Friday, July 09, 2010

Realism About Deficits and Stimulus

-- Posted by Neil H. Buchanan

In a Dorf on Law post last April, I reluctantly offered a critique of the in-house columnists who write for the op-ed page of The New York Times. My reluctance grew from my conviction that it is all too easy to fall "into the pattern of waking up, reading the op-ed page, and then blogging about" something especially silly in one or more of that day's columns. In the ensuing fifteen-plus months, I have successfully restrained myself from giving into this temptation too often. This is especially surprising, given the juicy targets offered on a daily basis.

The most promising target of potential commentary, of course, is David Brooks. His toxic (and puzzling) combination of faux-populism and pseudo-intellectualism is on display twice a week, yet only two of my DoL posts (here and here) have been devoted to responding to his columns. It was especially difficult to ignore a column last month in which he offered yet more proof that some people simply should never write about economics. His column from earlier this week, however, has put me over the top. I beg the readers of this blog to forgive me.

Entitled "A Little Economic Realism," Brooks offers a case study in insincere Main Street anti-intellectualism. He brands economists who advocate further economic stimulus "theorists" and "Demand-Side theorists," whom a "practical executive" like Barack Obama would do well to treat with great skepticism. "These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty." "The theorists have high I.Q.’s but don’t seem to know much psychology." "You [the practical, non-theorist executive] can’t read models, but you do talk to entrepreneurs in Racine and Yakima." "The Demand Siders are brilliant, but they write as if changing fiscal policy were as easy as adjusting the knob on your stove." Let's get them gol-durn intillekshuls out of our lives!!

It is not merely the insincere regular-guy meme that undermines Brooks's argument. He attacks Demand-Siders as being committed to mere "models": "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?" The idea that the U.S. will become insolvent -- unable to pay its bills -- is technically wrong, of course. Even if we give Brooks the benefit of the doubt, however, he at least seems to be claiming that another stimulus will lead to a fiscal crisis. How would one make such a prediction? We have never, of course, been in the situation in which the U.S. economy now precariously wobbles, which means that we have no "practical" evidence of what will happen under any policy scenario. Anyone who predicts disaster on the basis of a collection of incomplete evidence along with a prediction about how the economy works is making claims based on ... a model. The question is not who is using a model and who is not. The question is whose model makes more sense, given the evidence and the underlying assumptions in the model.

In response to pro-stimulus arguments, Brooks merely offers that demand-side theorists "don’t have a good explanation for the past two years." How can things not have gotten better by now when "it is certainly true that the fiscal spigots have been wide open." That is, of course, utterly false. Last year's stimulus bill was widely criticized at the time by "demand-side theorists" (such as Paul Krugman) for being far too timid, given the weakness of the economy; and the final votes for the bill (three Republicans and Ben Nelson of Nebraska) were only secured by reducing the size of the bill still further.

If people like me argue that things would have been worse without the stimulus, Brooks has an answer: "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." True. No one can re-run history. We do know, however, that nonpartisan estimates have put the number of jobs created or saved by the stimulus in the 1-3 million range. (Those estimates, of course, are based on models, too.) That is not nearly enough jobs, but it is better than having done nothing and watching the unemployment rate rise toward Depression-era levels.

Whereas demand-side theorists have their egg-headed models, supported by things like economic data and analysis, Brooks has anecdotal journalism. He has either interviewed a businessperson or two in Yakima and Racine, or he has read articles by someone who did. His confident conclusion: "Higher deficits will make them more insecure and more risk-averse, not less. 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. Maybe they are wrong to feel this way, but they do. And they are the ones who invest and hire, not the theorists."

Business confidence is certainly an important part of any economic model, but it is not the only thing that determines the success of a policy; and confidence itself is affected by far more than media hype about deficits. In particular, all of the evidence indicates that businesses tend to hold back on investing and hiring when they are worried about the future of the economy. When things are as bad as they are today, it is natural to worry that anything the government might try will fail. Even so, the one thing that businesses need is customers. When the government's stimulus payments show up in the form of actual sales by a business to someone who would not otherwise have been able to buy anything from that business (or any other), then the business owner's confidence begins to rise.

Naturally, when the economy is still in the doldrums, it takes time for confidence to turn around. Frankly, demand-side theorists not only have a good explanation for the last two years, but we predicted it in advance. If the economy receives renewed stimulus, it will start to turn around. If it does not, then the (unfortunately muted) gains from the (highly inadequate) first stimulus will be lost; and the economy will get much worse. Will the businesspeople in Yakima and Racine feel better then, knowing that the government did nothing to halt the slide?

Bizarrely, Brooks ends his column by calling for an extension of unemployment benefits as well as further aid from the federal government to the states. In other words, he endorses exactly what the demand-side theorists are calling for. But, he warns: "Don’t be arrogant. This year, don’t engage in reckless new borrowing or reckless new cutting." In other words, he is willing to write more than one column telling people why stimulus is bad, but then he endorses some of it. Apparently, it is only "reckless" borrowing that is bad. Thanks for that.


egarber said...

There is one thing businesses and economists from all sides fear the most: deflation.

Those pushing for austerity don't seem to have a good answer for that basic "paradox of thrift" problem. Individuals are (rationally) saving, which is sapping aggregate demand when it's needed most. That is deflationary to an extreme. Without something to prop up demand, that downward spiral would decimate large sectors of the economy.

I often hear conservatives say that stimulus doesn't generate real growth, that it's like a diet pill rather than core health.

I think that's plainly wrong. Stimulus, especially that which leads to needed infrastructure improvements, generates a multiplier effect across the economy. If a worker is hired at a solar power company with those funds, he's less likely to default on his mortgage, which means banks can more effectively lend to small businesses. Further, his company will draw capital from investors, which makes the stimulus essentially like seed money.

And in any case, government spending is a permanent fixture in the larger framework going in. Few conservatives would say a limited defense contract is worthless, merely because the provision is "temporary." On the contrary, we're told that such work subsidizes a given company's entry into other arenas -- private technology ventures, etc.

So to me, stimulus isn't a diet pill; it's more like a protein infusion for muscle growth.

Neil H. Buchanan said...

Bravo, egarber!

Bill Abendroth said...

I also concur with Egarber, not only for the proposition that stimulus has a multiplier effect, but also because regardless of the economy, America's infrastructure needs more work.

I write separately, particularly to take issue with Mr. Brooks assertions how "no one knows." Mr. Nouriel Roubini's Crisis Economics not only goes into considerable detail about all the people who "knew" a crisis was coming, but also the history of past bubbles. During the Hoover administration, Treasury Secretary Andrew Mellow must have been listening to people from Racine and Yakima, because he initiated the kind of fiscal austerity called for by ignorants and hypocrites. Another book Mr. Brooks could try is Reinhart and Rogoff's This Time is Different (assuming Mr. Brooks finds it too difficult to pick up the phone and call his Nobel laureate colleague).

What bothers me most, though, is this new rationale for "give rich people more money." That strategy didn't work when it was called trickle down economics, a rising tide lifts all boats, Milton Friedman and the monotarists, the so-called Austrian School, the Supply Siders, etc etc etc. Now, the same foolish and failed strategy is called "common sense conservatism" or "Main Street Economics" or some other such platitude in praise of the uninformed and inexperienced.

Having failed to establish any intellectual basis for what clearly would be a disastrous strategy, Mr. Brooks and his ilk simply dismiss expertise. If patriotism is the last refuge of the scoundrel, scurrilous appeals to "common sense" must be the second to the last.

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