I’ll have more to say on the remarkable spectacle of Mitt Romney’s ostensibly market-loving GOP opponents slamming him for the fact that Bain-owned companies often laid-off large numbers of workers, but I think this illustrates a non-Mitt point about the political economy of recessions. Part of what’s animating the opponents of demand-side stimulus seems to be a sense that austerity can be used as a tool to force structural reforms that have nothing in particular to do with the recession, but that the proponents of austerity think are smart long-term policy. You see that happening very clearly in Italy today, and perhaps it will work. But it’s a dangerous game.
It happens to be the case that Barack Obama is too much of a technocrat by instinct and inclination to go this route, but you can see in the attacks on Romney that the political mood is ripe for some kind of anti-layoff legislation. And you can also see in a lot of the discourse around everything from defense spending to school funding that there’s a growing sentiment in favor of public expenditures as a kind of make-work employment program. In important ways mass unemployment is the enemy of reform. People are willing to tolerate a certain amount of instability and risk in life as the price of opportunities to get ahead, but once policymakers send the messages that millions of people languishing in unemployment for years is a scenario they’re prepared to tolerate—and it’s a signal they’ve sent loud and clear—then the psychology and politics shifts. People come to think that preserving what they have should be the focus of their political activities. And who can blame them? The standard explanation about why flexible labor markets are good is underscored by a presumption that central banks will provide a monetary policy environment in which labor markets clear. But if the central bank refuses to do this, then the case for preserving existing employment at all costs suddenly looks much stronger.