Friday, June 01, 2012

The Continuing Economic Crisis, Excuses, and Cynical Credentialism

-- Posted by Neil H. Buchanan

Much of my recent writing has focused on the debate over austerity versus stimulus -- whether governments (in particular, the U.S. federal government and the governments of other major economic powers) should be decreasing or increasing spending on anti-recessionary items (like unemployment benefits and Food Stamps), and whether they might also use this opportunity to borrow at low rates to finance long-run investments. By their nature, such debates take on an abstract air, focusing on internal squabbles among economists and policy wonks, ignoring the reality in the outside world.

Today's economic headline brings us back to reality. In "Weak U.S. Hiring Adds to Global Gloom," The New York Times reports that the U.S. economy added a tiny number of jobs in May, and that the unemployment rate rose from 8.1% to 8.2% in April. We are now almost exactly three years past the official end date of the Great Recession, and we continue to see unemployment rates at levels that are near or above the peaks in previous recessions. More than half of the unemployed have been without a job for more than half a year, states are cutting off unemployment benefits to new and old applicants alike, and the Republicans refuse even to consider extending help to the long-term unemployed.

This is not just a human tragedy, but an economic one as well. Lost economic output is not only an immediate loss, because it undermines the basis for economic growth in the future. The unemployed who are being told to sink or swim on their own are, to a distressing degree, sinking. If the economy ever comes back (and I still think that it will), those people will either be unemployable or, at least, expensive to bring back into the economy. In the meantime, homes are being lost, families are falling apart, and lives are being wasted.

In light of such facts, it is disappointing to find oneself writing, as I did last week, about statistical manipulations by people who claim that the United States and every other major government have not been engaged in austerity programs. All of the evidence shows that they have been doing so -- including, for example, the Cameron government's own announcements about their policies when they enacted them. They did not say, "We'd like to cut spending, but we can't." They are in a parliamentary system, so they could do what they promised to do. They laid off public workers, raised tuition at the universities, and so on.

This was supposed to cause the British economy to expand. Indeed, if the Confidence Fairy existed, the effect should have been immediate. Businesses and consumers would have seen that a new, fiscally austere sheriff had come to town, and they would have responded by increasing their spending. When the government's cuts soon took effect, the private spending necessary to more than offset those cuts should already have been in place. No such thing has happened, as Keynesians prominently predicted at the time.

What is the Cameron government's response? Changing the subject, of course. Sure, the economy is still in terrible shape, and getting worse. But Cameron and his Chancellor of the Exchequer, George Osborne, according to a news article last weekend, "point to the relatively low interest rates Britain pays on its debt, and praise from the major debt rating agencies, as evidence that their plan is working." First, if the economy is terrible, and no one is hiring, who cares if interest rates are low? Interest rates are a means, not an end. Is anyone responding to those low rates by borrowing and building businesses? No, for very Keynesian reasons. They see no prospect of customers, so why borrow and spend?

And second, the reason that rates are low is that the economy's prospects are so bad. No reasonable investor expects the British economy to revive any time soon, and the government is decreasing its borrowing, so the people who are fortunate enough to have money to lend know that they will find fewer and fewer borrowers in the future. If they expected the economy to pick up soon, in response to Cameron's austerity, they would know that short-term rates would rise in the future, which would make long-term rates (which are based on predictions of short rates) go up. Yet the U.K. -- very much like the U.S., where long-term Treasury bonds are now yielding an astonishingly low 1.48% -- sees nothing but low rates for years in the future. (This, among other things, is an advantage of not being tied to the euro, which punishes Greece and Spain with high borrowing rates, even when their economic forecasts are dire.)

This all means that the debate is no longer about the human, or even the economic, devastation of the Great Recession and its aftermath. We argue about whether overall borrowing reflects austerity, or whether low interest rates are a sign of success -- or even whether austerity is happening at all. Is it possible to be even more detached from reality?

As it turns out, yes it is. The new move from many on the right is to attack the credentials of Keynesian economists. I am not making that up. The subject is no longer even about the nuts and bolts of various economic theories. It is about attacking the economists who espouse Keynesian theories as being unqualified to speak with authority on the subject.

For example, an acquaintance recently told me that his conservative friends have recently been saying, "You know, Paul Krugman's Nobel Prize wasn't really for macroeconomics." Similarly, the Dorf on Law reader who provides reports on the thinking of the right wing (described in yesterday's post) recently let us know in a comment that the new move is to describe Krugman as "not a Macro economist." What to make of this?

