David, Go To Your Corner… Paul, Go To Your Corner… Matt, Go To Your Corner… Noah, Go To Your Corner

David Brooks at NYT:

Many economists say we need another stimulus bill. They debate about whether the stimulus should take the form of tax cuts or spending increases, but the ones in your party are committed to spending increases. They trot out a plausible theory with computer models to go with it. If the federal government borrows X amount of dollars and pumps it into the economy, that would produce Y amount of growth and Z amount of jobs. In a $14 trillion economy, you’d probably have to borrow hundreds of billions more to have any noticeable effect, but at least you’d be doing something to help the jobless.

These Demand Side theorists are giving you a plan of action. But you’re not a theorist. You’re a practical executive, and you have some concerns.

These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model?

Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?

The Demand Siders don’t have a good explanation for the past two years. There is no way to know for sure how well the last stimulus worked because we don’t know what would have happened without it. But it is certainly true that the fiscal spigots have been wide open. The U.S. and most other countries have run up huge, historic deficits. And while this has helped save public-sector jobs, we certainly haven’t seen much private-sector job growth. It could be that government spending is a weak lever to counter economic cycles. Maybe monetary policy is the only strong tool we have.

The theorists have high I.Q.’s but don’t seem to know much psychology. Lord Keynes, though a lesser mathematician, wrote that the state of confidence “is a matter to which practical men pay the closest and most anxious attention.”

Paul Krugman responds:

A quick note on David Brooks’s column today. I have no idea what he’s talking about when he says,

The Demand Siders don’t have a good explanation for the past two years

Funny, I thought we had a perfectly good explanation: severe downturn in demand from the financial crisis, and a stimulus which we warned from the beginning wasn’t nearly big enough. And as I’ve been trying to point out, events have strongly confirmed a demand-side view of the world.

But there’s something else in David’s column, which I see a lot: the argument that because a lot of important people believe something, it must make sense:

Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?

Yes, I am. It’s called looking at the evidence. I’ve looked hard at the arguments the Pain Caucus is making, the evidence that supposedly supports their case — and there’s no there there.

And you just have to wonder how it’s possible to have lived through the last ten years and still imagine that because a lot of Serious People believe something, you should believe it too. Iraq? Housing bubble? Inflation? (It’s worth remembering that Trichet actually raised rates in June 2008, because he believed that inflation — not the financial crisis — was the big threat facing Europe.)

The moral I’ve taken from recent years isn’t Be Humble — it’s Question Authority. And you should too.

Scarecrow at Firedoglake:

Note Brook’s cowardice is not naming Krugman, DeLong, Baker, et al, or for that matter, traditional Republican economic advisers like Bruce Bartlett and Mark Zandi, who recently called for more stimulus now and strongly warned Congress against cutting spending before the economy has more fully recovered.

Brook’s intellectual sleight of hand is to say, “well, all economists have been wrong, so why pay attention to Krugman and friends?” That’s just dishonest, because not all economists have been wrong, and it’s important to know which have been right and which have been catastrophically wrong.

Over the last 30 years, a particular group of economists has been proved dead wrong, and their belief system nearly destroyed the economy. It’s the school of economists who claimed markets are self correcting, that financial markets don’t need much oversight, and the government shouldn’t use fiscal policy to help a depressed economy recover even when monetary policy (lowering Fed interest rates) becomes ineffective. When Alan Greenspan in a moment of candor admitted his surprise and shock that his entire economic philosophy had failed, he was speaking for that school, which Krugman et al have vilified for forgetting essential lessons from the Great Depression. It is Greenspan’s school, not Krugman and friends, that has been arrogant in rejecting well deserved criticism. But Brooks seems completely ignorant of this distinction.

Ezra Klein:

At first glance, David Brooks and Paul Krugman have released precisely opposite columns over the past few days. Krugman’s Sunday effort blasted the Senate for failing to pass further stimulus in the form of unemployment benefits. “We’re facing a coalition of the heartless, the clueless and the confused,” he lamented. Brooks’s column is an effort to punch holes in the case for stimulus. “Debt-fueled government spending doesn’t increase confidence,” he writes. “It destroys it.”

