A friend drew my attention to this passage from Michael Hiltzik’s The New Deal: A Modern History in which he quotes Harry Hopkins explaining the basic dilemma of overseeing a government job creation program (he’s talking specifically about the Federal Theater Program but the point is general):
You can’t care very much what people are going to say because when you’re handling other people’s money whatever you do is always wrong. If you try to hold down wages, you’ll be accused of union-busting and grinding down the poor; if you pay a decent wage, you’ll be competing with private industry and pampering a lot of no-accounts; if you scrimp on production costs, they’ll say your shows are lousy and if you spend enough to get a good show on, they’ll say you’re wasting the taxpayers’ money. Don’t forget that whatever happens you’ll be wrong.
This was meant as advice to Hallie Flanagan, but I actually think it’s something that those of us who believe stimulative policy is appropriate during recessions need to think more seriously about. For a long time we had a consensus that we could get around this problem because monetary policy could stabilize the macroeconomy. But it turns out that the Federal Reserve’s customary tool of short-term interest rates can run out of firepower. One possible solution to this problem is for Congress to enact a massive fiscal stimulus program on a discretionary basis. What we found out in the 2009–11 period, however, is that this doesn’t really work politically. And Hopkins found out the same thing in the 1930s. It’s not that you can’t get anything useful done with fiscal stimulus—you can do lots of great stuff and help the economy out in the process—but there are some really serious barriers to actually stimulating at the necessary scale.
That doesn’t mean we’re doomed. But it means we need to adopt public policies in advance to help rescue the economy before the next zero bound episode. That means giving the Federal Reserve a powerful new tool to hand out money to people and working out an automatic mechanism for state governments to get injections of money in severe downturns.
