The Agenda

Afghanistan, Schumer-Hatch, the Debt Burden

(1) Is Afghanistan turning a corner? As Iraq gets worse, early indications suggest that the new strategy of U.S.-led forces and the Afghan government is actually having an impact.

An opinion poll published this month by the BBC found a leap in optimism among Afghans, with 70% believing the country was going in the right direction, compared with 40% a year ago. Support for Nato troops rose from 59% to 62%. Meanwhile, opium production dipped in 2009, with the area of poppy cultivation down by a third in Helmand – the province under British control that has hitherto been the poppy centre of the country. Also in Helmand, district centres that were run or threatened by the Taliban until a few months ago are now under Afghan army and police control, and peaceful enough for the shops and bazaars to reopen. At the same time, anecdotal evidence from the villages suggests an increasing number of Taliban fighters – battle-weary or drawn by new jobs – are returning home to their families.

Taliban elements seem to recognize that they are losing the ideological struggle, and so they’re making efforts to reduce civilian casualties. This is progress. The question is whether it is sustainable.

(2) Is Schumer-Hatch the right way forward?

Keith Hennessey has raised serious doubts about the president’s proposal for a “Small Business Jobs and Wages” tax credit.

If enacted quickly, the President’s new Small Business Jobs and Wages tax credit proposal will therefore create fewer (and maybe far fewer) than 165,000 – 297,000 jobs this year.  For comparison, remember that the U.S. economy has lost 2.7 million jobs since a year ago, and 7.2 million jobs since the beginning of the recession in December 2007.  297,000 is 4.1% of 7.2 million, so you’re talking about a policy change that at best would restore fewer than 1 out of 25 jobs lost since the recession began.

Now for the bigger problem:  the White House fact sheet is correct– CBO says this is the job creation policy with the greatest job creation bang per deficit buck.  Other policies are less efficient.

One wonders if the CBO also considered the Schumer-Hatch proposal, which bears a close resemblance to Michael Boskin’s call for an alternative stimulus last fall. 

(3) Carmen Reinhart and Kenneth Rogoff offered a sobering perspective on the extraordinary debt levels that the leading economies will be carrying post-crisis.

Given these risks of higher government debt, how quickly should governments exit from fiscal stimulus? This is not an easy task, especially given weak employment, which is again quite characteristic of the post-second world war financial crises suffered by the Nordic countries, Japan, Spain and many emerging markets. Given the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. Yet, the sooner politicians reconcile themselves to accepting adjustment, the lower the risks of truly paralysing debt problems down the road. Although most governments still enjoy strong access to financial markets at very low interest rates, market discipline can come without warning. Countries that have not laid the groundwork for adjustment will regret it.

This reminds me of the most persuasive argument against the Recovery Act, from Jeffrey Sachs of Columbia University’s Earth Institute.

In short, although the sharp downturn will unavoidably last another year or even two, we will not need zero interest rates and mega-deficits to avoid a depression or even to bring about a recovery. In fact, the long-term, sustainable recovery will be accelerated by a policy framework in which the budget credibly returns to balance over several years, the government meets its critical responsibilities in social services, infrastructure and regulation, and the Fed avoids dangerous swings in interest rates that actually contribute to the booms and busts we seek to avoid. 

To be sure, Sachs advocates a higher tax take and heavy public investments. Yet he also makes the case against deficits that exceed 5 percent of GDP as a mark of “instrument instability.” He also makes the case against efforts on the part of the Fed to smooth out business cycles, efforts that have contributed to the cycle of extremely sharp bubbles and busts. 

In the U.S., we don’t really have anyone advocating for a stable policy framework. Conservatives rightly want to pare back the size of the federal government over time, yet congressional Republicans have soft-pedaled the case for voucherizing Medicare while attacking the Obama administration for proposing notional cuts to Medicare cost growth. The next decade will see a painful liquidation of malinvestments in housing and other declining sectors, and government will be expected to cushion the blow. But rather than do this in a manner that delays liquidation and restructuring, we ought to try to facilitate the process by, for example, pursuing, as Edward Glaeser has put it, people-based rather than place-based policies. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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