Tuesday, February 24, 2009

Robert Reich, like Paul Krugman, is neither an historian nor an expert in foreign affairs...

... which explains his bizarre take on getting out of the recession.

In a piece actually criticizing President Obama for promising to cut the deficit, Reich gives us his full take on borrowing your way to prosperity:

We're in a deepening recession, in case you hadn't noticed. The biggest challenge is to ramp up aggregate demand. Yes, we have to borrow lots from the Chinese and Japanese to do this, and, yes, it's costly in terms of additional interest payments to them. But there's no choice. In fact, if the slump gets worse -- and I have every reason to fear it will because that's the direction we're heading in as fast as you can imagine -- we'll probably have to have a second stimulus. And if the second isn't enough, a third. And so on. FDR's biggest mistake was doing too little until World War II. (No one should interpret this as a recommendation for more military spending -- I'm just saying Obama will probably have to think and do much bigger than the $787 billion stimulus so far.)

Can we continue to borrow and borrow and borrow? Yes, but eventually we'll have to pay higher interest rates to continue to attract global savings, mostly from the Chinese and Japanese. But that's not anytime soon. The Chinese and Japanese are not going to yank their money out of Treasury bills because the slump is worldwide and T-bills are about the best and safest place to park savings. Besides, the Chinese don't want the dollar to plunge. They'd be stuck with a lot of paper worth far less than they got it for, and their exports would be in even worse shape than now....

As to the economics, remember that when it comes to deficits and debt, the real issues over the long term are (1) the ratio of debt to GDP (we're still under 50 percent, which ain't bad, considering all the spending that's been going on; at the end of World War II it was substantially above 120 percent). And (2) whether and when we're back to growing the GDP, which is the most reliable way of improving the ratio.


Let's just take two rather ridiculous pieces of this post:

1) The idea that continuous borrowing from the Chinese has no consequences other than high interest rates because the Chinese have no better place to put their money than Treasuries and they need our export market. This works only if you see China exclusively as an abstract country with money to lend and products to sell. The reality: China is our major world competitor over this century for oil, for market share in the automobile and technology markets, and for political dominance in Asia, the Middle East, and Africa. As I noted yesterday, Secretary Clinton's visit to China already demonstrates the cost of our borrowing from the wizened old men in Bejing: she was not allowed to raise human rights issues in any vigorous manner. Why? You don't get to criticize your creditors.

2) The post World War Two recovery fantasy--which also seems to have deluded Paul Krugman. Let's point out those things about post 1945 recovery that we already mentioned last month:

(1) The relatively complete devastation of all other major industrial bases on the planet, to include Japan, Russia, Germany, France, Italy, and even Great Britain, which left the US with a virtual monopoly on heavy industrial production for at least a decade, and a hegemonic position for most of another decade.

(2) The complete absence of developing world economic competition with American (and then European) markets. World War Two ends with most colonial empires in disarray, but it takes decades after formal independence for nations like India, Indonesia, Korea, or Malaysia to become competitors for low-income factory/sweat-shop work.

(3) Low oil prices caused the American/British domination of most oil supply areas and the relative lack of competition for oil products.

(4) The fact that the Federal government engaged in almost no real social spending compared to today--or even the 1960s. The absence of government social spending and the incredibly low national spending on education (especially pre-Brown v Board of Education) meant that the government could make that 8-10% investment in Cold War spending without causing taxes to go up unduly.

(5) The fact that the GI Bill not only allowed millions of white American men to go to college, but also set back most of the gains in the workplace made by women during the World War Two era by excluding them from this benefit.

(6) The fact that high union membership (and therefore the success of collective bargaining) was a byproduct of the heavy industrial model of the economy, which placed its premium on a (relatively) small number of employers who are looking for a workforce with an 8th Grade education, and possess no motivation to become better educated....

(7) The complete absence of a number of modern externalities, like environmental regulations....


What continues to amaze me is that people fawn over economists like Krugman and Reich despite their almost complete historical and political ignorance....

But they do. They even consider them thoughtful.

9 comments:

Anonymous said...

Steve, since Krugman and/or Reich did not mention any of the facts that you just listed, this does not necessarily mean that they have not taken any of them into account in their proposals, as you speculate.

Viscerally, I am not impressed with Krugman, but I am with Reich. What he says usually sounds right to me. That is the level on which I operate -- you call it fantasy! I suspect that to a degree you operate on a visceral level as well; but you do go beyond that with your studies and analysis, for which you deserve credit and admiration.

I will admit an obvious conclusion about myself, that I cannot approach your level of analysis and historical perspective. So I depend on others like yourself to educate me.

That said, I cannot help but feel that you use your knowledge to push an agenda. Whether your agenda is an outcome of your knowledge, or of a political impulse, or both, only you can reveal.

