Back in November I pointed out that economists would be of little use in getting us out of the meltdown mess because they were hopelessly divided on the fundamental issues we face. The Cato Institute was kind enough to make that case for me as it released a full-page ad in a variety of daily papers around the country this week. The ad decries President Obama’s contention that a consensus exists among economists regarding an overall recovery plan. The ad reads as follows:
“There is no disagreement
that we need action by our
government, a recovery
plan that will help to
jumpstart the economy.”
-PRESIDENT-ELECT BARACK OBAMA, JANUARY 9, 2009
"With all due
respect Mr. President,
that is not true."
"Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth."
The statement is signed by close to 300 academic economists, many of whom are employed as faculty members at respected universities.
The ad attempts to make three points:
- There is no consensus among economists about the wisdom of a federal stimulus package.
- The way to respond to the current economic situation is to reduce taxes and “the burden of government.”
- A significant number of trained economists support this view.
Fine. Let’s parse the statement.
Point One: There is no consensus among economists about the wisdom of a federal stimulus package.
Consensus doesn’t mean unanimity. Tens of thousands of economists worldwide believe that the Keynesian-inspired notion of government stimulus is exactly what is required in the present moment in that it represents our last, best hope of heading off a devastating recession—if not something worse. What’s more, the majority of the American people believe this to be true. Otherwise we’d be quoting President McCain. We’ll concede the point that pockets of disagreement exist amongst conservative economists.
Point Two: The way to respond to the current economic situation is to reduce taxes and “the burden of government.”
Let’s start with “burden of government.”
Perhaps it is the “burden of government” that we have:
· Social security to fall back on when our 401ks lose a third of their value due to abuses of the free market
· Medicare to provide health care for senior citizens
· Unemployment insurance when we are whacked from our jobs
· A military to defend our security against foreign terrorism
· A federal prison system to protect us from the acts of criminals
· A food stamp program to feed hungry people who don’t have jobs
Need we go on? We could. For pages. We could outsource public education to Halliburton. We could let people who do not have enough to eat go door to door to see if any chores could be done in exchange for a meal. We could leave it to religious institutions to provide the primary safety net, as is common in the Muslim world.
I couldn't help but notice the conflation of Hoover with Roosevelt as big government spenders of the same ilk. Right. I get it. Hoover started the ball rolling on big government and Roosevelt finished the job. Mr. Cato, who writes your history for you? Dr. Economist, meet Dr. Historian.
Oh, and then the lost decade in Japan. Somehow, while the commercial ruling class of the entire world agrees that Japan let its banking system fester, Mr. Cato and these 300 economists understand that Japan just needed to lower taxes and “reduce impediments to work.”
We have the stimulus initiative presented as “a triumph of hope over experience.” And whose experience would that be? Would it be the experience of millions of Americans who suffered through the Great Depression? Just when did your prescribed remedy of having a federal government do nothing in the face of imminent economic collapse get a trial run? Would that be perhaps the government of the former Soviet Union as it fell? Did you guys work a deal with Argentina? Postwar Italy? What are we talking about here?
Finally, my favorite part. The part about “removing impediments to work.” I went up to your website, Cato.org, and pretty much figured out that you were talking about taxes. Especially corporate taxes. That figures. The corporate community has been aggressive on that topic for, well, forever. But what other impediments can be identified? I thought of a few you might want to consider:
· Unions
· Child labor laws
· Health coverage
· Retirement plans
· Unemployment benefits
· Minimum wages
· Hangovers
· Car problems
I would suggest that one additional impediment to work might be the worst recession since 1930 brought on by rampant abuse of the free market. But yes, if we could just get rid of those other impediments to work, on your terms, we could probably get that economy humming in a jiffy. And you did mention impediments to “saving, investment and production.” The answers to those would be, of course, no taxes, no taxes and no taxes. But wait, there’s more! For saving we could…privatize social security! Wasn’t that one of your pet projects just a few years ago, Mr. Cato? I bet you even wrote W’s talking points on that one. And as for production, how about cutting out those nuisance environmental laws designed to protect our air and water?
Once we have the damned government off our backs and have reinstituted the primacy of the free market, maybe you guys could come up with a theme park concept to make the inevitable gut-wrenching free market roller-coaster ride of our economic cycles even more fun. I even have a name for the park: Wall Street II—(“Feel the Thunder! Duck the Lightning!”)
