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Nope, No Serious Economic Arguments Here

Kevin Hassett just finished up a conference call for the Republican National Committee. The subject: Obama's claim that the private sector is doing "fine." Hassett, an economist at the American Enterprise Institute and former adviser to John McCain, has a reputation as an honest, ideologically moderate conservative. As such, I was eager to hear whether he'd pass up the cheap shots and make a serious, fact-based criticism of Obama's proposals to strengthen the economy—proposals that include, but are not limited to, helping state and local governments retain more public employees. 

I should have known better. Hassett started by saying Obama had an “obsession” with increasing public sector jobs. From there, he proceeded to document all of the problems with the economy right now: Sluggish growth, persistently high unemployment, and so on. He finished up by suggesting Obama was wrong to propose proposals that would, as the Recovery Act did, invest in public works, boost counter-cyclical social spending, or assist state and local governments. That approach, Hassett said, was “indefensible” and had “no evidence in the data.”

Hassett rattled off the figures very quickly and I wasn’t able to keep up, but, broadly speaking, I agree with his assessment of the economy. The economy isn’t growing fast enough. Too many people are out of work. But the question right now, and the question for November, is what to do about this.

Obama’s proposal, which he’s been promoting for more than half a year and which the Republicans have largely refused to consider, would start by helping financially strapped local and state governments. With new money in hand, they could stop reducing their workforces and start hiring back some of the workers they’ve let go.

Hassett may call that approach an “obsession,” but it’s an obsession Obama's Republican predecessors had and for good reason. As Ezra Klein pointed out last Friday, one obvious distinction between this recovery and that from the most previous recessions is the sudden and sharp downsizing of the public sector workforce. (See graph at left.) Instead of hiring more workers, to boost growth and reduce unemployment, local and state governments have been laying off workers during this recovery. And that's almost certainly retarded growth, as Yale economists Ben Polak and Peter Schott argued in the New York Times on Monday:

Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent.

Their conclusion is hardly an outlier. Most mainstream economists accept the basics of Keyensian economics and that’s why most mainstream economists think that the Recovery Act boosted employment, although they differ by how much and at what cost.

The best guess of the Congressional Budget Office, for example, is that the law saved or created between half a million and three-and-a-half million jobs. “Our position is that the recovery act was not a failed program,” CBO Director Doug Elmendorf told House Republicans during congressional testimony last week. “Our position is that it created higher output and employment than would have occurred without it.” That’s also the consensus of a broad spectrum of economists that the University of Chicago’s Booth School of Business surveyed earlier this year: 80 percent of the respondents agreed that employment at the end of 2010 was higher than it would have been without the Recovery Act.

During the conference call, I asked Hassett whether he disagreed with that consensus. He responded by saying there was a cost to short-term deficit spending, that any boost to employment would be temporary and more than offset by the long-term cost of paying off the extra debt. That's not an unreasonable point of view. But it's also not the slam dunk Hassett's comments (and those you hear from Republican politicians) suggest. On the contrary, low interest rates make this an ideal time to borrow and, besides, temporary bursts of spending have very little impact on the long-term fiscal picture. In fact, the Booth School survey asked that question specifically: Will the benefit of creating jobs and increasing growth right now justify the cost of paying for the Recovery Act in the future? Opinion was more mixed than on the other question, with 46 percent saying yes and 27 percent saying they were uncertain. But only 12 percent said no. Hassett's the one in the small minority, not those who support the Recovery Act.

That's obviously not the same question as asking whether we need another round of stimulus now, although I suspect the answers would be similar: Obama's American Jobs Act also has support from a broad swath of the economic community. Romney's proposal, meanwhile, would likely cause more pain in the short term. As Greg Sargent reported this week, even some economists who support Romney's overall approach (i.e., lower taxes, fewer regulations) agree about that. “On net, all of these policies would do more harm in the short term,” Mark Hopkins, a senior adviser at Moody’s Analytics, told Sargent. “If we implemented all of his policies, it would push us deeper into recession and make the recovery slower.”

Could Hopkins, Elmendorf, Polak, Schott, and those economists in the Chicago survey—not to mention some Nobel Prize-winners named Krugman and Stiglitz—be wrong? Could Hassett and a relatively small group of conservatives who say similar things know something all of these highly respected, independent experts don’t? Yes. But for Hassett to call the opposing view “indefensible” seems awfully ... indefensible.

Update: Upon looking this over, I thought I should give Hassett a little more credit than I did originally: His argument about the trade-offs of short-term stimulus has a logic to it and I wouldn't want to imply otherwise. But to listen to him, and other Republicans, they're clearly right and anybody who disagrees is clearly wrong—which is pretty audacious given how many very respectable economists seem to supported short-term stimulus before and support it now. Also, a reader emailed to report an error in my original: I had given only the upper bound of the CBO's estimate of the Recovery Act's impact. CBO actually gave a very broad range for its estimate. Even the lower bound would represent a net gain of jobs, something many Recovery Act detractors deny, but I'm sorry for that error and appreciate the reader's pointing it out to me.

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