Smart Gov Investing Creates Jobs

Soon GOP presidential candidates will parrot the nostrum 'government doesn't create jobs.'

Actually, government does create jobs, have a look at right of this column at the daily U.S. Department of Defense Contracts valued at $6.5 million or more.

Call up US Rep Diane Black and Rep. Scott DesJarlais (R–Tennessee) and tell the members that, for example, Tullahoma Industries LLC,* Tullahoma, Tennessee (awarded a maximum $59,389,738 modification contract announced May 6) is going to have its DoD contract nixed because 'government doesn't create jobs.' [*Small business in Historically Underutilized Business Zone]

Black and DesJarlais don't believe this nonsense any more than any other Republican.

Black and DesJarlais just want government money spent on Republicans and the special moneyed interests for whom the GOP fronts, and of course industries bordering their congressional districts.

Throw in the bigotries and outright racism of rural Tennessee and you have today's Republican Party in a nut shell.

But ask Black and DesJarlais and every GOP candidate for president if they want massive infusion of money for infrastructure and schools across the nation, and suddenly the 'government doesn't create jobs' nonsense emits again.

Krugman Prevails Again over Austerity

Thomas Herndon devastates
GOP fantasy economics

Updated - 'The really guilty parties here are all the people who seized on a disputed research result, knowing nothing about the research'

"(L)ast week, a startling discovery (by Thomas Herndon, a Ph.D student at the University of Massachusetts-Amherst) obliterated one of the key premises upon which the whole austerity movement was based. ... The discovery of (a) simple math error eliminated one of the key 'facts' upon which the austerity movement was based," notes Henry Blodget.

Economists, notably Paul Krugman, have been tearing out their hair for years trying to reason with Republicans and too many Democratic policymakers.

But facts, like evidence, logic, science and other liberal constructions mean nothing to many Republican policy makers, aka the austerians, no matter how badly Americans families suffer.

Don't look for this new development to change policy radically and immediately; Repubs such as Paul Ryan and company are not easily swayed.

Here's Krugman on the austerity agenda:

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

I hope not; I’d like to believe that ideas and evidence matter, at least a bit. Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified.

As John Nichols notes: "Nobel Prize-winning economist Paul Krugman suggests that an essential underpinning of the 'the intellectual edifice of austerity economics' has been called into question. But, adds Krugman, 'the really guilty parties here are all the people who seized on a disputed research result, knowing nothing about the research, because it said what they wanted to hear.'"

See also UMass Econ in the News.

State employment numbers echo slow national growth for May

Downward Revisions to Real Potential Economic Output

GOP: 'Let's make the economy scream.'

"The continued erosion of public-sector employment highlights the extent to which policymakers at both the national and state levels have undermined economic recovery through shortsighted austerity measures. While teachers, police and firefighters have been bearing the brunt of these cuts, we all have suffered from the resulting drag on the economy."
- The Economic Policy Institute

By Dong Hall

"[The] Bureau of Labor Statistics release of state-level employment and unemployment data echoes the slow national employment growth in May, with 16 states experiencing job loss in the preceding three-month period (February 2012 to May 2012), twice as many as experienced three-month job loss in the April report."

Consider now the national commitment of Republicans to block any and all stimulus initiatives, a program that is nothing less than economic terrorism.

This one-two punch by the GOP on the state and national levels leaves economist such as Paul Krugman to state "we're doomed."

A longer treatment is pulbished today by Andrew Fieldhouse, Failure to stimulate recovery is costing trillions in lost national income.

By Andrew Fieldhouse

In a recent blog post on the (negligible, if not nonexistent) long-run economic cost of deficit-financed fiscal stimulus at present, I noted in passing that the Congressional Budget Office (CBO) has downwardly revised potential economic output for 2017 by 6.6 percent since the start of the recession. This may seem trivial, but for a $15 trillion economy, this dip reflects roughly $1.3 trillion in lost future income in a single year, on top of years of cumulative forgone income (already at roughly $3 trillion and counting). The level of potential output projected for 2017 before the recession is now expected to be reached between 2019 and 2020—representing roughly two-and-a-half years of forgone potential income. This represents a failure of economic policy and merits considerably more attention than received, especially when weighing the benefit of near-term fiscal stimulus versus deficit reduction.