As for the 3.4 million Americans who have lost their jobs since December 2007—I am just curious—what do you and your 300 economists say to them?
Or are the comforting words in the aforementioned ad intended to suffice?
Wall Street got drunk, it’s true. But the free market economy sold ‘em the booze, catered the party and booked the party girls. But don’t get me wrong. I am not against a free market economy; I just desire a regulated free market economy--one that protects the body politic from market abuse. Because you know, Greed & Fear, it’s an old story. Or maybe that wasn’t in your experience?
Your website mentions, “government planning is just too clumsy for the modern world.” I know exactly what you mean. I, too, prefer the Bentley-hum of a free market economy—precision-tuned, sleek as a JagUar…until that unfortunate moment when it goes off the cliff.
Finally, as to the tone of your headline: didn’t you really mean, “Without hardly any respect, Mr. President, who has only been in office a few days and has yet to prove yourself on anything?” Despite the fact the nation’s new president was elected with a decisive mandate, perhaps the honeymoon is over. But even, “We beg (beg?) to differ…” would have been a slight improvement. You might check with your copywriters on that. “With all due respect” sounds a tad, just a tad, like thinly veiled contempt. Isn’t it a little early for that?
To the eminent economists who signed the ad—all 300 of you: I invite you to write nuanced explanations for why you signed the ad. I know you are capable communicators and I know you have many valid critiques to contribute regarding the effort now underway to jump-start the economy. Fears concerning a ballooning national debt would be one I can well understand, for example.
President Obama spoke of the need to confront “ideological rigidity and gridlock” in his press conference on February 9th. I would be interested to know your thoughts on that. I tried to contact one of your number—Dr. V.V. Chari, Paul A. Franzel Land Grant Professor of Liberal Arts at the University of Minnesota. Unfortunately, he chose not to respond to a nobody blogger who was curious as to why he would choose to sign this particular political advertisement.
Economics is wrongly called “the dismal science” for one good reason. It is not science. It is not a science any more than political science is science. Economics is a framework, a discipline, for thinking about money—nothing more. In some respects, the category of “Liberal Arts” is a better fit. The debate these economists would have us join seems more like the topic of intelligent design versus evolution than a policy discussion. That is, they stake out their beliefs: free market, limited government, cryogenics, whatever; and then attempt to “prove” them via convoluted arguments about…nothing. No objective content. No data. No empirically based hypothesis. I call this ideological rigidity. As to the ad, my attitude is: “Hey, if you sign it, you own it.”
Cato Institute clearly desires a do-over. Many would advise to just ignore the jibe. I say otherwise. I know the Cato Institute isn’t Mr. Cato. It is led by an eminent board of directors including the chairman & CEO of the FedEx Corporation and the president of Tamko Roofing Products, Inc. Its funders include: General Motors (yes, the company receiving the bailout), Microsoft, R.J. Reynolds Tobacco Company and Wal-Mart. The Cato Institute represents more than whatever you choose to call them—libertarians, market liberals (Cato’s term), Objectivists (Cato’s term)—it represents the voice of one strain of corporate America.
Some elements of this faction do not engage lightly as the loyal opposition. They desire an accommodating, supine federal government that is willing to bend to their every need, er, regulate by working with business. The trouble is, they had one, for eight long years. That is, to a significant degree, how we got here.
Gentlemen, (on a quick scan I didn’t notice many female signers) Economists of the Ad; I invite your comments. But before you assume I am a big-spending liberal Democrat, read my blog. I am a liberal Democrat who is also a fiscal conservative and a big-time deficit hawk. So a $789 billion dollar recovery plan pains me. But I support it. I also believe in fair and progressive taxation to pay for government: things like social welfare and national defense. That’s harder to explain than “market liberal.” But I’m sure you can explain it. Empirically.
The ad and its list of signers may be found here: http://www.cato.org/special/stimulus09/cato_stimulus.pdf
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Comments
The Worldly Philosophers"
None of the BIG ecnomic giants could even balance their checkbooks. Put them in the category of TV weathermen who don't "believe" in climate change.
This does not mean the burden is unjustified or wrong in any sense. For example, if I took a couple thousand dollars from you and gave you household electricity in exchange, that might be a good deal for you. It depends on the price and its fairness.
Gov't spending should also be evaluated against a standard of the value of the bargain, not either applauded or denounced solely because it is gov't spending.
