Especially in the light of yesterday's weak jobs report, I keep coming back to the disturbing fact that as soon as the shutdown/debt ceiling debacle was at least temporarily behind us, the political system, without dropping a beat, went right back to deficit reduction mode.
The president, to his credit, has always kept jobs and growth in his rhetoric, but sometimes the framing/messaging becomes a mash-up that's more confusing than elucidating:
The issue is not growth versus fiscal responsibility -- we need both. We need a budget that deals with the issues that most Americans are focused on: creating more good jobs that pay better wages. And remember, the deficit is getting smaller, not bigger. It's going down faster than it has in the last 50 years.
OK-stop right there. These two developments are inversely related. As the austerity evidence in Europe has clearly shown, when you reduce your budget deficit in the midst of output gaps, those gaps stop closing and even reopen. The deficit decline that the president is touting here is not part of the near-term solution, it's a big part of the near-term problem. It's a key factor in the slog in which we're demonstrably stuck.
Note the little figure I just made, plotting the budget deficit as a share of GDP against annual percent changes in payrolls. As usual, there's a zillion moving parts moving both of these variables, but it's still revealing that as deficits began to shrink too soon, employment growth leveled off, and did so at too low an altitude.
Source: NIPA, BLS
In this regard, what's confusing about the president's framing is the timing. Sure, we need both growth and "fiscal responsibility." But since the latter means deficit reduction, we decidedly don't need both at the same time!
The president then goes on in a much better mode:
The challenges we have right now are not short-term deficits; it's the long-term obligations that we have around things like Medicare and Social Security...So the key now is a budget that cuts out the things that we don't need, closes corporate tax loopholes that don't help create jobs, and frees up resources for the things that do help us grow -- like education and infrastructure and research.
That's right. If we must have premature deficit reduction, then it should come from places that have the smallest job multipliers, like wasteful loopholes. Or it should be back-loaded in time. But that's not what we've been getting and it's hard to imagine it's anything like what we'll get going forward, given the divisions in Congress.
The economics of the moment is that fiscal responsibility really means less, not more deficit reduction right now. That's easy for me to say, I'm sure. But it's the truth. Just look at the jobs report.
Addendum: I was chatting with WaPo economics reporter Jim Tankersley about the above figure earlier and he suggested that aggressive Fed monetary policy may be a factor in the leveling off (versus declining) of the employment growth line, the idea being that monetary tailwinds are counteracting, at least to some degree, fiscal headwinds. That sounds right to me, and it leads one to wonder whether greater Fed stimulus could increase that employment growth rate. Obviously, that's theoretically possible, especially if they were to increase the expected rate of inflation. But the immediate choice set at the Fed seems to be either to shrink the punch-bowl ladel (taper) or not. Using a bigger ladel does not appear to be on the buffet table.
It would take some analysis to confirm my instinct on this, but I suspect we're by now at a relatively flat part of the curve that maps unconventional Fed policy onto growth, i.e., the benefits from more QE would be small. That's not, btw, to say that the costs from a taper would also be small. Given expectations and reactions we've seen so far, I suspect there's an asymmetry in play: more QE might not help as much as less would hurt.
This post originally appeared at Jared Bernstein's On The Economy blog.
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