Thursday, September 23, 2010

It's the Ignorance, Stupid

By Mike Dorf


On last Thursday's Wall Street Journal op-ed page, Daniel Henninger penned a piece titled "It's the Spending Stupid," in which he touted that slogan as a sign of the times.  And sure enough, that very day I saw two bumper stickers with that slogan on them.  According to Henninger, tea partiers and Americans more broadly have been concerned for a long time about "the federal-spending balloon," with the concern boiling into rage quite recently.  I think Henninger is probably right--at least superficially--about most of the tea partiers but quite wrong about the broader point.


Here's the heart of Henninger's case:
The most important and startling number in American politics today is Congress's approval rating: 23%. This is a no-confidence vote. The second branch of government is losing the country. Surely it's about the spending. What else? That Congress hasn't spent enough?
In a word: Yes.  When it mattered most, Congress didn't spend enough.  In order to get to 60 votes in the Senate in 2009, the Obama Administration proposed a stimulus package that was substantially smaller, and contained less in the way of direct government spending, than leading Keynesians thought necessary.  They warned at the time that this could be the worst of both worlds: A stimulus too small to jump-start the private sector would through its inadequacy be used as evidence that stimulus doesn't work.  And this is indeed more or less what happened, leaving the White House and Congressional Dems to argue that things would have been much worse without the stimulus, which is probably true, but not a great political selling point.


If Congress had enacted a larger stimulus in early 2009, and if it had worked in the way that Krugman, Stiglitz, et al thought it would, then the public would not be in a throw-the-bums-out mood.  How do I know?  Because there is actually good evidence for the original aphorism that "Spending Stupid" uses for its riff.  That, of course, was the reminder Bill Clinton set for himself and his staff in 1992: "It's the Economy, Stupid."  Based on a mountain of data, Clinton knew that what voters care about above all else is their economic wellbeing.  That was true in 1992 and there's no reason to think it's not still true in 2010.


So why do people say they care about spending as such?  I would divide public opinion into two groups: 1) Some substantial fraction of the core of the tea party movement are long-time conservative ideologues who simply oppose government spending.  2) The great mass of the American public, including those who think they are angry about government spending, are understandably angry about having lost or fearing loss of jobs, nest eggs, and homes, but have seized on spending as the butt of their anger, without any clear understanding of what exactly TARP, the stimulus, healthcare, and various other measures adopted in the late Bush Administration and the Obama Administration do or why.  Both the Obama Administration and the news media share some of the blame for this state of affairs--the former for not clearly and repeatedly explaining their economic policy, and the latter for not reporting on these matters in a way that makes them accessible to the public.


The wonder of it all is not that so many people are currently in a state of confusion.  That's understandable because Keynesianism is quite counter-intuitive: We got into the Great Recession as a result of a decade of personal and national spending that we couldn't afford, subsidized through low interest rates made possible by borrowing from abroad.  It's odd that the way out of the resulting downturn is more of the same, except that it's true--up to a point anyway.  But when demagogues and ideologues suggest that a stimulus bill in 2009 and a health care bill in 2010 (which they deliberately conflate with TARP and bailouts in late 2008) caused the economic bust that preceded these legislative events, they are saying something at once preposterous (absent time travel) and appealing to those not paying close attention: borrowing to spend is unsustainable.


Against this backdrop, the true wonder is that American voters appear to be quite sensible over the long run: They may express a preference for reduced spending or for lower deficits but their revealed preferences are for modest, sustainable deficits.  But of course that is over the long run, and as long as we're talking about Keynes, it's worth recalling what he said about the long run.

13 comments:

Sam Rickless said...

Indeed. And let's not forget about the trillion or so dollars and counting that have been spent fighting wars in Iraq and Afghanistan. I would like to know how many true-blue anti-government-spending conservatives opposed these wars, particularly the former. One trillion dollars is an awful lot of money, far better spent on the things that count and can help jump start the economy than on military contractors. How about: "It's the spending on the war, stupid!"

John Q. Barrett said...

I think that to too many, "Keynesianism" is is an off-putting, inaccessible word and "deficits" are just scary, especially to people who think, from daily experience of present difficulties, that they're getting stuck for the big tab after somebody else got to eat the big meal. But the concept and desirability of borrowing to spend wisely is widely familiar -- for example, anyone who has experience or knowledge of sensible home mortgage borrowing that gave a person or family shelter and comfort which allowed the rest of life (health, relationships, education, work ... the pursuit of happiness) to flourish not only knows but understands and believes in the concept. Plus, of course, there is our national history of progress/life betterment that has flowed from public spending. So you're right about the ignorance, Mike, but part of the problem also is poor communication.

