Wednesday, March 23, 2011

Disproving Conservative Economic Myths

I keep reading the same things over and over again about the economy. As near as I can tell Krugman and company have been right in the predictions and the conservatives have been pushing for exactly the opposite in their policy and the Democrats cave. Here are few recent posts on this topic as usual, I think it's worth following the links to the original stories.

Robert Reich wrote The Republican's Big Lies About Jobs (And Why Obama Must Repudiate Them). Cutting taxes on the rich doesn't in fact creates jobs. Cutting corporate income taxes also doesn't creates jobs. and cuts in wages and benefits means people spend less so jobs are not created. Obama needs to start combatting the lies.

Kevin Drum wrote Chart of the Day: Why the Stimulus Didn't Work. It wasn't just that the recession was worst than thought or that the stimulus was too small, it was also that states are cutting back their spending to below 2008 levels at the same time. "They have data for all but six states, and on average for 2012, 'those 44 states plan to spend 9.4 percent less than their states spent before the recession, adjusted for inflation.' That's not just less than last year, it's less than 2008. That wiped out nearly the entire effect of the federal stimulus package."

John Berry wrote in The Fiscal Times about the Many Holes in GOP Mantra that Stimulus ‘Failed’. "It’s likely that in the run-up to the 2012 election, we will be treated to the Republican mantra that the federal government is broke and that President Obama’s $800 billion stimulus package “failed.” By any fair measure, both of those assertions are nonsense."

As just one example: "Meanwhile, Boehner and others, such as Mississippi Gov. Haley Barbour, a Republican presidential aspirant, are trying to turn the reality of the stimulus on its head: More government spending destroys jobs and slashing spending creates them, they claim. "In the last two years, the federal government spent $7 trillion and our economy lost several million jobs,” Barbour told the Chicagoland Chamber of Commerce last week. “I guess we ought to be glad they didn’t spend $12 trillion. We might have lost 12 million jobs.”" He then points out the hypocrisy, "For instance, in an effort to save 800 jobs at a plant in his Ohio district, Boehner fought hard last month to continue funding for an alternative engine for the F-35 joint strike fighter plane."

Mark Thoma argues The Unemployment Problem is Mainly Cyclical, Not Structural. "As noted above, cyclical and structural unemployment can be hard to sort out. One way around this is to find a group of workers who should do well if the problem is structural, and see how they are faring. This Economic Letter by Bart Hobijn, Colin Gardiner, and Theodore Wiles of the SF Fed attempts to do just that. It answers the cyclical versus structural unemployment question by looking at a segment of the population that ought to be doing relatively well if the problem is structural, recent college graduates, and finds that "structural factors are of minor importance for current unemployment""

Krugman followed up, Work of Depressions Watch. "The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people? If the problem is lack of skill, then highly skilled workers — such as recent college graduates — should be doing well. If the problem is too many carpenters in Nevada, then non-carpenters somewhere else must be doing well. Who? Where? Well, if there are such people, they’re doing a very good job of hiding. This is a demand-side slump; the evidence is grossly inconsistent with any other story."

Niklas Blanchard doesn't disagree with the demand-side explanation but does point out a few labor market inefficiencies in Hiding from Paul Krugman is Easy.

Alan Greenspan wrote a paper (pdf) saying "I judge that a minimum of half the post-crisis shortfall in capital investment, and possibly as much as three quarters, can be explained by the shock of vastly greater government-created uncertainties embedded in the competitive, regulatory and financial environments faced by businesses since the collapse of Lehman Brothers."

Krugman was busy and just attacked his tone, "He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression — and who saw no evil, heard no evil, refused to do anything about subprime, insisted that derivatives made the financial system more stable, denied not only that there was a national housing bubble but that such a bubble was even possible. If he wants to redeem himself through hard and serious reflection about how he got it so wrong, fine — and I’d be interested in listening. If he thinks he can still lecture us from his pedestal of wisdom, he’s wasting our time."

