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July 19, 2010

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Paul Krugman: The Pundit Delusion

Posted: 19 Jul 2010 12:33 AM PDT

Why is Obama's approval rating so weak?:

The Pundit Delusion, by Paul Krugman, Commentary, NY Times: The latest hot political topic is the "Obama paradox" — the supposedly mysterious disconnect between the president's achievements and his numbers. The line goes like this: The administration has had multiple big victories in Congress, most notably on health reform, yet President Obama's approval rating is weak. ...
But the only real puzzle here is the persistence of the pundit delusion, the belief that the stuff of daily political reporting — who won the news cycle, who had the snappiest comeback — actually matters. ... I'd argue that susceptibility to the pundit delusion is part of the Obama administration's problem.
What political scientists, as opposed to pundits, tell us is that it really is the economy, stupid. ... Larry Bartels sums it up as follows: "Objective economic conditions — not clever television ads, debate performances, or the other ephemera of day-to-day campaigning — are the single most important influence upon an incumbent president's prospects for re-election." ...
Now, the fact that "ephemera" don't matter seems reassuring, suggesting that voters aren't swayed by cheap tricks. Unfortunately,... the evidence suggests that issues don't matter either, in part because voters are often deeply ill informed.
Suppose, for example, that you believed claims that voters are more concerned about the budget deficit than they are about jobs. (That's not actually true...) Even so, how much credit would you expect Democrats to get for reducing the deficit?
None. In 1996 voters were asked whether the deficit had gone up or down under Bill Clinton. It had ... plunged — but a plurality of voters, and a majority of Republicans, said that it had risen.
There's no point berating voters for their ignorance: people have bills to pay and children to raise, and most don't spend their free time studying fact sheets. Instead, they react to what they see in their own lives and the lives of people they know. Given the realities of a bleak employment picture, Americans are unhappy — and they're set to punish those in office.
What should Mr. Obama have done? ... The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis. Obviously, he didn't do that. Maybe he couldn't have passed an adequate-sized plan, but the fact is that he didn't even try..., political advisers believed that a smaller package would get more friendly headlines, and that the administration would look better if it won its first big Congressional test.
In short, it looks as if the administration itself was taken in by the pundit delusion, focusing on how its policies would play in the news rather than on their actual impact on the economy.
Republicans, by the way, seem less susceptible to this delusion. Since Mr. Obama took office, they have engaged in relentless obstruction, obviously unworried about how their actions would look or be reported. And it's working: by blocking Democratic efforts to alleviate the economy's woes, the G.O.P. is helping its chances of a big victory in November.
Can Mr. Obama do anything in the time that remains? Midterm elections, where turnout is crucial, aren't quite like presidential elections, where the economy is all. Mr. Obama's best hope at this point is to close the "enthusiasm gap" by taking strong stands that motivate Democrats to come out and vote. But I don't expect to see that happen.
What I expect, instead, if and when the midterms go badly, is that the usual suspects will say that it was because Mr. Obama was too liberal — when his real mistake was doing too little to create jobs.

links for 2010-07-18

Posted: 18 Jul 2010 11:02 PM PDT

"More Stimulus Despair"

Posted: 18 Jul 2010 09:19 AM PDT

About to hit the road for a long travel day, so don't have time to do anything except point to the latest debate on fiscal policy: Tyler Cowen says the US could learn some things about fiscal policy from Germany, see here for his summary. But as Paul Krugman points out, it's not clear what there is to learn since key conditions for fiscal policy effectiveness such as high unemployment and interest rates at the zero bound are not present in one of the key examples from Germany given in the column.

Don't Expect Miracles from Monetary Policy

Posted: 18 Jul 2010 09:13 AM PDT

A recent post of mine at MoneyWatch:

Don't Expect Miracles from Monetary Policy, Maximum Utility: ...As I've said many times, I think the economy needs more help, particularly labor markets. But where will that help come from? Additional fiscal policy seems to be off the table due to worries about the deficit, worries I think are baseless, but I don't control the fiscal policy levers. That's the best thing to do right now, but it's not going to happen.

That leaves monetary policy, and the Fed is making noises about giving the economy more help. Though the Fed isn't willing to go this far yet, one thing they could do is to purchase long-term securities in an attempt to lower long-term interest rates. Or they could set a higher inflation target to try to lower long-term rates. The idea is that this will spur investment spending by businesses and new spending on durables by households.

Paul Krugman, in a relatively wonkish post, discusses the options the Fed has, and notes that when it comes to the purchase of long-term securities (also known as quantitative easing), we shouldn't expect too much:

But how strong would this effect be? Even if the Fed bought a couple of trillion dollars' worth, probably not all that large. I'm not saying don't do it, but don't expect miracles.

He doesn't explain in detail why we shouldn't expect much, but here's the worry I would have. Lowering interest rates either through purchases of long-term securities or through a higher inflation target (another policy Krugman discusses) is just the first step in this policy, and some of the additional steps that are needed are problematic. With respect to the first step, there's no guarantee that the purchase of long-term securities will lower long-term rates, but most analysts think it could if it is carried out on a large enough scale (the necessary scale -- trillions -- is is one of the things causing resistance to this policy). So let's assume the Fed can lower rates by a point of two if it so desires, either through quantitative easing or through a higher inflation target.

For the policy to be effective, there is a second step that must occur. Firms and households must respond to this incentive by investing more in new plants and equipment and purchasing more durable consumer goods. But as this discussion at The Economist I took part in notes, firms are saving rather than investing right now, and the reason seems to be due to a poor outlook for the economy along with considerable existing excess capacity. Under those conditions, a poor outlook and lots of excess capacity, a point tor two fall in the interest rate is unlikely to spur much new activity (and households, who are still struggling with high unemployment rates, are unlikely to increase their purchase of durables enough to make up the difference). So I fully agree with Krugman. We should try this, the state of the economy demands that we try something even if it may not work, but we shouldn't expect miracles.

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