Joe said...

The inability to have a bigger stimulus was in large part a result of the need to get 60 votes in the Senate. The public simply is not that aware of this fact.

They also want more sanity, but apparently are about to vote in more Republicans who will cause more gridlock and partisan insanity. As with Clinton in the mid-1990s, this very well might help Obama though.

Bob Hockett said...

This is great, Mike. One quick thought: Sometimes I find it helpful, to neutralize the initial counterintuitivity of the Keynesian story, to point out that Republicans since Reagan have often traded on a (less empirically plausible) variant of it -- the 'supply sider' Laffer curve variant. The claim there is that cutting taxes, by stimulating economic activity and growth, will actually increase the tax take. It turns out to be less plausible than the purer Keynesian story, at least where the tax cuts in question are for the wealthy, because the wealthy have lower marginal propensities to consume and hence don't stimulate more production with their saved taxes. But at least the basic idea's roughly the same, such that those who bought Reagan's 'voodoo' economics ought doubly to buy Keynes's real economics.

Thanks again for the words of wisdom,
Bob

Paul Scott said...

Those worried about spending can just keep attaching Don't Ask Don't Tell and immigration reform to all spending measures. Bigotry can then do the work for them.

michael a. livingston said...

The problem, I think, is that for a theory to be valid it has to be falsifiable: or, to paraphrase, there has to be some circumstance under which the Democrats would say more Government spending does not work. Had the stimulus succeeded, and the economy was healthy, the Democrats would unquestionably have argued that their approach succeeded. But now that it failed, they simply say that it didn't go far enough: and if a second stimulus failed, they would call for a third, and so on. Perhaps, in purely economic terms, there is some logic to this, just as there might be logic in arguing that "the Reagan and Bush tax cuts didn't balance the budget only because they weren't deep enough." But can people really be blamed for rejecting an argument that says, we tried it and it failed, so let's do the same thing more extensively?"

Michael C. Dorf said...

Really? Really??? Michael L, you would have a point if the leading proponents of the stimulus were not saying at the time that it needed to be much larger, but they were. AND as noted at http://tinyurl.com/2f4nxld
by most measures, the stimulus has not failed but has been a limited success just about exactly the way that was predicted by the macroeconomists who thought it was too small.

I would also point you to the evidence of the mid-1930s, when Roosevelt prematurely turned to trying to balance the budget, causing the double dip, and to WW II, which is generally regarded as a gigantic and successful stimulus.

You can assert "the stimulus was a failure" but that doesn't make it so. If you want to say that it hasn't worked well enough, or that the long-term price-tag would be too high, fine, but what you're writing here are simply political slogans.

Paul Scott said...

"...and to WW II, which is generally regarded as a gigantic and successful stimulus."

Can someone with a better understanding of economics explain this. I hear/read about it frequently, but I have never understood it.

Surely a government program that randomly killed males 18-25, destroyed existing structures and then poured money into programs to rebuild those destroyed structures could not possibly be economically helpful, could it? I get why some major infra-structure programs that started just before or during the war (for example, our interstate freeway program) would be an economic boon. But surely the war itself was a huge drain on the economy, no?

That is, if there was no WWII, but the government spent all the money it spent on the war effort anyway, wouldn't we certainly be in a better position? Further, even if the government didn't spend any of the money it spent directly on the war, wouldn't we still be better off?

Clearly, whatever the cost may have been, fighting WWII was worth it, but it was a cost, right? The US can't actually improve its economy simply by going to war, right? If it can, can someone explain how that works?

Michael C. Dorf said...

Paul,

Neil's in England so I'll take a crack at this:

During a deep and long recession or a depression, the economy is stalled at an equilibrium that is well below its normal productive capacity. Left to its own devices, the economy has a hard time getting out of the rut, because the unemployed have no money to spend and those with money are hoarding against the chance that things will get still worse. Government spending--i.e., stimulus--puts money in the hands of people who will spend it. That's the basic Keynesian insight and it's a further fact that this should work regardless of what you pay people to do. Keynes himself gave the example of the govt paying one group of people to bury pots of gold and paying another group of people to dig it up. The wages they earn will then translate into demand for actually valuable goods and services and thus jump-start the economy.

