Matt Zeitlin: Impetuous Young Whippersnapper

I feel like, aside Eric Cantor’s dreams of being Newt Gingrich and a standing policy-preference for more corporate and capital gains tax cuts, there are a few conceptual problems that the entirety of the Republican leadership, and much of the conservative commentariat, have about our current economic crisis.

1. Unemployment is, aside from other economic problems (low growth, the financial crisis), is really bad for the welfare of people. This central fact can be elided by models of recessions which assume an average level of income and take a 100% welfare loss to one person being the same as a 1% loss to 100 people (Matt Rognlie has a better, more technical explanation here) and by the fact that, even if the income and modelable effects of unemployment aren’t huge, the happiness effects are very strong. Now, because unemployment is such a big deal politically and too individuals, we can expect the Republicans to get immediate political comeuppance if they can be effectively portrayed as anti-stimulus, and therefore anti-job.But, on the other hand, if unemployment remains too high, then expect Democrats to get pummeled in 2010 and 2012.

2. We really do need stimulus. Republicans and conservatives have had a variety of strategies to avoid confronting this essential fact. One is to adopt the absurd argument, most prominently promulugated by Eugen Fama of U Chicago, that because of the NIPA savings-investment accounting identity (basically, that private sector investment is equal to private savings, corporate savings and the likely-to-be-negative government deficit) means that stimulus can’t work to increase growth or decrease unemployment, in the long term.

The other bad, and equally silly, argument is the one spread by Michael Steele that the government can’t create jobs. This ignores the fact that actually the government creates plenty of real jobs but also that just getting people to work and getting money in their pockets may not be ideal, but as far as closing the output gap, stimuluating spending and increases general welfare, it’s a fine strategy.

There’s also the lack of recognition of the fact that monetary policy has failed and that, unless we want to just wallow in low growth and unemployment, we need to think of some way to close the output gap and stoke consumption. Becuase of this total ignorance about the need for fiscal policy to stimuluate the economy, we generally haven’t heard the good, constructive conservative stimulus proposals like this one sketched out by Greg Mankiw or this one by Bruce Bartlett. And because Republicans have become such No-Nothings, they weren’t able to constructively criticize the Obama stimulus plan. As Noam Scheiber argued, this should have been an engineering debate, not a poltical one. So, the GOP could have agitated to put in more payroll tax cuts or to reinstate the Investment Tax Credit or criticized genuinely non-stimulative spending. Instead, they made their baseline position an opposition to stimulus spending at all and 36/41 on the senate voted for the insane Jim Demint tax cut proposal. And where the centrists did go after the bill, they took out of the most stimulative parts.

But the main things one and two the Republicans understand all lead up to the big number three.

3. This recession really is different from past one. Not only are the drops in employment, growth and projected length exceed both the post WWII average, but they are probably only matched by the Great Depression, but there is no mechanism for us to naturally climb out the hole. As opposed to other recessions, where we eventually climbed out “naturally” (more or less), this recession, because it’s driven by a total crisis/freeze in the financial sector, could last indefinitely. Just look at Japan, which after 20 years of unimpressive growth, has had a one quarter GDP drop of 3.3 percent, with more bad times likely to come. As Matt Yglesias points out, Japan still hasn’t really fixed the problems that lead to the lost decade, and was able to climb out of the hole due to American-lead consumption of their exports.

But an export-lead recovery obviously isn’t an option if the entire world economy is tanking. So, we can’t just sit on our hands and pray for a reversion for the mean. In a depression, or a really large recession, or a finance-driven deep recession or whatever you want to call it, you can either wait a really, really long time and have the entire world face declining living standards for that entire time or you can try to take aggressive, quick action to get things back into shape. Now, obviously, there is no guarantee that whatever government action, be it stimulus or some sort of shock-fix to the financial sector. As far as I can tell, congressional Republicans and some commentators simply don’t understand the gravity of the crisis, or in Rush Limbaugh’s case, hope that Democrats fail anyway.