But if you actually look at their prescriptions, they are, in this case, similar. Krugman wants to see unemployment benefits extended. So, it turns out, does Brooks. “Extend unemployment insurance,” he recommends. “That’s a foolish place to begin budget-balancing.” He goes on to argue for a program that would “mitigate the pain caused by the state governments that are slashing spending” by tying state and local aid to the passage of state budgets that make long-term sense — but notice that he’s recommending state and local aid.

Now it may be that a retrenchment to state and local aid and unemployment insurance represents a tremendous defeat for those of us who believe the economy needs further government help to get back on its feet. But getting passage of both — and quickly — would also mean it gets some of the most necessary, and quickly-usable, help that government can provide. If you can’t do much more on stimulus, you can at least mitigate some of the pain and prevent some of the most predictable sources of economic contraction.

Brad DeLong on Brooks:

David Brooks advises Obama:

David Brooks: You are practical…. Too much debt could lead to national catastrophe. Too much austerity could lead to stagnation. Well, there’s a few short-term things you can do. First, extend unemployment insurance; that’s a foolish place to begin budget-balancing. Second, you need to mitigate the pain caused by the state governments that are slashing spending. You need a program modeled on Race to the Top. You will provide federal money now to states that pass responsible long-term budget plans…

And David Brooks advises Obama:

David Brooks: A Little Economic Realism: These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model?… [M]any prize-festooned economists do not support another stimulus…. Are you sure your theorists are right and theirs are wrong? The Demand Siders don’t have a good explanation for the past two years…. The theorists have high I.Q.’s but don’t seem to know much psychology… debt-fueled government spending doesn’t increase confidence. It destroys it. Only 6 percent of Americans believe the last stimulus created jobs…. Consumers are recovering from a debt-fueled bubble and have a moral aversion to more debt. You can’t read models, but you do talk to entrepreneurs in Racine and Yakima. Higher deficits will make them more insecure and more risk-averse…. They’re afraid of a fiscal crisis. They’re afraid of future tax increases. They don’t believe government-stimulated growth is real and lasting… they are the ones who invest and hire, not the theorists. The Demand Siders are brilliant, but they write as if changing fiscal policy were as easy as adjusting the knob on your stove. In fact, it’s very hard to get money out the door and impossible to do it quickly. It’s hard to find worthwhile programs to pour money into. Once programs exist, it’s nearly impossible to kill them. Spending now creates debt forever and ever…

Did he have a long dark night of the soul that led to a complete ideological conversion? Was important new information about the structure of the economy brought to his attention? Did word come down from the Conintern demanding that he cease his line wobble?

Did his doctor change his meds–drastically?

Nope. None of the above.

The first quote starts four lines after the second ends.

Dean Baker at CEPR on Brooks:

There also is a basic question of logic that Mr. Brooks neglects. If the country really did start to face insolvency (i.e. no one would buy its debt), why would the Fed not simply step in and buy up government debt itself, as it has been doing to some extent over the last year and a half? This could cause inflation, which could be a serious problem, but then the issue would be inflation, not insolvency.

Of course, as practical matter, it is more than a little far-fetched to believe that we will have to worry about inflation any time soon. All the measures of inflation are in the 1-2 percent range and headed downward. With the unemployment rate still near double-digit levels and huge excess capacity in nearly every sector of the economy, it would take some real magic to spark inflation. (Since Brooks is anxious to argue that central banks and international financial institutions, who all missed the housing bubble btw, agree that insolvency is a real concern, it is probably worth mentioning that Olivier Blanchard, the chief economist of the IMF, believes that the economy would benefit from a somewhat higher rate of inflation.)

After inventing a crisis of national insolvency to concern the president (should President Obama also worry about invading Martians?), Mr. Brooks tells readers that:

“The Demand Siders don’t have a good explanation for the past two years.”

Hmmm, is that right? Seems to me that we have a very simple theory to explain the past two years. There was a huge bubble in housing that burst beginning in 2006. This led to a plunge in residential construction that cost the economy more than $500 billion in annual demand. In addition, the loss of $6 trillion in housing wealth, coupled with the loss of around $7 trillion in stock wealth, has cost the economy more than $500 billion in annual consumption demand. This is the result of the wealth effect on consumption, a phenomenon that economists have been writing about for close to a century. In addition, there was a bubble in non-residential real estate that collapsed about a year after the collapse of the housing bubble. This cost the economy about another $150 billion in demand. That gives a total loss in annual demand of around $1.2 trillion. All of this was completely predictable and predicted by at least some demand siders.

