Austerity. It was a huge mistake on Obama's part and it could definitely happen again. Brad DeLong explains:
"Ten years and ten months ago, US President Barack Obama announced in his 2010 State of the Union address that it was time for austerity. “Families across the country are tightening their belts and making tough decisions,” he explained. “The federal government should do the same.” Signaling his willingness to freeze government spending for three years, Obama argued that, “Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t.” So great was the perceived need for austerity that he even vowed to “enforce this discipline by veto,” just in case congressional Democrats had something else in mind.....
In 2012, Lawrence H. Summers, the director of Obama’s National Economic Council until January 2011, and I warned that without a renewal of aggressive fiscal stimulus, prime-age employment, productivity, and real incomes would never recover to their pre-2007 trends. We were right about the latter two, while the prime-age employment rate eventually recovered only after 12 years (three times longer than in previous post-World War II business cycles)....
I am reminded of this now-ancient history because it increasingly looks like we are about to repeat it.
Owing to the COVID-19 pandemic, US prime-age employment is back down to 76%, just a little higher than it was in 2010. Remember, in normal times (before 2007-08), one-fifth of prime-age Americans were neither employed nor looking for a job; but now, an extra 5% of the population has been added to this cohort. That is millions of people who could be performing any number of useful paid tasks that are currently being left undone.
Under a sane national policy, the federal government would spend as much money as it takes to generate the demand necessary to make it worthwhile for employers to re-hire this one-twentieth of the working-age population. Worries about what we can afford would be set aside until the day the world’s savers no longer regard US government debt as a special, singularly valuable asset. That day may never come.
As John Maynard Keynes famously observed during World War II, “What we can do, we can afford.” Today, the point is even more obvious. We do not even have to figure out how to finance the response to the current crisis; that part of the equation has already worked itself out."
But we'd never do something so dumb again right? Think again and consider what might happen when the clear necessity to spend money--lots of money--meets the reality of Congressional politics. Matt Yglesias:
"[Congressional politics] could add up to a scenario where Republicans insist on spending cuts in government funding deals while Democrats argue that deficit reduction should feature tax increases too in order to be balanced and fair. This would exacerbate party tensions on the Democratic side, make it essentially impossible for a Biden administration to solve any big problems, and very likely founder on the basic reality that Republicans are fanatically opposed to taxing the rich.
There is an alternative to “eat your peas” politics — a push for a different kind of bipartisan deal in which, rather than giving up on progressive spending priorities, Biden tries to secure support for them by giving in to big, GOP-friendly tax cuts.
The Democratic economic policy wonks I’ve floated this by are skeptical, but mostly because they insist Republicans would never go for it. The Republicans are more optimistic — though they concede it’s dicey. Call it an ice cream party, the opposite of eating your peas. Certainly it might fail. But given the economic fundamentals, it’s worth a shot."
Definitely. Ice cream all around barkeep!
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