Of course, as long as the govt is going to be spending money, it's better to spend it on something that's independently useful, like building highways or killing Nazis. And as between domestic public works projects and foreign wars, the former have a higher "multiplier" effect, which is why, quite apart from the cost in lives, it's never a good idea to go to war simply as a stimulus measure; repairing roads and bridges will be both more directly productive and will ramify better through the economy. But sufficiently massive deficit spending on war (as in WW II) will have a substantial stimulative effect.

Bob Hockett said...

I'm no Neil, but I'm quite confident that Mike's reply to Paul S -- as well as that to Michael L -- gets things precisely right.

Nobody argues that all expenditures are equally effective stimulii or equally free of collateral costs. Nor need they do so in arguing that government expenditures tend to be stimulative for as long as an economy remains mired in a liquidity trap or an associated demand-deficiency-induced slump.

Reagan's defense spending and Bush's wars are themselvesas, it bears noting, widely credited for much (though not of course all) of what growth the economy experienced in the '80s and early '00s -- even by those who argue, rightly in my view, that the growth would have been healthier and more sustainable had it been stimulated by expenditures channeled toward domestic educational and infrastructural improvements.

I also know of nobody calling for more stimulus now who did not call for more stimulus at the outset. And nobody now saying the small stimulus we got would have been a 'failure' no matter how large or small seems to have any answer to all those economists of multiple persuasions who now agree that things would have been worse than they are had we not done what we did. Counterfactual claims of this sort might be difficult to falsify, per Michael L's concern, but no social science seems capable of conformity to strict Popperian criteria. Nothing new here.

Is there *anything* in what Mike said with which Neil might disagree? I suspect only one minor detail: Keynes spoke of burying currency in bottles rather than gold in pots. Dang, Mike, how could you have missed so critical a distinction.

Smiley face.

michael a. livingston said...

Mike and Bob,

I still don't think you have answered my question of, are there any factual situations in which the Democrats (and the Republicans) would not be making essentially the same policy recommendations, viz., tax and spending cuts for the Republicans, tax and spending increases for the Democrats. I would recommend Louis Eisenstein's classic, The Ideologies of Taxation (c. 1960), in which he notes the perseverance of ideologies regardless of factual circumstance, also that people can support policies for reasons of institutional or personal self-interest and still believe quite honestly that they are correct. I'm not saying that the Democrats are always wrong: just that I don't see a moral difference between the two parties on this issue.

Michael C. Dorf said...

Michael,

I would distinguish between: 1) the general proclivities of Dems for more spending on social programs, funded by more progressive taxes (and the corresponding proclivities of Repubs for less spending on social programs, and lower taxes across the board); and 2)preferences about stimulus in a deep and long recession. The DLC/Clinton wing of the Democratic Party is not especially committed to high spending/strongly progressive taxes, and there are people who worry about long-term deficits who nonetheless support Keynesian stimulus. Put differently, I think that the public is being ill-served by assertions that stimulus to jump-start a stalled economy can only be supported by progressives who generally favor a large public sector. Matt Miller is an example of a Clintonian deficit hawk in normal times who supports stimulus now (and supported a larger stimulus in early 2009). See, e.g., http://tinyurl.com/2foheh3
There are doubtless countless others.

Bob Hockett said...

Hi Michael,

I'm inclined once again to agree with Mike here. I'd first draw the same distinction that he draws, and then point out that there seem to be - and to have been - plenty of '90s-style 'new' Dems who tend and have tended to be more interested in higher federal expenditures right now than they would be in non-slumpy circumstances. Larry Summers would surely be one such, as would be Peter Orszag. Doubtless Al Gore and Bob Rubin would also be counted here. Lloyd Bentsen was, of course, another conspicuous such Dem during the earlier Clinton years, still credited by many (though less so by me) with having laid the foundations for the 'prosperity' of the later Clinton years by successfully arguing for deficit-closing expenditure-cuts and moderate tax reforms. It also bears noting, I think, that there still are some level-headed Republicans out there - most of them economists not political figures - who argue for more stimulus spending right now. I believe Zandi is one, Hubbard (not L. Ron, but Glenn) another. So I don't think we need account for all favoring and disfavoring of stimulus expenditure right now by reference to blinkered ideological commitment or venality, even if there be plenty of both. Seems to me we can do just as well by attributing these positions to macroeconomic understanding in the one case, ignorance and proneness to fallacies of composition (like conflating an economy with a firm or a household) on the other.

All best and thanks again,
Bob