Megan McArdle on Stimulus, Politics, and What Washington Is Getting Right
Megan McArdleis a senior editor for The Atlantic, where she writes about business and economics. Megan was interviewed by The Motley Fool's Tim Hanson at our 2011 Investing Conference, held in Arlington, Va., at the end of September. What follows is a lightly edited transcript of their discussion.
Tim Hanson: Megan, I think we will start with the fact that we had Deputy Treasury Secretary Neal Wolin here earlier this afternoon and he was talking about several of the administration's initiatives to jump-start the economy. Obviously a very important subject on a day when the stock market is dropping as it is. [Editor's note: The Dow Jones Industrial Average (INDEX: ^DJI) dropped nearly 400 points on Sept. 22.] What have you seen in their plans that have merit and what have you seen that is a non-starter?
Megan McArdle: I think you have to ask first, how are you going to think about stimulus? Do you think of it -- I like to make a distinction -- do you think it is like a pacemaker or do you think it is like a defibrillator where something is dying and you bring out the crash cart and it is alive again? And I don't think that stimulus works that way. I don't think we have had a lot of evidence that you can kind of jump the economy back to a different level of permanent output.
What I do think you can do with these kinds of initiatives is palliate the pain. You can try to, for example, prevent people's human capital from basically depreciating as they are out of work, and the long-term unemployed are a huge problem in this country. The biggest that we have seen this problem, basically since the 1930s.
Now in 1980, we had higher unemployment, but that was very short and sharp. These are factories that saw a fall in demand, and then as soon as demand recovered, they rehired those people. That is not happening now. The people who are losing jobs are probably never going to; not all of them, by any means, but a lot of the people who are losing jobs may never have another job either in that job category or in that industry again.
So for example, secretaries have been hit very hard, and as a former secretary at one time myself, you could see this coming in 1994. The work wasn't there, but a lot of people continued to have them because if you are a big, important executive, you have a secretary. Not because you actually needed someone to type your notes.
And so that kind of dislocation is a huge problem, and with the job market so slack, there is nowhere for them to re-enter the labor force. As they are out, their skills depreciate, their work habits, their depression grows, and so preventing that from happening is actually a big deal, and that can actually, in some ways, permanently improve the long-term economy.
So some of the things that the administration is doing I really approve of. Their initiatives to try to get employers to hire the unemployed, for example, people who have been out of work for more than six months. I don't think that that has a huge potential to suddenly generate 8 zillion new jobs, but it does perhaps have the potential to shift hiring within the labor market so that you are kind of spreading the unemployment a little more evenly. And that is actually a big deal, because if you can get people back in the labor market after nine months instead of leaving them out for two years, you have actually preserved something in the economy that is going to be growth going forward.
The temporary stimulus measures are not bad; I just don't think that they are very likely to get through this Congress. At this point, there is a very stark line between what people, what Republicans want and what Democrats want, and as we saw yesterday, [House Speaker] John Boehner can't even control his own caucus. So that is the other part of it is that all of this stuff, you can sit there and propose anything. They could propose to spend a trillion dollars and jump the economy back up to 5% unemployment and it wouldn't really matter.
Hanson: So along those lines with an election obviously looming, you'd think the election would be an impediment to progress rather than an incentive to progress.
McArdle: Yeah, it's strange because usually you do see this, what they call the "political business cycle." So for example, there is this kind of much-vaunted Democratic effect on growth, and if you actually break it down, apparently a lot of it is just accounted for the fact that Democrats are much more expansionary with both monetary and fiscal policy leading into elections, and that is kind of the normal run of things and so they basically get all of that growth in a couple of years of their administrations. That is not happening this time because the Republicans are kind of standing [unclear] history yelling, "Stop!"
Instead I think what we are actually going to see is possibly contraction leading in to the election, and I don't just want to sort of smack the Republicans here; I disagree with them about their stance certainly on things like the debt ceiling and in general with the kind of "no to everything" that the Obama administration proposes. He could propose petting puppies and John Boehner would be like, "My caucus won't take it!"
Hanson: Well there is a good case against that. They are not washed.
McArdle: Probably carry disease. We should execute puppies. [Laughing.]
Hanson: Can we take that out of context? [Laughing.]
McArdle: But that said, the Republicans have some justified skepticism of stimulus. They have some justified skepticism of this; [look at] Ireland right now, after two years of hearing [New York Times columnist] Paul Krugman bang on how Ireland was terrible and austerity wasn't working, Ireland is now growing faster than Spain or Italy or Portugal. The evidence isn't so clear that you can just say the Republicans are being mindless and stupid. I think, on the other hand, the president should have the opportunity to do some moderate things that he thinks will improve the economy. So yeah, I don't think we are going to see the kind of growth that you normally do. I actually think, especially with Europe, which is obviously, I'm sure other people have mentioned...
