Policy Debate

The foes of austerity are up in arms, demanding even more reckless fiscal and monetary madness to counter the consequences of recent reckless fiscal and monetary policies. They are disciples of Paul Krugman, who believes that policy makers have failed by doing too little rather than too much. In the 7/9 FT, the lead editorial calls on the Fed to launch QE3 at its next meeting because, “the Fed is still the only game in town.” In a 7/13 WSJ op-ed, James Carville and Stanley Greenberg, who are former Clinton advisors, write that the “actual solution to our economic situation is straightforward: increased government spending, well in excess of what the 2009 Recovery Act contemplated…”

In a 7/5 FT op-ed, Robert and Edward Skidelsky advocate more France for everyone: “Government should restore the full employment guarantee. This does not mean guaranteeing everyone a 40-hour a week job. Government should gradually reduce the maximum allowable hours of work for most occupations, guaranteeing a job for everyone who wants to work that amount of time.”

The editors of the NYT are also against austerity. They are all for the federal government to aid state and local governments to create more public sector jobs, as they argued in an editorial dated 7/12 and titled, “The Road to More Jobs.” Wasn’t that one of the main goals of the American Recovery and Reinvestment Act (ARRA) passed during February 2009? Yet it failed to boost public construction on infrastructure and to save lots of state and local jobs, as was promised by its promoters. Indeed, since ARRA was implemented, public construction fell 16% to $269.6 billion (saar), the lowest since November 2006! Since February 2009, state and local payrolls decreased by 645,000 workers to 19.1 million, the lowest since February 2006! Why will the results be any different if we spend another $800 billion?

Given the recent municipal bankruptcies announced in California and the budget squeeze in Scranton, PA, it seems that municipalities have too many workers receiving excessively generous retirement and health care benefits. Property taxes have been depressed by falling home prices while pension payouts continue to soar. Cities and towns simply don’t have enough money to pay their bills. Chapter 9 bankruptcies may be the only way for them to reduce the out-of-control cost of benefits paid to municipal workers.

Today's Morning Briefing: Head Spinning Stuff. (1) Mind numbing issues. (2) No wonder S&P 500 marking time. (3) Popcorn and global warming. (4) Banksters and their inside jobs. (5) From the Persian Gulf to the China Sea. (6) Krugman’s disciples. (7) Chapter 9 is the way out. (8) What if there is a tie? (9) Waiting for better times with a sector-neutral portfolio. (10) Staying home beats going global. (11) US tax receipts stall. (12) “Beasts of the Southern Wild” (+++). (More for subscribers.)