Many mixed signals

The President and Vice President have this week sent mixed and confusing signals on the macroeconomic picture. It is hard to reconcile a “stay the course” strategy with (a) new bad data, (b) “we misread the economy” and © “we had incomplete information.”

This seems to be part of a broader problem with the Administration’s ability to send clear, coordinated, and internally consistent signals on economic policy.

I want to distinguish between my views on sound policy and the communications critique I present here. As an example, I oppose the House-passed climate change bill. But that is independent of my critique below that the President is making an absurd claim to sell that bill. There is a more intellectually valid case he could make for a bill that I oppose. I was skeptical but open to a successful PPIP, but the Administration oversold an underdeveloped policy.

A certain amount of confusion is normal, especially in a rapidly-changing economic and market environment. But events are not driving changes on a daily basis as they did last Fall. Instead, this confusion is being driven by deliberate policy signals from senior Administration officials.

Macroeconomy and stimulus

• More important than any question about a second stimulus, a reporter should ask the Administration if they think the economy is right now getting weaker or stronger. Before last Friday, I’m confident they would have said something like, “It’s slowly getting stronger, but it will take time.” Last Thursday’s jobs rport creates uncertainty around this answer. It’s a crucial judgment for the Administration to make, and an important signal to send. For now the Administration is signaling that it thinks the economy continues to strengthen, while admitting that their initial forecast was overly optimistic, and while confronting an important jobs report last week that moved in the wrong direction.
• The Administration argues the stimulus is working to improve the economy now. Their “create or save” metric, however, makes it impossible to prove this, so they must rely on demonstrating that cash is actually flowing out the door, and showing particular examples of new jobs resulting from that spending. It’s hard to convince people that jobs are being created when they see on net that hundreds of thousands of jobs are being lost each month. And so little of the stimulus cash has flowed so far that their argument that the stimulus is helping now is incredible.

The budget

• The President and his Budget Director Peter Orszag say that the President’s budget would cut the deficit in half, yet Director Orszag argues elsewhere that the deficit measure they use in that calculation is the wrong one.
• The President and Director Orszag say their budget reduces future deficits by $2 trillion over the next decade. CBO says it would increase deficits by $4.8 trillion, and that debt held by the public would exceed 82% at the end of the decade, a level not seen since the end of World War II. The Administration gets its result in part by using a “current policy” spending baseline, even though Director Orszag used on a more rigorous “current law” baseline while at CBO.
• The President and Director Orszag say that health care spending is the primary long-term budget problem. But CBO correctly says that the aging of the population, and its effects on Social Security, Medicare, and Medicaid spending, is a bigger and more immediate problem than health care cost growth 40+ years from now.
• The President and Director Orszag say their health care proposals would slow the growth of long-term public and private health care spending. CBO says the legislation being developed in Congress would significantly increase government health care spending, and that the long-term changes don’t produce scorable savings. Director Orszag claims this means that CBO agrees with him that these proposals will save money, but just won’t attach a number to it. And yet the Director, who has hundreds of analysts working for him, has not produced his own numbers to measure the long-term savings from health care reform.

Climate change

• The President and his team make the Orwellian argument that cap-and-trade legislation that would raise the price of energy is good for the economy. If they want to argue that the long-term climate benefits are worth the economic costs, that’s a debatable argument. it is absurd to claim that higher energy prices will help the U.S. economy by creating “green jobs.”

TARP

• With great fanfare the Administration rolled out its new and improved TARP plan this Spring, including stress tests, a new foreclosure mitigation plan, and a Public-Private Investment Partnership to buy toxic financial assets. PPIP is now on life support, and we have not yet seen from the Administration any evidence that the foreclosure mitigation plan is working. Aside from the apparently successful stress tests, the new TARP plan for banks looks a lot like the old TARP plan for banks.

The Vice President’s and President’s recent macro/stimulus comments were so provocative that it is unsurprising they are driving intense press scrutiny. There are many other claims that the Administration has made that would collapse under rigorous questioning, and that send mixed signals to investors, Congress, the press, and the public. I will continue to wait for this rigorous questioning from a largely docile and pliant press corps.

(photo credit: February 20, 2009 — Stop Go by Davery B.)