Potential output is the estimated level of economic activity that would occur if the economy’s productive resources were fully utilized—in the case of labor, this means something like a 5 percent unemployment rate rather than today’s 8.2 percent. Potential output is not a pure ceiling for economic activity, but the level of economic activity above which resource scarcity is believed to build inflationary pressures. As of the first quarter of 2012, the U.S. economy was running $861 billion (or 5.3 percent) below potential output—the shortfall known as the “output gap.” This has a number of implications for federal fiscal policy:

1.Deficit-financed fiscal stimulus will have a very high bang-per-buck while large output gaps persist. The government spending multiplier is much larger in recessions than expansions (see Figure 3 of Auerbach and Gorodnichenko 2011) and the U.S. remains mired in recessionary conditions, where economic growth is insufficient to restore full employment.

2.Deficit-financed fiscal stimulus is largely self-financing because every dollar of increased output relative to potential output is associated with a cyclical $0.37 reduction in budget deficits, and this feedback effect is greatly amplified by the large government spending multiplier.

3.There is so much slack in the U.S. economy—i.e., supply of resources in excess of demand—that government borrowing will not “crowd-out” productive private investment; this can be seen in the near record-low 1.6 percent yield on 10-year U.S. Treasuries.

So deficit-financed fiscal stimulus is highly cost-effective, largely self-financing, has a very low opportunity cost, and poses no risk to inflation. But there is another potential benefit: closing today’s output gap can increase potential future output (thereby also increasing the ability to repay debt incurred). The reason is simple—if long bouts of inactivity leave permanent “scars” on the potentially productive resources (and they do), then the longer the economy operates below potential, the more future potential is damaged. Concretely, factories aren’t built because firms can’t even sell what existing factories are producing. Children’s educational outcomes are damaged as economic distress forces their families to move and as they lose access to decent nutrition and health. Desirable early-career jobs for recent graduates that could impart valuable skills throughout their working lives aren’t available to them, so lifetime earnings suffer. And so on.

The CBO certainly is worried about this scarring—look at the annual revisions to real potential GDP made by them since the onset of the recession: Estimates have consistently been revised downwards except between Jan. 2009 and Jan. 2010, when the deficit-financed $831 billion Recovery Act arrested economic contraction and began shrinking the output gap.

The Recovery Act, however, was nowhere near large enough to restore full employment and close the output gap—the 10-year cost of the stimulus, after all, was smaller than the annual output gaps that have persisted since 2009. As the economy has slowed as fiscal support waned, CBO’s potential output forecasts have withered as well. So why did Congress pivot from job creation (i.e., stimulus) to deficit reduction at the start of the 112th Congress?

The whole point of long-term deficit reduction, after all, is to raise future income. But failure to restore full employment decreases potential future income. Worse, while the economy remains depressed below potential output, near-term deficit reduction—particularly spending cuts—greatly exacerbate the output gap because the government spending multiplier is so high. (We’ve seen this play out across much of Europe, where government “austerity” programs have cut spending, pushed economies back into recession, pushed up unemployment, and cyclical deterioration in the budget deficit has rendered spending cuts entirely counterproductive.)

The downward revisions to potential output in CBO’s forecast reflect a failure of Congress to resuscitate the economy and restore full employment, but it’s a policy failure that can still be reversed. Fiscal stimulus can increase employment and industrial capacity utilization today and actually “crowd-in” private investment, thereby increasing today’s capital stock and future potential output. With respect to fiscal tradeoffs, cost effective deficit-financed fiscal stimulus will actually decrease the near-term debt-to-GDP ratio (the relevant metric for fiscal sustainability), whereas deficit reduction cannot raise future income until the output gap is closed and the private sector is competing with government for savings instead of plowing cash into Treasuries. The full cost of Congress’ misguided pivot from job creation to austerity is larger than even just today’s mass underemployment—trillions of dollars of potential future income will also be lost unless we pivot back to addressing the real crisis at hand.