Maybe we will gov't spend our way to prosperity. This would be a neat trick and more impressive than the more easily attained goal of gov't spending our way to ameliorating some distress suffered by some of the economically dislocated.
The stimulus plan is being billed as a way to restore a healthy economy, not just a way to alleviate the worst suffering by those affected by the downturn.
Thus saying that the New Deal fed the starving is not invoking history to bolster actual ostensible current hopes about the stimulus plan. Instead it is changing the conversation to defend the current (possibly misguided, certainly desperate) hopefulness about stimulus from (conceivably) valid criticism.
It assumes, properly, that the free market can best fulfill demand for goods. It's also an essential element of liberty in general, as liberalism seeks the least coercive methods to achieve a working system. The fundamental liberal principle is that those who would restrict freedom bear the burden of proving why it needs to be restricted.
That said, Cato is libertarian, which is a belief that holds that what they see as liberty is more important that what works. To be libertarian is to fail on principle.
The philosophy America is founded on - liberalism - is about creating a WORKING system of self governance.
Also, it is fundamental to liberty that we give up some rights to preserve others. In a perfect state of freedom, we are allowed the freedom to do harm. By joining under a social contract, which is what the Constitution is, we surrender the right to do harm, and agree to accept the will of the majority - within the bounds of the Constitution.
So, Cato is no more for "market liberalism" than Marx was. Their belief obviously allows markets the freedom to do harm, a violation of the liberal principles they draw from to create libertarianism, a subset of liberalism.
The actual phrase is : Free market COMPETITION. They aren't too wild about any restrictions that preserve competition. So, again, they're no more "market liberal" than Castro is.
Cato should just admit they're corporate lackeys, with a long held and oft discredited set of beliefs. They are locked into those beliefs, and therefore always start with their conclusion, then work up anything that supports it.
It's difficult for some to compromise an ideology when their income depends on it.
Can I get an "amen?" How about 300?
Good post
The stimulus plan is a jump-start. Nothing more. It is designed to avert further adverse consequences and thereby begin to reverse the negative momentum the economy has gained. It is part of a first series of steps.
It carries risks to be sure. It is not guaranteed to work and will certainly not work in all of its aspects. But, based on empirical, historical data, a good bit of it should work.
And yes, we will have to pay for it later. That is understood. By not stripping the economy to the bone, we are better poised to recover more quickly--again, by reversing the negative momentum of deep recession.
And don't forget, the money being borrowed now is borrowed at incredibly low interest rates. And some of the bets on so-called toxic assets should pay off with profits for the taxpayer in the mid-term.
if I offered to lend you money, interest free, to buy stuff you don't need, would you take it right now?
Let's see if the economy is in fact jump started.
Regardless, we should be buying things with the stimulus that we most urgently need, not things we do not really need.
What are those things we most urgently need? I don't know. I do know that the exigency of this "economic emergency" does not justify spending many hundreds of billions of dollars (still a lot of money, even in these massive spending times) in sub-optimal ways.
The process of deciding how to spend the money has not been too edifying to this point.
This is problematic behavior on our part.
"...and Cato, his great-grandfather, too, as one who had often obtained military prizes, and who, having lost five horses under him, received, on the account of his valour, the worth of them out of the public exchequer."
Sounds like a Bailout to me.
Keep spreading the word.
-Stan
I do not, however, concur with your assessment as to the debate over the current stimulus package within the context of the the historical background of the Great Depression.
That does not mean that CATO people are correct either.
You are correct as to the limited extent to which the social sciences can be sciences, because the actors within the models, so to speak, have passions, which generates what George Soros correctly identified as refelxivity. Good book, that one.
In English, the models that would make the social sciences science, to be tractable, have to make such radically simplifying assumptions that they are at variance with reality, or as a generic property have multiple soultions to them, if you allow for the correctly complicated specification of the model, and then, you say, well, this could happen, or, that could happen, and what will matter is choices, which is to say leadership, because again, at the root of the problem is human agency. That is why Truman wanted one handed economists, and why he couldn't find an intellectually honest one handed economist as well.
Nonetheless, as to the history, there has always been a respectable literature that portrays a more complicated picture of causality to the Great Depression that is worth noting now.
