When Shakespeare’s Richard the Third decried the “winter of our discontent”, he meant that unhappiness had gone into hibernation. He intended to awaken it. No need for R-III-R in Washington these days. With all problems diagnosed as “systemic”, systemic pessimism is everywhere.
Two weeks ago, in her weekly Wall Street Journal column ( http://tiny.cc/4gkz6 ), Peggy Noonan pointed to reports of Americans giving up their citizenship. She worried that popular gloom over economic decline and powerlessness to change an out-of-touch leadership could lead to civil unrest and national decline.
Last week Hudson Institute scholar, journalist, and economist Irwin Stelzer in The Weekly Standard (at http://tiny.cc/53ouc ) wrote in similarly dirge-like tones, “The American economy is in serious trouble, and the remaining weapons we have available to prevent a double dip are few indeed. ” Nothing in his column except a last sentence assertion of faith suggested the slightest hope.
Then this morning, again in The Wall Street Journal, editor, publisher, and investor Mort Zuckerman added (at http://tiny.cc/yyl7i ), “Our brief national encounter with optimism is now well and truly over.… We have a paralyzed system. Neither the Democrats nor the Republicans seem able to find common ground to address what is clearly going to be an ongoing employment crisis.”
No wonder for all this gloom. Each new report on the economy seems worse than the last: lost jobs, declining overall investment, federal deficits that could ruin the U.S. economy for decades to come. Pick your poison.
Non-ideological political players in Washington are puzzled. The Obama Administration’s confounding response has been increased spending and letting the Bush tax cuts expire. This is not even a Keynesian approach. Keynes would not have countenanced tax increases in what is now clearly the deepest job-losing period since World War II. Indeed, it appears that, when not working in the White House, neither would key administration economic advisors.
You have probably heard of a 2007 paper by recently retired chair of the Council of Economic Advisors Christina Romer and her husband, Berkley professor (like his wife) David H. Romer. It has been making the astonished rounds of opinion journals and bloggers. “This paper investigates the impact of changes in the level of taxation on economic activity,” they write, adding, “[We] separate revenue changes resulting from legislation from changes occurring for other reasons.” Apparently they take this analysis to a level of detail never attempted before. From it they conclude, “The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.” (To download paper: www.econ.berkeley.edu/~cromer/RomerDraft307.pdf <http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf> )
If that devastating analysis weren’t enough to sink the president’s program, how about another recent study, this one by Harvard professor Robert Barro (see http://tiny.cc/f3zni )? You may have heard of it, too, as it has also been widely discussed. Barro looked at the Keynesian proposition that a dollar of government spending produces as much as $1.50 increase in gross domestic product. He apparently applied more rigorous analytical tools than had been used previously and found that in fact a dollar of increased spending produces only eighty cents increase. In other words, GDP goes down when government spending goes up.
Yet the administration plows forward. Meanwhile, the non-ideological Deutsche Bank issued a report in late July warning that, as CNBC reported, “The nascent US economic recovery would be halted in 2011 if Congress fails to extend the Bush tax cuts for the wealthiest Americans….” (see: http://www.cnbc.com/id/38467149 )
Europe seems to have taken note. Cutting spending has become the order of the day in the major governments of the European Union. So what about here?
It is hard to escape the conclusion that ideology, not economics, is driving the White House and congressional Democrat’s approach to the current crisis. The president keeps blaming his predecessor for the downturn. But how about blaming Barney Frank, who, when the previous administration warned that policies he and others in Congress were pursuing on Fannie Mae and Freddie Mac could sink the economy, blithely announced that he would “roll the dice”?
The remedy isn’t mysterious: stop stimulus spending, renew the 2003 tax law, put a brake on the regulatory binge. Congressman Paul Ryan has a more detailed plan. So does former House speaker Newt Gingrich. But it will take a new Congress to move on any of these blueprints — and a big enough GOP victory in the fall to scare remaining Democrats to go along despite inevitable White House opposition.
The elections will tell whether it is truly time for pessimism. Or hope.