The Shrinking Frontiers of the Possible

Joe Nocera’s musings about Kurzarbeit aside, it is not the case that what we need right now are more and newer ideas for increasing growth and jobs.  We do not have a scarcity of such policy ideas.  What we are lacking are the political institutions that would allow us to carry any of them out.  Our policy problem is a political problem.

It is remarkable how much of our lingering economic malaise can be attributed, not to the inherent thorniness of the problems we face, but to the misaligned incentives of our political system.  As Greg Hannsgen pointed out in a recent post, there is no reason to believe that the United States government has suddenly been rendered unable to pay its debts as they come due.  Rather, the danger appears to be that the political system (or at least an empowered minority of it) will simply refuse to do so.

This is a recurring pattern.  Take the case of growth and employment.  The real resources necessary for a higher level of economic activity and employment are there, sitting idle.  Unfortunately, most of the textbook policy solutions lay equally idle; discarded and now beyond the realm of political possibility.  We have the productive capacity, but through political choice or obstruction we are simply refusing to use it.

Under these circumstances, what should policy writers and economists do? One approach is to carry on and continue to make the economic arguments in favor of this policy or that—and to “hope,” as Peter Orszag recently put it, “that the legislative constraints can be adjusted.”

‘Hope’ is the correct term here.  There is little reason to believe that any policy idea that would increase GDP or job growth—no matter where it sits along the ideological spectrum—has any chance of being approved by the House or of overcoming the new Permanent Filibuster in the Senate.  We have developed a political system in which the opposition (if you will forgive this parliamentary term) have an incentive to be skeptical of any possible solution to our economic problems—to remain unpersuaded even of what used to be their own policy ideas.

The other approach is to focus on “next time.”  If our institutions cannot handle this, we need to create new ones—or to rely less on them.  Perhaps we need political reform, or to build more automatic stabilizers into the system.  The downside of this approach, obviously, is that it leaves us with nothing to say to the millions of people whose lives have been turned upside down by this economic crisis.

What these people need right now is any policy that would (a) boost aggregate demand or create jobs (at such a level as to bring us some substantial amount of the way back to the economy’s real potential), and that (b) does not require Congressional authorization.  This is the policy puzzle of the moment.