In 1927, in response to the collapse of German reparations payments under the Dawes plan, the Federal Reserve System lowered interest rates, when most observers at the time thought the Market already had a bubble; see the Ibbotson Index.There was also a real estate bubble at the time, which can be observed in the Case-Shiller Real Estate Index.
The Fed then pulled the plug in early 1929, and continued pulling the plug on the money supply throughout the 1929-1933 period.
See Milton Friedman and Anna Schwartz, Monetary History of the United States, which almost every EVEN Keynesian economist agrees with, for details as to the importance of the Federal Reserve, although Bernanke, The Great Depression, uses the same data to argue for activism being the optimal course at the time. What the bigger picture really shows is that the Fed is a loose cannon.
Additonally, it is a fact that the Hoover administration did increase the budget deficit and public spending overall, although,because of the fall in federal revenues due to the downturn, not as much as some Keynsians today, were they alive then, would have thought optimal. Hoover was in a hard box.
It is also a fact that there was an eerily similar debate during 1929-1933 about whether the problem in the banking sector was a liquidity problem, or a balance sheet problem which is highly relavant now.
If it was a liquidity problem, a crisis of confidence, then Federal Action on the moentary and fiscal side would have been efficacious.
However, if the problem was the overvaluation of assets in the late 1920's, which an examination of the Case-Shiller Index real estate index in conjunction with the Ibbotson stock index seems to suggest was the case, then there was not much to be done because the banks were insolvent, and absent nationalization, which was basically what happened in the end, there was no cure, but in which the disease, beyond an intrisnic feature of economics discussed below, was the manipulation of interest rates by the Federal Reserve, and the cure would be to prevent such activities in the first place because unless the Fed's models can forecast the entire path of the economy over time, it is highly likely to make systematic errors that deviate from the path of the decentralized decision problem, which is to say the Market with eventually cataclysmic results, like now.
What the Libertarian types do not want to talk about is that the Market equilibrium path independent of government action almost surely generically (see Andreu Mas Colel for gory details) has cycles that are large in amplitude at low frequencies, which means that events of the severity of the Great Depression are a part of life over long time periods.
What the Left/Keynsians do not want to talk about is that their proposed solutions are often worse than the disease unless you believe that one person has a right to take something from someone else, because the Market path also has the generic property of being Pareto effcient in the sense that one person cannot be made better off at ANY equilibrium without another person being made worse off.
Life, in other words, is a bitch, which doens'nt take a social scientist to figure out.
You are correct here, in that the question always is one of choices; just think them through carefully because of the narrative below.
Returning to the history of the Great Depression, Roosevelt's actions, and the actions of the other capitalist states in a general sense increased uncertainty among the capitalist classes as to the future of capitalism, and it is a fact that private sector investment did not and does not respond well to the incalculable nature of politics. Moreover, the worldwide govermental intervention of raising trade barriers and the move to competitvely devalue currencies had the effect of reducing interdependence in the global political system, which probably contributed to World War II;Even Keynes thought that, and the complaints about the Buy American provisions in the stimulus package from Japan and the EU are scary in that regard, as is is the worldwide printing of money, which the global fiat order makes possible, and in which the point would seem to be to make anyone but yourself eat the amplified global finance and real estate bubble loss, again scarily analogous to the beggar thy neighbor devaluations of the 1930's.
In the event, the nascent American Keynesian measures failed in 1937 under the weight of monetary policy, see Friedman and GDP series for details, which was driven by concern over the inter-temporal budget constraint to be mentioned below that was not unreasonsable actually, generating another deep recession, and that recovery did not occur until the ultimate Keynesian stimulus package of ... World War II.
What is relavant now is that the Federal Reserve created this stock and real estate asset price bubble as one in a series, see the Levy Institute, because of the inter-temporal bankruptcy of the federal government dating to the 1980's, which is the fact that Federal Government has made promises in Entitlements and Empire (goolge my name at the Mises Institute and you will see extended argument and also here on my blog under the Federal Solvency crisis 1988-2007) that it cannot keep. Monetary policy has been hiding that fact under the Greenspan put until right now.
