Confused Public Opinion Underscores Need for Fed Action

I think Mark Thoma has reaches a smart conclusion here about the need for macroeconomic policy to reflect epistemic humility rather than an effort to prove some particular theoretical view. He says “we should try everything that has a reasonable chance of working. That means quantitative easing, new spending on infrastructure, tax cuts to encourage investment and hiring, make work programs, whatever it takes to get both the economy and people working again.”

But this argument is embedded in a piece that’s primarily an attack on people urging the Federal Reserve to do more. I’m obviously not a macroeconomist, so I can’t really say that I have a particularly strong view about whether monetary or fiscal measures are likely to have a greater impact on aggregate demand. That said, as a licensed, bonded, and certified professional political pundit I do feel very strongly that aggressive monetary measures are more realistic, which is an important part of my calculus.

Why? Read Jon Chait:

Obama’s trickiest dilemma is that the public does not agree with–or, to put it less charitably, understand–the basis for his anti-recession strategy. Whatever your view of deficits, they clearly make more sense during a recession than during an expansion, when deficit spending can help fuel overheated growth. The trouble is, public opinion tends to get loose with the purse strings during boom times and tight during recessions, which is the opposite of what you want. During the 1990s boom, the public favored expanded social spending and tax cuts over paying down the national debt. Today, by overwhelming margins, they favor an immediate balanced budget, even in the face of economic catastrophe.

That is, of course, insane. But Republicans have taken full advantage of the public’s fiscal insanity. President Bush used to scoff at proposals to pay down the national debt, saying, “The surplus means the government has more money than it needs.” Nowadays, Republicans like John Boehner say things like, “American families are tightening their belts,” and, therefore, Washington should “lead by example and show the American people that the government can go on a diet as well.”

What sounds to the American people like simple common sense is economic malpractice, and vice versa. Thus the Democrats’ predicament: High unemployment is making them unpopular, but the only steps they can take to reduce unemployment are themselves unpopular. If the Democrats actually gave the people what they say they want–$1.4 trillion in spending cuts and/or tax hikes to eliminate the 2010 deficit–Republicans would capture approximately 100 percent of Congress in the next election.

This, however, is precisely one of the reasons we’ve outsources primary responsibility for macroeconomic stability to a quasi-independent technocratic institution that’s primarily influenced by elite opinion rather than mass sentiments. This model is problematic in some ways, but in principle one of its advantages should be an ability to do the right thing at a time when the public may be confused by analogistic reasoning. Unfortunately, the same skew in favor of elite opinion also seems to me to give the Fed a skew in favor of elite interests and joblessness is primarily a problem at the moment for the sort of people who aren’t likely to be invited to any FOMC members’ Christmas parties.