I have never been one to be wowed by the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which I have called variously "the Swedish Bank Prize," the quasi-Nobel, and the faux-Nobel. (See, for example, my post here.) It is an award almost always given in recognition of technical achievements, not for insights into the real world of economics. When Krugman won (for his work on international trade theory, and economic geography), I was no more impressed than I was when James Buchanan (no relation) won for "constitutional economics." The prizes are distractions. People on the left point to Krugman's faux-Nobel, because he is now a prominent commentator, and people on the right point to various Chicagoans' faux-Nobels. Whatever praise might be appropriate for the achievement of winning that prize, the Swedish selection committee simply does not base the prizes on criteria that amount to saying, "This economist knows how to fix the economy better than anyone else."

Nobel obsession, however, seems to run deeper on the right than the left. They are excited that some economists with faux-Nobels are willing to say that the government should not try to fix the economy (except by shrinking itself), and it is convenient to ignore the fact that their prizes were no more tied to the real world of macroeconomics than was Krugman's.

But surely some of those conservative economists received their awards for work in macroeconomics, right? Indeed they did. Again, however, the work that was recognized was not deemed "true," but rather internally interesting to academic economic debates. When, last Fall, the faux-Nobel went to Christopher Sims and Thomas Sargent, many on the right took this as validation of their anti-Keynesian views. As I pointed out at the time, however, "I find the exercise of looking to faux-Nobelists to weigh in on policy matters a bit silly, but if one was looking to see which side Sims and Sargent are on in the current policy divide, it is clear that they are with people like Krugman (and me)."

Moreover, if we are going to simply proceed by lining up "my Nobels versus your Nobels," it all becomes rather silly, indeed. The right has Lucas (but not Sargent) and a bunch of guys, most of whom are no more macroeconomists than right-wingers claim that Krugman is. (Krugman, by the way, most definitely is a macroeconomist. The Swedish committee simply awarded him for a different set of work.) The left has (in addition to Krugman) Samuelson, Hicks, Tobin, Solow, Modigliani, Diamond, Akerlof, Stiglitz, Vickrey, and Sen -- all of whom are (or were) Keynesians who believe that the right response to economic slumps is not to cut, cut, cut. Not only Sargent, but even Milton Friedman has said and written things that support expansionary policies during deep downturns.

What does that tell us about today's economic debate? Nothing. What matters is not credentials, but reasoned analysis. The austerions continue to point to ideas that are either utterly detached from the real world (such as the always-fatuous idea that people increase saving when the government borrows more, in anticipation of higher taxes in the future), or to arguments that are only true in different contexts (such as the idea that the government cannot "fine tune" the economy as well as economists in the immediate post-WWII period had hoped, which does not in any way undermine the idea that we should respond forcefully to the second-worst economic downturn in the past century).

Again, however, these debates on side issues serve an important purpose for the anti-government crowd. If they can change the subject from the suffering of real human beings, who are allowed to dangle in the wind while Republicans talk about preventing the government from coddling lazy people, then their agenda is advanced. If they can make it appear that their faux-Nobelists are better than the pro-Keynesian faux-Nobelists, then maybe we will all forget the clear evidence piling up against the hypothesis of expansionary austerity.

It is a cynical, but completely familiar, game. Unfortunately, it seems to be working.


Charles said...

"Moreover, if we are going to simply proceed by lining up "my Nobels versus your Nobels," it all becomes rather silly, indeed."

Fair enough so how does one settle the question of what is the best policy to pursue when there are counterfactuals and various casual factors in play? Economists can't agree on what caused the Great Depression, what got us out of it, whether the minimum wage causes unemployment, etc. The only thing they seem to agree on is trade policy.

What policies you think will benefit those in a recession others believe will be more harmful and Keynesaian remedies are hardly noncontroversial. Hayek said in his essay The Pretense of Knowledge "that the very measures which the dominant 'macroeconomic' theory has recommended as a remedy for unemployment — namely, the increase of aggregate demand — have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable. The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labor and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate — or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity."

Hayek and Keynes both has strong beliefs about trade cycles that continue to influence those on the right and left. Let's assume both sides are sincere about favoring policies whose benefits exceed the costs.

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