Stimulus Talk Yields to Calls to Cut Deficits

From The New York Times:

At a moment when many economists warn that the American economic recovery is likely to be imperiled by prolonged high unemployment and slow growth, President Obama is discovering that the tools available to him last year — a big economic stimulus and action by the Federal Reserve — are both now politically untenable.

The mood in both parties of Congress has turned decidedly anti-deficit, meaning that the job-creation programs once favored by the White House and Democratic leaders in Congress have been cut back, then cut again. It is a measure of the mood that Mr. Obama on Tuesday hailed an initiative by his administration to cut the budgets of most major government agencies by 5 percent, at a time when conventional theory would call for more government spending to lift the economy.

Even the Federal Reserve is pulling in its horns. No one could expect it to cut interest rates further — they are at rock bottom. But spurred by inflation hawks in their midst, the Fed has gotten out of the business of buying Treasury securities and mortgage bonds, one of its main strategies over the last two years for pushing down long-term interest rates.

Over the last few weeks, the cautious optimism that the economy is on the mend has given way to more caution than optimism.

Although Congress has enacted or is likely to pass an estimated $200 billion worth of additional spending since last year’s stimulus package, the appetite for a big new fiscal boost has slackened.

The anti-deficit mood is not limited to Washington. Over the last two days, Britain and Germany have announced austerity plans, in contrast to what many in Europe were arguing for a year ago. Spain and France have announced similar moves. The politics of those moves vary from country to country: in Britain, it is explained by the election of a Conservative government; in Germany by the usual postwar German aversion to deficits.

But the crisis in Greece has focused minds across Europe, especially in Spain, Portugal and Ireland. So just two weeks ahead of a meeting of the Group of 20 economic powers in Toronto, there is a widespread consensus that grand stimulus programs are a thing of the past.

The box that Europe, the Obama administration and Congress find themselves in today — desperate to stimulate the economy and fearful of the political reaction — gives new meaning to Milton Friedman’s famous line from the mid-1960s. “In one sense, we are all Keynesians now,” he wrote to Time magazine, referring to the theories of John Maynard Keynes, who called for government spending to counter downward cycles in the economy. In a less-remembered continuation of that sentence, he added, “in another, nobody is any longer a Keynesian.”

Today they are periodic Keynesians. The Senate has taken up a jobs bill that could cost $100 billion over the next decade, a fraction of last year’s historic stimulus package, but significant by the standards of other such jobs packages over the last two decades.

Although a growing number of economists now expect the Fed to start tightening monetary policy next year, rather than later this year, there is little sense that it will resume buying assets and printing money to do so — a strategy called quantitative easing.