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The jobs debate on Earth 2

By Ezra Klein,

Imagine an alternative universe. This universe is a lot like our own. The sky is blue. The earth revolves around the sun. Rebecca Black is inexplicably famous. John McCain is a United States Senator representing the great state of Arizona.

European Southern Observatory/M. Kornmesser

But in this universe, Republicans have developed a very different critique of the Democrats’ approach to the jobs crisis. Democrats, they say, focused too much on demand and not enough on debt. The Obama administration should have listened to the McCain campaign when it proposed buying bad mortgages and offering homeowners a 30-year mortgage at a low interest rate. It should have listened to Senate Republicans who tried to promote a mass refinancing initiative as a solution to the economic crisis.

Instead, the Republicans would sigh, Democrats gave in to their affinity for government spending and Keynesian economics and wasted valuable time and money on tax cuts that did little, infrastructure projects that weren’t actually “shovel-ready,” and long-term investments in health IT infrastructure and high-speed rail that did nothing for the flailing economy.

In this universe, as in our universe, John McCain and a group of Senate Republicans gathered reporters yesterday to announce the “Jobs Through Growth Act.” But in this universe, rather than offering a vague gesture towards tax reform and a rehashing of various plans for deregulation and domestic oil production, they hammered home their critique of the Obama administration’s failed housing initiatives.

“Republicans,” McCain said on Earth 2, “have a better idea than more tax cuts and government spending. The economy isn’t growing because households are buried under mortgage debt. So we propose to attack the problem at the source. On the advice of Harvard’s Martin Feldstein, we are introducing legislation that would empower the federal government to absorb mortgage principle that exceeds 110 percent of the home value. But because we can’t simply reward banks who made irresponsible lending decisions, they will have to absorb half of the losses. And because we can’t simply reward homeowners who took out irresponsible loans, they will have to agree to a form of enhanced bankruptcy in which falling behind on their mortgage opens all of their assets to seizure.”

Liberals would find a lot to dislike in this plan. For one thing, it’s voluntary on all sides, and voluntary programs have failed again and again in the housing market. For another, it’s extremely punitive to distressed homeowners who fall behind in their payments on their new mortgage. But that would be an argument worth having. Republicans would have come up with a plan to address a current problem in the economy — too much debt — and address it in a way that Democrats, who believe in goosing demand, have not broached.

But that’s not the world we live in. In the world we live in, McCain and his colleagues released a package rehashing longtime conservative ideas that may or may not be worth trying, but have nothing to do with the problems currently bedeviling the economy. Greg Sargent got Gus Faucher, the director of macroeconomics at Moody’s Analytics, to take a look at the package, and Faucher’s response got at this problem exactly:

“Should we look at regulations and make sure they make sense from a cost benefit standpoint? Certainly. Should we reduce the budget deficit over the long run? Certainly. But in the short term, demand is weak, businesses aren’t hiring, and consumers aren’t spending. That’s the cause of the current weakness — and Republican Senate proposals aren’t going to address that in the short term.”

We desperately need a real debate about how to address our extraordinary jobs crisis. But that debate actually needs to be based on some plausible story of what got us into this mess. A fall in aggregate demand, which is what Democrats point to, is a plausible story. A slow and painful deleveraging process is another. But an inefficient tax code or a bevy of environmental regulations simply isn’t.

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