What happened to stimulus vs. austerity?

For two years American policymakers battled.  Those on the left argued that America’s top economic policy priority was addressing an extremely weak short-term economic picture, and that fiscal stimulus was the solution.

Those on the right argued that fiscal stimulus wouldn’t work or wasn’t worth it. They argued that addressing America’s long-term fiscal problem was at least as important as our weak short-term economy. Government fiscal austerity, they argued, was the best way to increase expectations of future economic growth, which would drive a faster short-term recovery. In addition, that fiscal austerity would directly address our Nation’s most important long-term policy problem.

President Obama initiated this debate in early 2009 by proposing almost $800 B of fiscal stimulus.

Two years later, in his 2011 State of the Union address, the President pivoted. America must focus on the long run, he now argued. But rather than joining the growing policy consensus that we must address our government’s fiscal problem, the President tried to define a new problem to solve.

From out of the blue, President Obama argued that America’s principal economic challenge is wage competition from China and India. We are in a race with China and India, he argued, just like we were in a Space Race with the Soviet Union in the late 1950s.

We need to Win the Future, he said, by copying the Chinese:

Meanwhile, nations like China and India realized that with some changes of their own, they could compete in this new world. And so they started educating their children earlier and longer, with greater emphasis on math and science. They’re investing in research and new technologies. Just recently, China became home to the world’s largest private solar research facility, and the world’s fastest computer.

… We know what it takes to compete for the jobs and industries of our time. We need to out-innovate, out-educate, and out-build the rest of the world.

… This is our generation’s Sputnik moment.

The Soviets launched a satellite and so we had to. The Chinese are educating and investing, so we must as well.

It’s hard to think of a less apt comparison. The Soviet Union was our enemy. China is not. India is our friend, the world’s most populous democracy, and has an economy moving in fits and starts toward free market capitalism.

The Space Race was a zero-sum game. Our more complex economic relationships with China and India involve both competition and areas of mutual interest. Their workers compete with ours as part of a global labor supply, but the price competition also makes it less expensive for Americans to buy stuff.

The President’s logic is that we should match the Chinese, policy for policy. The Chinese are building high-speed trains, therefore the U.S. should do the same. The Chinese are spending more on education, therefore the U.S. should spend more on education. The Chinese are subsidizing green tech R&D, therefore the U.S. should offer such subsidies, for fear of otherwise losing the green tech race.

The Chinese and Indian economies are radically different from our own and from each other. There’s no logical reason why our government’s economic policies should mimic either of theirs. And if you’re going to choose one, why should the U.S. emulate the Communist Party of China rather than the developing free market capitalism of democratic India? The President’s wage competition argument applies equally to both nations.

A better path is for the U.S. government to implement policies that make sense for the U.S., no matter what China and India do. American economic policy changes should focus on solving American policy problems and maximizing future productivity growth here at home.

The short-term U.S. economy appears to have stabilized but is still quite weak. The fiscal stimulus advocates have gone quiet, either because they have given up on the argument or because they know they cannot succeed legislatively. With an 8.9% unemployment rate and a future recovery path measured in years, it’s impossible to argue that fiscal stimulus was a success. Only Dr. Krugman is left to wave the stimulus banner, hurl invective, and call everyone stupid.

Far more constructively, yesterday ten former Chairs of the President’s Council of Economic Advisers argued that policymakers should prioritize austerity:

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blockquote>Repeated battles over the 2011 budget are taking attention from a more dire problem—the long-run budget deficit.

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