The Dangerous Fantasy of Targeting "Deficit Reduction" for Economic Growth

The Great Deficit Hype took a couple of hits in recent days. Tragically, it's not likely that anyone in the Beltway is listening, the priority of deficit reduction has taken such a tenacious hold.

But even in the apparent absence of  rational policy possibilities, it's worth paying attention to some saner voices - and from relatively stodgy circles. 

Professor of economics and and former vice-chairman of the Federal Reserve, Alan Blinder, had this warning in the Wall Street Journal (via Economist's View) :

"The Myth of Job-Killing Spending" ...  House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." ... Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.

Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? ...

The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them? ...

Despite ... evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.

On the same note, Bill Gross, co-founder of PIMCO, a major investment management firm - writing in a prospectus for clients -  called the notion "dazed or crazed" that the federal government should cede job creation solely to the private sector in the current climate and called for extensive infrastructure investments by the federal government:

Both parties, in fact, are moving to anti-Keynesian policy orientations, which deny additional stimulus and make rather awkward and unsubstantiated claims that if you balance the budget, "(jobs) will come." It is envisioned that corporations or investors will somehow overnight be attracted to the revived competitiveness of the U.S. labor market: Politicians feel that fiscal conservatism equates to job growth. It's difficult to believe, however, that an American-based corporation, with profits as its primary focus, can somehow be wooed back to American soil with a feeble and historically unjustified assurance that Social Security will be now secure or that medical care inflation will disinflate. Admittedly, those are long-term requirements for a stable and healthy economy, but fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth. Fed Chairman Bernanke has said as much, suggesting the urgency of a congressional medium-term plan to reduce the deficit but that immediate cuts are self-defeating if they were to undercut the still-fragile economy...

(G]overnment must take a leading role in job creation…Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.... In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they're sitting pretty as it is. Government must step up to the plate...

Talking Points Memo, which published Gross' warning, commented that unfortunately no one seems to be paying attention to what's clearly necessary for real jobs-driven recovery where it matters most - in Washington:

Unfortunately for Gross and those who share his concerns, the fight over the debt limit seems driven by Republicans hungry for long-standing ideological victories and Democrats cowed into an anti-stimulus fervor whipped up by the right. To many observers it appears that fixing the currently broken economy isn't really what this is about.