Stimulus, jobs and finance

A recent article in Economist Voices by two economist from Santa Cruz, Joshua Aizenman and Gurnain Pasricha, points out that the total fiscal stimulus has been decidedly less than we might think (the EV article is paywalled, an earlier working paper version availablehere). In fact, the results of their study show “that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009” and that the US “ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries we studied.” The clue is in the first quote – while the national government engaged in a major stimulus, the state governments contracted, leaving overall stimulus just above zero. This should give anyone pause who thinks the fiscal stimulus strategy was tried and failed. And it reminds me of a favorite point from Daniel Lazare’s Frozen Republic, which is that the complexity of the American federal constitution makes national coordination of joint efforts too confusing. This is a democratic problem – if you can’t actually tell what’s going on, and who is responsible for what, power remains obscure, and holding politicians to account is a more difficult task. After all, one could be excused for having thought theUS undertook a major fiscal stimulus – and for the most part, the effect of state and local level contraction has gone under the radar.

But what if there had been a more serious fiscal stimulus? While we have defended some of the virtues of, say, a jobs program against those who think monetary strategies would work better, there are some significant questions to raise about them that speak to the underlying organization of the American economy, and its place in the global economy. In a recent attack on Obama and the Democrats, James Galbraith argues the stimulus failed to restart the economy because of “the complete collapse of the financial sector.” (h/t Art Goldhammer) Now the statistics cited above might suggest that financial collapse isn’t the only reason – there wasn’t nearly the stimulus one might think. But Galbraith points to what is surely an important issue “the for profit job-creation model – the ‘Great American Jobs Machine’ which was predicated on bank credit and venture capital – is moribund.” At the very least, the financial model of the American economy is not just in crisis but in what is increasingly looking like long-term stagnation. Democrats have punted on this issue – sitting around praying that private investors will soon start investing more is just political thumbsucking.

On Galbraith’s account, the only solution would be what is now politically impossible – government jobs programs. Curmudgeon that he is, Galbraith doesn’t go for a classic infrastructure project, crankily suggesting that the “pampered and educated children” of the middle classes “would not take the work and would not do it well if they did.” Instead, Galbraith holds out “state and local government public service” and the “non-profit sector, funded indirectly by the public” as growth areas. If this isn’t a failure to take the bull by the horns I don’t know what is. Having declared the financial model of jobs creation moribund, Galbraith seems to think the US economy could possibly get along without producing anything. If the financial model is indeed in crisis, then that is a deeper structural problem with the American economy than an increase in public service employment could address – how, eventually, would the debt get paid back if all the money were going into activities that produce no foreign exchange? Are we seriously going to soak up ten percent unemployment with more policemen, firemen and health workers?

Put another way, there is no getting around the collapse of American manufacturing, and the problems with the United States having become the world’s banker. Re-orienting the American economy means changing not just its domestic priorities but its international position as well, including addressing the global imbalances that have underwritten the American financial industry. We have no clear idea of what the right answers are to this problem, but it does not help to sweep them under the rug. And it is a further reminder that significant change, nevermind improvement, is more than a technical fix or two away.