But you are not the only one with knowledge around here. You have competitors. So how is a person like me to choose?

What is wrong with the ideas of Larry Summers, Tim Geithner, Paul Volker, Christina Romer, Peter Orszag, the Obama team of economists? They all have histories and are highly regarded.

According to The Economist, "Their influence helps explain why Mr Obama wants a hefty fiscal stimulus to keep the economy from “falling into a deflationary spiral”".
http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=12685546

Presumably, this team has helped produce the Obama "Recovery and Reinvestment Act", and is behind the additional stimulus elements that we heard about, though not in great detail, in the President's speech last evening.

So where does that leave a person on my level, wrt either supporting or not supporting the economic stimulus plan? How do I know that you are not cherry picking to support your political agenda, Steve?

In my "fantasy" world, all I can say is that the Obama stimulus plan sounds good to me, which is pretty much what I offer, when I comment, to the extent of my understanding. I also give my reasons.

I do agree with your list indicating that the circumstances at the end of WWII are not identical to what we face now. However, that does not mean that it is invalid to cherry pick some of the FDR/HST policies that may work in today's environment.

Part of the stimulus must focus on jobs, which Obama's plan does. For example, FDR focused on job creation with his 1935 WPA which created 3.5 million jobs in a year. This is a model where massive spending created jobs.
http://www.indiana.edu/~liblilly/wpa/wpa_info.html

The CCC in 1933 created over 3 million jobs. The WPA and CCC were infrastructure spending programs.

Whether massive spending now, to create jobs and do other things deemed important, can be accommodated later when the GDP returns to growth mode, by fiscal discipline and increased IRS derived revenue due to the growth, thereby reducing the deficit and debt, well that's the key question. Obama's economic claims it can.

It will be interesting to see how Obama's team plans to deal with the entitlement problem, which is why I speculated the other day about the difficult measures that could be incorporated. Obama did not give any details on this issue. I'm sure we will here more -- we have to!

Perry Hood

tom said...

Perry, when you cite an online article, please use the html "a" tag.

That will not only make it easier to follow your references, but will also eliminate the possibility that URLs will run off the edge of blogger's columns and be difficult or impossible to copy/paste into the browser's address bar.

tom said...

I am surprised that you could not find something more timely and relevant than a four month old Economist article to support your point. Especially one that concludes by questioning how effective Obama's choices will be, and whether or not they will be able to work as a team.

Certainly these people all have impressive credentials, but more importantly, as The Economist points out, they all share the same economic viewpoint. I would be much more comfortable with a team that had a much broader range of economic perspectives, and in my dream world it would include someone w/ Austrian or Chicago school leanings.

As Steve has tried to point out several times, that list of differences between now and the post WWII era is precisely why WPA style programs have no chance of working now. And to say that your WPA reference is mere propaganda lacking any sort of detailed analysis would be an understatement.

The WPA (aside from being flagrantly unconstitutional in its original incarnation as a gross abuse of Executive Orders) was very wasteful as noted here and here, and had a wealth of unintended consequences particularly on blacks. (Bias Alert: The Cato Institute is well known for its strong libertarian bias - so well known that the only reason I mention it is to save Perry the trouble of discovering that I have an agenda. And while they occasionally make mistakes like anyone else, they generally do an excellent job of producing very detailed research papers on a wide variety of topics, which is why I cite them frequently.)

tom said...

"But you are not the only one with knowledge around here. You have competitors. So how is a person like me to choose?"

Why not try reading several different perspectives on an issue, and the commentary & criticism of each article by the author's peers, and then choosing the one that seems most convincing. Or better yet, create your own synthesis of the most convincing points from each source.

If you are going try to understand or argue public policy, it wouldn't hurt to learn the basic principles of macroeconomics. I recommend Hidden Order: The Economics of Everyday Life by David Friedman. (Bias alert: David Friedman is a free market anarchist. He is also a much more interesting writer than any other economist I have encountered so far. This book explains basic economics in a clear, non-boring way w/o using any math other than arithmetic and a bit of very basic algebra.)

Knowing the basic economic principles will help you to understand what the "experts" are saying and evaluate whether or not you should believe it.

Of course all of this is just a long winded way of saying, "Don't believe anyone; Learn to think for yourself."

Steve Newton said...

Perry
Of course I have an agenda--see the name of the blog.

That does not mean, however, that I consciously distort information.

I have read significantly of both Krugman and Reich, many of their books and articles, and the answer to your question is that they do not deal with those issues I discussed.

Should you take my word, alone and unsupported. I'd hope not. But I have also provided the dissenting opinions of over 125 academic economists, including three Nobel laureates, who think that Keynesian stimulus is the wrong way to go.

