More on government spending

Much has been written in the past couple days about the psychological pull that austerity economics had in the aftermath of the crisis; Krugman, Klein, Fatas, Noahpinion, and others have all taken a stab at why austerity was so attractive as an economic policy in the aftermath of the financial crisis. I think they all get at important parts of the puzzle, but I think Felix Salmon has the most apt take:

But I think the general view of the public, and of our mainstream elected representatives, is even simpler. These people aren’t economists, and don’t think in terms of cycles; they certainly can’t clearly articulate the difference between a financial crisis and a fiscal crisis. Everything just reduces to “we spent too much, we should spend less”, which makes intuitive sense: the biggest problem with Keynes is that, just like Ricardo, a lot of what he discovered is deeply counterintuitive.

I think the point about the general public is particularly astute; the vast vast majority of the people in this country don’t have the time or inclination to follow political or economic debates in this country. As such, the narrative that debt=bad and cutting spending=good made intuitive sense to a lot of people, and that intuition allowed the GOP the space they needed to push their agenda (under the guise of deficit reduction).

At times I’ve felt that the Obama administration has had space to do less deficit reduction than they’ve chosen to do–in particular, I think their handling of the debt ceiling negotiations in 2011 and the fiscal cliff negotiations in the wake of the election particularly poorly. This tendency to give way to GOP demands regarding the deficit quite easily have instilled in me a general sense  over the past several years that President Obama is actually quite a bit more hawkish with regard to the debt most proponents of deficit spending would prefer. Of course, it is difficult to disentangle President Obama’s actual views from his political posturing, but that just brings me to my second, and much more important, point.

Given the inherently counter-intuitive nature of the appropriate fiscal response to the economic situation over the past few years, it was never going to be politically palatable to continue to run deficits at the levels required to counteract the downturn effectively (regardless of Obama’s true policy preferences). As such, this crisis has driven home the importance of automatic countercyclical fiscal stabilizers for me. In particular, I think enhanced unemployment insurance and a progressive income tax (that falls as income falls) were two things that really helped us out quite a bit over the past 4 years. I hope that policymakers realize the importance of the countercyclical stabilizers and move to strengthen automatic stabilizer spending; in particular, I would like to see payouts for unemployment insurance increase and I hope we stay away from regressive tax systems like a VAT. If people are worried about the employment incentives with regard to unemployment insurance, why not mandate that the insurance be paid out for a fixed period of time, regardless of whether the individual has found a job or not? Food for thought.

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