The stimulus is poitless unless it were to be absolutely targeted at technical advance that would not be made by the private sector; which of course would probably be in the national defense sector in part, but given the return of Russia, one would want to think very carefully about the potentially awesome consequences on the table, when the alternative is that everybody takes a twenty per cent haircut in the United States in living standards, which is approximately the deviation of current living standards from that which would be generated on the basis of productivity.
http://classics.mit.edu/Plutarch/mar_cato.html
Keep re-embedding the word,
-Stan
'Stan:' Cato is named after the following:
From libertyfund.org
"Almost a generation before Washington, Henry, and Jefferson were even born, two Englishmen, concealing their identities with the honored ancient name of Cato, wrote newspaper articles condemning tyranny and advancing principles of liberty that immensely influenced American colonists. The Englishmen were John Trenchard and Thomas Gordon. Their prototype was Cato the Younger (95–46 B.C.), the implacable foe of Julius Caesar and a champion of liberty and republican principles. Their 144 essays were published from 1720 to 1723, originally in the London Journal, later in the British Journal. Subsequently collected as Cato's Letters, these "Essays on Liberty, Civil and Religious" became, as Clinton Rossiter has remarked, "the most popular, quotable, esteemed source of political ideas in the colonial period."
This new two-volume edition offers minimally modernized versions of the letters from the four-volume sixth edition printed in London in 1755.
Ronald Hamowy is Professor of History at the University of Alberta, Edmonton."
Don,
You have a lot on your mind!
Thank you for actual discourse--for making your case. I do follow it, or nearly...
And I concur with the factual basis of your argument. I know Hoover spent some money: too little, to early, too late, to wishy-washy, but I get the fact of the matter.
And I think Roosevelt blinked in 1937, then, yes, the war build-up wrote the next chapter.
Much of what he did worked. And government stimulus since has worked on a number of occasions.
Monetary policy did not cause the present bubbles, it only greased the wheels. Demand for high-yield American investment products for an international market--products that turned out to be, largely, vaporware, was one core cause of the meltdown.
I personally believe the we are now experiencing a crisis of confidence and balance sheet.
Thank you for your comments!
It will NEVER be tiresome to ask why this kind of behavior is going on now, all of a sudden.
while opposing say "wasteful government spending" (stumulus) on renovating schools or providing more training to inner city at risk youth or food stamp programs for families who aren't able to afford food.
If it were me I would think the Cato Institute could have opposed at least some of the fat government spending in Iraq but that is not wasteful (in their view)...?
Logically speaking...their position makes no sense. Or am I missing something? Three trillion spent in Iraq is also significantly greater than the stimulus package (spread over two years) as well, unless my skill in recognizing greater and smaller numbers is terribly off...
p.s. i also think that in the future liberals should adopt conservative rhetoric and loudly oppose wars on the basis of "risky government spending..." as they are doing with this stimulus package...they want to talk money? We could also talk (more) about money...
As I understand it Cato actually split with Bush over the war in Iraq. Being a "market liberal" is a tricky thing, I guess. I for one would like to hear them debate the proposition--"Resolved: to the extent that war is good for business we support it."
but it's interesting that Cato split with Bush over Iraq. Were they opposed to the banking bailouts? Which have also been (unless I'm mistaken) far larger in number than the "wasteful spending" on our fellow citizens (and ourselves)?
Welfare should only, mind you, be extended to banks? I'm wondering out market libertarianism even accepts the reality that the economic system as we know it seems to be collapsing. Or are they accepting that? Are they thinking that "the market" (with steroid-like taxpayer funding "injections" periodically and whenever needed...into the banking system) will fix itself?
I'm disappointed in the lack of executive pay caps in corporate bailouts. The Merril Lynch thing was depressing ("bonuses" no, no.....they're "rewards"...ugh!)
Here's a snippet from Wikipedia's Cato entry: (the #'s are citations)
"Cato scholars were sharply critical of the Bush administration on a wide variety of issues, including the Iraq war, civil liberties, education, health care, agriculture, energy policy, and excessive government spending. However, on other issues, most notably Social Security,[1][2] global warming,[3][4] tax policy,[5] and immigration,[6][7][8][9][10] Cato scholars had praised Bush administration initiatives. During the 2008 U.S. presidential election, Cato scholars criticized both major-party candidates, John McCain[11][12] and Barack Obama.[13][14]"
Their attitude, as I see it, is, "Market, Heal Thyself."
Now THAT is a really good question. And I, for one, would love to hear their best answer.
One more very basic and yet huge impediment to work for many people is: access to good-quality, affordable child care. We are about 50 years behind in figuring out the answer to that one as a country.
That's just one reason I favor infrastructure spending over tax cuts as a stimulus measure.
That's from Moody's.