'Unbridled capitalism doesn't work'

Joseph Stiglitz, Roubini, Krugman: All agree that we have not even hit bottom yet.

From Der Spiegel, by way of Salon:

Joseph Stiglitz: "It's going to be bad, very bad. We're experiencing the worst downturn since the Great Depression, and we haven't reached the bottom yet. I'm very pessimistic. Governments are indeed reacting better today than during the global economic crisis. They're lowering interest rates and boosting the economy with economic stimulus plans. This is the right direction, but it's not enough."

Tim Geithner Will Not Be the Effective Front

Timothy Geithner's appearance on Meet the Press makes one thing perfectly clear: Geithner cannot be the pitchman for the Obama recovery from the machinations of AIG and the like and their political and regulatory allies.

There is simply no political passion, identification of bad actors, nor populist (democratic) appeal from Geithner. As Paul Krugman said on ABC's This Week, "It's a plan to rearrange the deck chairs and hope that that keeps us from hitting the iceberg. They've done some things very fast, but they've been very small things ... There's no way this could be enough." (See Huffington.)

And Republicans are absurdly appropriating the populist message in the political battle.

Obama likely sees this. So, look for Obama to be a FDR-like frontman, as he should be.

And, if you have not read it yet, do read Matt Taibbi's 8,700-word piece in Rolling Stone.

We Needed This Under Bush

Update: Obama fields questions on offshoring, health care, jobs and so on. Hey, this guy actually believes in solving problems.

Geithner to Outline Major Overhaul of Finance Rules - Officials said the plan, which will be unveiled Thursday, will subject hedge funds and traders of exotic financial products to governmental supervision.

About time, so will critics of these unregulated exotic financial products now rule the airwaves?

And M. Shihid Alam asks 'what about the victims of financial markets?'.

But, one ought to note, even Nouriel Roubini (Dr. Doom) has good things to say about the Geithner overhaul. From Roubini's e-mail:

Nouriel Roubini (March 25): Finally, Geithner and Bernanke (see respective testimonies at AIG hearing on March 24) have come to agree about the need for a new insolvency regime for systemically important financial institutions (bank holding companies and non-bank financial institutions) in order to avoid another Lehman and expensive ad-hoc bailouts like AIG

Necessary features: A new conservatorship/receivership regime of insolvency could be similar to the one used to manage the orderly takeover of Fannie and Freddie. As soon as the stress test is done some large and systemically important banks (and their holding companies and non-bank financial arms) will have to be taken over. To do it orderly we absolutely need a special insolvency regime like the one we have for the bank arms of bank holding companies and similar to the one we have for Fannie and Freddie

On the other hand Paul Craig Roberts sees financial deregulation and offshoring (shipping American jobs overseas) as having done such tremendous damage to the U.S. economy that Obama's interventions and spending may be insufficent to bring us out of this recession, with one catastrophic result being the "depreciation of the US dollar and loss of its reserve currency role":

The enormous trade deficit that has been created by the pursuit of short-term corporate profits can only be closed in two ways. One is to stop the offshoring and to bring home the offshored production. Possibly, this could be done by replacing the corporate income tax with a tax based on whether value added to a company’s output occurs domestically or abroad.

The other way the trade deficit can be closed is by the inability of Americans to pay for imports. If debt monetization wrecks the dollar and drives up import prices, Americans will have to learn to live with less imported energy and manufactured goods. American annual consumption would shrink by the amount of the trade deficit.

Obama Scores

Why broadcast reporters do not comment on the erudition of Barack Obama v. the stammering ignorance of George W. Bush remains a mystery.

One thing is clear: Obama has made leveling with the American people an urgent priority.

Still, one wonders if the hollowed-out economy that Bush and his nihilists loosed onto Americans can be saved by Obama.

Obama is trying.

See Obama shoots back and scores - With a sharp retort about AIG, the president was on his game with the press, weaving through questions and driving home his economic plan. (Madden)