Hanson: It has come up, yeah.
McArdle: Really? Hot damn, my scoop is gone!
Hanson: You spoke about using the stimulus to potentially get back down to 5% unemployment. I don't think that is a random number because one of the things that I have seen, and I think you have reported on also, is that all of the estimates that politicians are putting out there about spending and everything is all predicated on unemployment going from about 9% to 10% today to 5% by I think 2014 or 2015. Is that crazy? Should we be wildly panicked?
McArdle: I think at this point it is crazy. I was kind of a pessimist early on mostly because I am a Great Depression buff, and so it wasn't that I was in any way like the seer who understood all that was going to happen years before anyone else; that's Paul Krugman's job. But I did say I am not sure. I remember being in a conversation with maybe Nate Silver, but some political science blogger who was saying, Well for Obama, look at the Reagan recession. Reagan was at 11% unemployment. It was terrible and he recovered. And I said, right, but that was a different recession. That was Paul Volcker kind of like stepping on the brakes on interest rates as hard as he could, and this is just different. I think that Carmen Reinhart and Ken Rogoff have made a good case that recessions like this -- and in some ways that is a misnomer because we have only had one recession like this, by which I mean a worldwide financial-led panic, right? That was the 1930s; we have not had anything like that, as far as I know, in history.
Hanson: We did it.
McArdle: Going for No. 2. We are No. 2! But as far as we can tell, in general, financial-led recessions, they last longer, they feature more unemployment, they feature sharply spiking levels of debt and there is almost nothing you can do about that. If you look at the countries in Europe, Italy is running a primary surplus. Ireland was running a surplus before their banking system went completely kaput, and some of these things just happen. When I look at that, I tend to think we are not going to see unemployment of 5% for a while. I would say more like 2016, and that, as I said before, that is a big deal.
Hanson: To go on to the other side, has there been anything that the Republicans and Congress have proposed that looks interesting and should be considered in anything they propose that is wildly worthless?
McArdle: I think that they probably shouldn't send letters to the Fed telling them how to do their job. That would be my...
Hanson: The independent fad.
McArdle: The independent fad. I think that that is not helpful on a bunch of levels. I actually really do -- my husband works for one of the leading libertarian magazines, and so I get these periodic forwarded emails, like, "Will you please explain why your wife thinks that this completely moronic plan is going to work?" And so I have a lot of exposure to kind of the other side of this, the people who are the; and I respect it. But I do think that, regardless of what you think of how the Fed are actually doing their job, countries where politicians start interfering with the central bank, or in general not countries where you see low, stable inflation and well-run political economy...
Hanson: So you are not investing in Argentina?
McArdle: No. These are the countries where eventually, right; so now you do it and you make him stop inflations. Well what happens when Democrats control Congress and they are like, you know what would be awesome? Six percent inflation right now. Do it! It would be like Jean-Luc Picard, "Make it so." So I think that the precedent that they are setting is incredibly bad and threatens to take us back to the days of good old Republican Fed chief, Arthur Burns, who under Nixon presided over kind of the worst burst of inflation in United States history since I think the Civil War. So that's what I disagree with.
In lots of ways, I am much more sympathetic to the Republican conception of how the government should be structured and how it should interact with the economy than I am for the Democrats. I think that their ideas about simplifying entitlement, simplifying the tax code, and radically reforming them are probably closer to what I think is necessary. But that is long term.
In the short term, in part for ideological reasons, they are not proposing a lot, and in fairness I don't think that that is because they want the economy to suck so that Obama loses, and that is what I have been seeing a lot of Democrats saying. I don't think that that is true. I talk to these guys. The reason they are doing it is they genuinely look at the stimulus and they say, what did it do? The economy was 8% unemployment and now it is at 9% unemployment. Why should we do this again? Are we going for 10? Obviously there is a lot of sort of great arguing about that, but frankly the evidence for stimulus is not that strong. I think the best you can say when you look at where unemployment in the United States went with a massive stimulus package. I mean $900 billion is the biggest stimulus package not only done in U.S. history, but basically in world history as far as I am aware.
It looks like, if you look at what happened when the stimulus ended to unemployment, it looks like it tweaked unemployment by like 0.3% for $900 billion.
Hanson: That's not a great return.
McArdle: That's a lot of debt. We are going to have to pay it back and like right now it is cheap, but four years ago it was really cheap to borrow subprime, 100% interest rate loan on a house in Yuma, Ariz., so it is not necessarily; we shouldn't necessarily take that as a signal it is a good idea to borrow as much as we can.
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