What people keep missing, IMO is that there are multiple schools of economics, differentiated for example by fiscal and monetary economists, etc. etc. It's not the simplistic choice between the "experts" around Obama and everybody else.

What bothers me about Obama's team is that there is no dissent among the economic viewpoints of the individuals on it.

Krugman and Reich, moreover, have both struck the pose (cited on multiple occasions in this blog; just search their names) that there is no legitimate reason for any economist to disagree with them for any other reason than partisan politics--or even racism.

There are whole journals of work on sticky information in economic transactions, economies as complex nonlinear systems, and lots of work that has gone on post-Keynes, none of which seems to be informing this plan.

Didn't you see the post wherein I noted that the Zandi analysis, which is touted as the end-all of stimulus analysis, is directly contradicted on several important particulars by a 2008 CBO study supervised by Orzag?

I want better discussions and more serious consideration of the impact of these plans. I'm talking weeks, not months--but this rush to stimulus is inherently dangerous.

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Anonymous said...

Tom, I appreciate your response and your recommendation.

My education and career have been focused on science, while areas like history and economics have had only a smattering of attention, as you can tell.

Regardless, here are my responses to other points. The Economist reference was 3 months old, but that's OK because the lack of currency has not changed the point I made about the quality of the Obama team. I take your point about more diversity being desirable.

Your references, all from Powell at the conservative/libertarian think tank CATO, hardly present a diversity of opinion on this subject.

Let's take the first reference. Roosevelt's tax increases, at the behest of Conservatives who caused him to worry about the deficit, were in the '37-'38 time frame, whereas the eminently successful job creations by the CCC and WPA were in the '33-'35 time frame.

True, the tax increases triggered a recession within the depression. The advice from conservatives was bad. Early spending ahead of WWII got us back on track then, as it should now, because job creation now should stimulate the economy.

My point was about job creation, which is crucial right now, and which I believe is applicable to addressing the cratering unemployment rate we are now seeing. Seems obvious to me, to economist Mark Zandi as well with his bang for the buck modeling.

In fact, so far, our job loss curve is on the exact same track as during the onset of the Great Depression. Job creation by temporary spending is the way to reverse this, and begin to restore confidence, thus restore consumer spending, thus growth.

Perry Hood

PS: Thanks for the link advice. I need to learn how to use the "a" tag.

Anonymous said...

Steve, to your post, it all comes down to who has the power and who has the Democrats' ears as well as the ears of the public.

The Keynesians, to the extent that this term describes their policies, seem to be winning this battle in the Obama administration, much to your consternation and concern.

Which brings me to this: One thing that concerns me about your admitted agenda, or anyone's for that matter, is that it then becomes too easy to cherry pick, even unconsciously, to further the agenda. I trust that you are aware of that and try to avoid that pitfall.

Now, if the anti-Keynsians have such an air-tight case on how to rescue and recover this economy in crisis, without massive spending, why is this not prevailing?

Are we in panic mode and ready to grab at anything that sounds good, especially elements of the FDR model?

What is wrong with the WRA and the CCC, as applied to our current needs, as part of the R&R Act is attempting to incorporate?

What is wrong with the Zandi model? Did the 2008 CBO study supervised by Orszag effectively refute if? If so, apparently Orszag has not had much influence on the R&R Act which originated in the House. Perhaps here is where your criticism about doing this too fast has merit. On the other hand, do we have time to refine the Obama approach?

It seems to me that the very people responsible for creating this crisis by generating huge deficits and doubling the debt, while cutting taxes favoring the wealthy, are the very same people who now speak out against the Obama rescue policy. They are not convincing with their hypocrisy. I guess it depends on whose taxes are cut, and on whom the spending is aimed.

It was the wealthy who were favored with the tax cuts, and the military-industrial empire on whom the spending was focused.

Moreover, it seems to me that the Obama people are trying to change this, by giving tax cuts focused on the middle and lower, assistance provided for the poor, and spending focused on creating jobs in the civilian job sector, all this aimed at jump starting the economy so that when growth returns, spending can be cut to attack the deficit.

No doubt, Obama is also trying to fulfill some of his campaign promises as well in energy, education, and healthcare. Good idea substantively and policically, as there is job creation in all these areas in the R&R Act.

I realize that this is a simplistic view which I voice here, which is about the best I can do.

So far, the Obama sales pitch has me impressed.

Is it possible, Steve, that the economy is in territory so unknown that none of the renowned economic theorists are presenting compelling rescue case scenarios that the politicians can buy into and then sell to the public?

Or is there an ideological battle going on here that transcends the economic issues, with a good chance that we are plunging deeper into irretrievable debt and eventual defeat and despair?

Perry Hood

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