It was also easy to see that the stimulus approved by Congress was inadequate. Demand siders rely on something called “arithmetic” to reach this assessment. After pulling out the $80 billion fix to the alternative minimum tax, which had nothing to do with stimulus, and the $100 billion or so designated for later years, the stimulus provided for roughly $600 billion in spending and tax cuts over the years 2009 and 2010. This comes to $300 billion a year. Roughly half of the federal stimulus was offset by cutbacks and tax increases at the state and local level, leaving a net stimulus from the government sector of roughly $150 billion a year.

Demand siders did not believe that $150 billion in annual stimulus from the government could offset the contractionary impact of a reduction in annual spending by the private scctor of $1.2 trillion ($1.2 trillion > $150 billion). That is how demand siders explained the failure of the stimulus to have much impact in reducing the unemployment rate. Perhaps this explanation is too complicated for Mr. Brooks (he repeatedly complains about the high IQs of the demand siders), but it actually seems fairly straightforward. If he wants to be honest, he could at least say that he doesn’t understand the demand siders’ explanation, rather than asserting that demand siders do not have an explanation.

Matthew Yglesias:

David Brooks, writing skeptically about the case for more fiscal stimulus, says:

But the overall message is: Don’t be arrogant. This year, don’t engage in reckless new borrowing or reckless new cutting. Focus on the fundamentals. Cut programs that don’t enhance productivity. Spend more on those that do.

So leaving aside the fact that it’s a bit difficult to know exactly which programs enhance productivity and which don’t (arrogant, even), obviously “do more productivity-enhancing stuff” is never terrible advice. But it just can’t be emphasized enough that even though the American economy is in fact sub-optimal on the supply side in many ways, this is also true of every other economy on earth at every other time on earth. When nations fall into a macroeconomic funk, it’s natural—and in some ways even a bit healthy—for people to start focusing on structural problems that they didn’t care about so much a few years ago in fatter times. But it can also get morbid.

[…]

Over the long-run, boosting our productivity growth rate will help us become more prosperous. But over the short-run, our potential to produce goods and services simply isn’t the issue. The issue is that because of demand shortfalls, that potential isn’t being used.

Having said all that, the really odd thing about Brooks’ column is that after bashing stimulus proponents for many grafs, he turns out to basically agree with stimulus proponents:

First, extend unemployment insurance; that’s a foolish place to begin budget-balancing. Second, you need to mitigate the pain caused by the state governments that are slashing spending.

Exactly. But if that’s what Brooks thinks, he should be complaining about conservative senators who don’t want to do those things, not about Paul Krugman.

Noah Millman at The American Scene:

Question for Matt Yglesias:

Your answer to our economic situation is that we need to ramp up government spending to stimulate consumer demand to increase employment. It’s not important to be efficient in how we deploy our stimulus money; it’s much more important just to get people buying stuff and making stuff for people to buy.

Your answer to the problem of climate change is that we need to substantially increase the price of carbon so that consumption patterns change and we all buy less stuff that is very carbon-intensive and either spend more of our income on non-carbon-intensive goods and services or simply live lives of greater overall leisure without so much emphasis on getting and spending. The government should do what it can to ease the economic pain of the transition, but some short-term economic pain is a reasonable price to pay for saving the planet.

I think the tension between these two positions should be obvious. I think Matt would reconcile that tension by saying that, no, he doesn’t really think that ramping up government spending on just anything is a good idea – he thinks we should ramp up spending on things that would help make the transition to a greener economy, even if this means sacrificing a bit of stimulus.

In other words, he thinks we should be planning for the long term when we spend in the short term, and now more than ever since this “spend lots of money now” window isn’t going to stay open forever.

In other words, if David Brooks had said “[D]on’t engage in reckless new borrowing or reckless new cutting. Focus on the fundamentals. Cut programs that entrench the existing carbon-based economy. Spend more on those that help foster a green transition” instead of talking generically about productivity and investing for the long term, Matt would have applauded instead of sniping.

Right?

Advertisements

Leave a comment

Filed under Economics, Mainstream, The Crisis

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s