The Perverse Politics Surrounding Economic Policymaking

The most remarkable aspect of our current economic predicament is the politics surrounding it, which are now as dysfunctional as Bear Stearns or AIG just before they tanked in 2008.  The latest illustration is this week’s partisan take on the effectiveness of last year’s stimulus, one year after its passage.  While every cable TV loudmouth with economic opinions calls himself or herself an economist, there was never a debate among real economists over whether an $800 billion, two-year package of spending and tax cuts would help spur growth and employment.  Whether one thinks that economic relationships were better described by John Maynard Keynes and Robert Solow, or by Friedrich von Hayek and Milton Friedman, the conclusion is that it would.  And one year later, the data show that it did: Growth is back, albeit still weak; and the rapid ascent of joblessness slowed sharply, not from a spurt of new job creation but because many fewer people lost their jobs.

The short-term benefits of the stimulus have been willingly acknowledged by conservative economists from Harvard’s Martin Feldstein (Reagan’s CEA chair) to AEI’s Kevin Hassett (McCain’s economic tutor).   That makes the current carping by GOP leaders either mindlessly uninformed or willfully misleading.  

To be sure, economists have serious differences about other aspects of stimulus, principally whether their long-term costs outweigh the short-term benefits.  Ironically, here’s where a truly perverse streak in our current economic debate really kicks in.  While a neoclassical economist would expect smaller short-term benefits and larger long-term costs from stimulus than a Keynesian colleague, both would agree that the prospect that government borrowing will continue to expand after a real recovery takes hold calls for long-term deficit reduction. So, how do we explain GOP opposition to the President’s call for pay-as-you-go budget rules and a bipartisan deficit reduction commission?  In this case, the ideological blinders which dictate no tax increases even to control runaway deficits reinforce the Republican political calculus that any achievement by the President could diminish the public’s anger at incumbents.  The result is the GOP’s perverse and dysfunctional “just say no” approach to the economic debate.  

With public concerns over long-term deficits heating up – especially among the Tea Party followers currently being courted furiously by Republican leaders -- the GOP probably won’t be able to maintain its blanket opposition to any serious move to reduce those long-term deficits.  But in other areas of economic policy where the politics are less clear-cut, most notably financial reform, their across-the-board opposition will be easier to maintain.  Moreover, the economics of financial reform are also less clear-cut, producing diverse views among Democrats as well.  With most Republicans unwilling to even consider a bipartisan meeting of the minds over these reforms, the structural problems that led to the market meltdown of 2008-2009 will remain unaffected.  In the wake of a financial crisis that very nearly tipped the world into a global depression, the politics that produce this outcome are unconscionable.

The final irony may come if the GOP political strategy succeeds.  If Republicans pick up large numbers of seats in Congress come November – and they might just take over the Senate -- their enhanced numbers and especially the new members may force them to show they can produce some real progress.  And those pressures, in turn, will require compromises with the President and congressional Democrats that seem utterly out-of-reach today.