, so do they worsen the deflations that always follow. For when variable speculative asset prices finally collapse as they always do after bubbles once the credit runs dry, fixed rate debt used to purchase them does not. People are accordingly left ‘under water' in the wake of most credit-fueled asset-price bubbles. They are left with debt ‘overhang,' hence all the more hesitant to spend or to hire. This is where we are now, in the depths of a classic debt-deflation of the kind Irving Fisher described during our last ‘great' depression – another collective action problem ‘on steroids' just like the massive credit-fueled bubble that got us here. How, then, do we *properly* address the present crisis, while also avoiding repeat performances in future? Collective action problems, unsurprisingly, can only be solved by collective agents – agents who act in the name of us all. In the modern world, we call those agents ‘governments.' Only our government is legally financed and empowered to act in the name of us all – of the nation as a whole. But for governments to play this vital role, they must both understand the role and be adequately financed and empowered to discharge it. ‘Starve' the government, treat it as a ‘beast,' and you starve and bestialize all of us in whose name it must act. You lead us to act as if we were mere hungry and frightened animals. The same happens when you man government instrumentalities with cynics or subversives who do not understand the structure of our problem or believe in the problem-solving mission at all. Government then loses its capacity to act as a collective, not fragmented, agent. It cannot then avoid being ‘imbecile' government, as our great Founder, Alexander Hamilton, referred to an earlier experiment we ran with fragmented government. And so our most acute collective action problems remain unaddressed and grow worse. Things gradually get ‘out of control.' Where inflations, deflations, hyperinflations, and debt-deflations are the collective action problems we face, a properly functioning government acts countercyclically. During unsustainable booms it strategically reigns-in credit-money and draws purchasing power out of the economy, to tamp down the emerging bubble before it grows out of hand. It limits the accumulation of debt – or, better yet, encourages the accumulation of real surplus, to be saved for the proverbial ‘rainy day,' just as the Biblical Joseph advised Pharao. During busts it of course does the opposite. It loosens credit and monetary conditions, seeks ways to trim leftover debt overhang, and adds its own purchasing power - real stimulus - to the economy so as to take up the slack. In sane times, we call these strategies ‘fiscal' and ‘monetary' policy. We also recognize that sound financial regulation constitutes a critical complement to the latter. It's all about minimizing volatility, modulating credit cycles, and thereby ensuring that relative stability which is prerequisite to sustained healthy growth. These do not seem to be sane times, however. The importance of sound, stabilizing countercyclical fiscal and monetary policy, as well as financial regulation, seems to have been lost on many politicians and the regulators they have appointed or approved. We have loosened credit and monetary conditions, and regulated laxly, during recent boom times. And now we hear politicians from multiple angles trumpeting self-undermining ‘austerity' during bust times and near-depression. Everything's backwards or upside down. To paraphrase the witches of Macbeth, ‘fair seems to be foul and foul seems to be fair.' We are in effect standing on our heads. The President, then, is to be thanked again for making at least some attempt at setting us back on our feet. But he's going to have to do better and more. He must not allow knee breeches and tricorner hats, or the 'Republican' cowards who're cowed by those wearing them, to lure him off course. Instead, he or the Vice President should do what my colleague and co-author Bob Frank now proposes in response to the treacherous deeds they're not poised to begin doing. I'll leave you, this week, with that: http://www.thedailybeast.com/articles/2011/09/08/gop-budget-obstructionists-must-talk-sensibly-about-the-cost-of-what-needs-fixing.html