Brad DeLong takes up the task. "If businesses are unwilling to invest in illiquid capital out of the fear that government action will impair the value of their investments, businesses must also fear that government action will impair the value of their existing illiquid investments." And the stock market surge suggests they don't. A better explanation is that demand is low so there's no need to invest in capacity. "And, indeed, if you ask people running businesses what is their single most important problem, they say that it is not (as they sometimes say it is) taxes; they say that it is not (as they said it was at the start of 2000) the cost and quality of labor; it is not (as they said it was in 2004) the availability and cost of insurance; it is not (as they briefly said it was at the start of 1993) government requirements. What do they say their biggest problem is? Poor sales."

Even I can find flaws in Greenspan's statements. He says, "Before the bail out of Bear Stearns, and later General Motors and Chrysler, the notion that large iconic American corporations would not be allowed to fail was embodied in nobody’s risk management template. Few envisioned a major corporation (aside from Fannie Mae and Freddie Mac) being ‘too big to fail’." I can name a lot of bailouts, here are a few since 1970.


Ken Flowers said...

Hi Howard, thanks for the links. I must say, I find more politics than fact in these arguments. First, these commentators are leveraging their economics credibility to push their political agenda with very little fact. (Same on the right, btw.) In Reich's article, you could insert "in my opinion" all over the place and not change the meaning at all.

The ones I know have an extreme left-lean, and are hard to listen to as unbiased.

The problem we have with macro-economics is the experiments are too large and the sample sizes to small to make statistically valid arguments about cause. What that leaves us with is both sides arguing preferences based on social-justice beliefs that they back up with statistically insignificant data that happens to support them. Nobody seems to objectively look at the data and give me answers I can do anything with.

I'm clearly no economist, but from my own experience, when you are deeply in dept, you stop spending. I'm sad that I don't get the things I want, but those emotions don't change anything. I find it difficult to not apply that same logic to governmental size problems.

Again, thanks for the links.

Howard said...

Thanks for commenting. I have some questions. :)

Your first two paragraphs don't help me. You don't say what is biased and what isn't fact. I think there are facts in there (eg delong's graphs) and saying they are pushing agenda doesn't make them go away. Also clealy thaws people over the last few years have posted tons of facts and I've linked to and commented on many. That may be hard to come into, but saying its merely opinion and hard to take is to my mind burying your head in the sand.

As far as experiments being big with too little data well maybe. But as Leif an and a few others argue, their economics comes from Keyes whose experiment was the depression. U of Chicago economists over the last few decades have ignored Keyes. They keep pushing things like spending is too high (it was high before the crash but didn't cause one, so it wasnt the cause but unregulated derivatives were). They say inflation is a problem but the data, interest rates, remain low disproving that. They say we must cut govt spending but that will reduce jobs and that's supposed to help this recovery even though it's jobs that are the problem. On the other hand the fact that the problem is demand is low fits the data and is ignored by them. I don't get it.

The last argument is flawed because the countries economy is not like your house's. You can't print money or tax or issue bonds (mostly) etc. There's a reason microeconomics is different from macroeconomics. Yes I want a lower deficit and have said so for years. I wanted the surplus of the 90s to be used to pay off the debt. But unfortunately now the problem is something else that we must address first. The best way to reduce the deficit is to get more people working (that's why it's high now). Long term the thing to address is healthcare costs. That will make the biggest difference.

There is data and I will continue to post it. I hope you continue to read it. And I hope you'll point me at the other side's data. I'll look into it too( and I have tried to post it). Unless we make the effort to understand the other sides arguments we can never come to agreement.

I know I now post in a kinda inflammatory style. Unfortunately it's come from several years of posting and being rather unconvinced in the rights arguments. They have over and over again struck me as opportunist and hypocritical. I'll be glad to be convinced otherwise. But it hasn't happened yet.