A mission of national import!

FRIDAY, APRIL 27, 2012

Two columnists and those new clothes: We’ve been called away from our sprawling campus on a mission of national import.

We expect to finish our current, award-wining series on Monday. Tomorrow, we expect to post about a recent, very rare error by Kevin Drum.

For today, we recommended the new column by Paul Krugman.

Krugman has written this column many times. We congratulate him for doing so, although we very much doubt it will help.

For today, we offer this reading assignment: Analyze this passage from Krugman as a version of The Emperor’s New Clothes:
KRUGMAN (4/27/12): None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

However, something has changed in the past few weeks. Several events—the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity Fran├žois Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s—seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.
An embarrassing problem was obvious. But everyone was in denial.

Finally, something broke through the wall of denial. Suddenly, everyone is admitting the problem!

Alas! Krugman’s column also refers to “policy elites.” In the original tale, were there highly-placed, wealthy interests determined to extend the illusion?

Opposing Krugman on today’s op-ed page, David Brooks starts his column in the following manner. Note the slight sleight-of-hand about “Nobel Prize winners”—reinforcing the (unstated but suggested) idea that no one can figure this out:
BROOKS (4/27/12): In 2009, we had a big debate about whether to pass a stimulus package. Many esteemed and/or Nobel Prize-winning economists like Joseph Stiglitz, Larry Summers and Christina Romer argued that it would help lift the economy out of recession. Many other esteemed and/or Nobel Prize-winning economists like Robert Barro, Edward Prescott and James Buchanan argued that positive effects would be small and the package wouldn’t be worth the long-term cost.

We went ahead and spent the roughly $800 billion. What have we learned?

For certain, nothing. The economists who supported the stimulus now argue the economy would have been worse off without it. Those who opposed it argue that the results have been meager. It’s hard to think of anybody whose mind has been changed by what happened.
Has Brooks learned something? Has his mind been changed in some way? Does he think our minds should have changed?

For whatever reason, Brooks doesn’t say.

Krugman says the lesson is obvious. Directly oppposite him on the page, Brooks advances a different perception.


  1. Actually, it seems that Krugman and Brooks are talking about two different groups --- economists and politicians.

    Krugman seems to say that economists are looking at the European austerity model and are seeing no positive impacts from it, and that realization has "trickled down" to the voters.

    Brooks are saying that U.S. politicians (though he calls them "economists") are looking at the 2009 stimulus plan and are still stuck in the opinion of it they held three years ago. (Surprise! Surprise! Surprise!)

  2. The Real AnonymousApril 27, 2012 at 10:10 AM

    And here I thought diversity of opinion from op-ed writers is a good thing.

    1. Well obviously you are not a citizen of the planet that the new Bob Somerby comes from, where there is only one "truth" that should be apparent to all, and must be reported in the way the new Bob Somerby says it should be reported.

    2. The Real AnonymousApril 27, 2012 at 10:49 AM

      Its a sad day when Sandra Fluke sums up Rush Limbaugh more succinctly than Mr. Somerby ever has.

      To wit: Limbaugh has become "confused by his own propaganda."

      A word to the wise, Mr. Somerby, a word to the wise.

    3. Yep. When you have devoted your life to scouring the New York Times daily for the latest outrage to blog about, and what you come up with are two op-ed columnists expressing two opinions, well . . . maybe its time to refocus.

  3. Wrong. Summers, Romer, and Stiglitz are, in fact, economists. They all have Ph.D.s, have published, and are well-respected in the field.

    1. I'm certain they are. But what I am saying is that economists not bound by political ideology have learned, and are continuing to learn, a great deal about the U.S. stimulus approach vs. the European austerity approach.

      It's basically Keynes vs. Friedman and the empirical data they are assembling will forever affect the course of global economic thought.

  4. He switches from the economists and asks "What have we learned?" We are not economists. We are the public. If it is the editorial "we" then it is Brooks and he is not an economist. I think he is saying that economists still disagree and we the people don't have a clearer picture of whether a stimulus is needed.

    In Europe, the revolt of voters is about proposed austerity policies that will hurt individuals who are already hurting. It isn't about economic policy -- it is about people's current situations and a fear that if govts take away safety-net and job or health-related benefits the people will be even worse off than they are now.

    This isn't an abstract exercise in economics. It is about personal survival -- our politicians don't seem to understand that no one believes there is a recovery when they personally are not surviving financially. The disconnect is stunning.

  5. Krugman sets up a straw man, rather than analyze the horns of the dilemma. He criticizes the idea that austerity will bring prosperity (simply because it suppose will foster confidence.) He demonstrates that this hasn't worked, as least for several European countries. Unfortunately, he omits several key aspects to the economic problems of the US and Europe:

    1. How much debt can a country afford before it collapses? When the international bankers raise a country's interest rates too much they no longer have the option of "stimulus".

    2. How can Krugman say that the US is now on "austerity" when the government is borrowing 35% of what it spends? What's Krugman's definition of "austerity" and "stimulus'?

    3. Although "austerity" is working badly for Europe, maybe "stimulus" would also work badly. After all the US has had stimulus and huge deficits, yet our economy sucks.

    4. Does Krugman's policy really amounts to supporting the government sector, as a commenter at the Times asserted: For all his talk of class fairness, Krugman consistently comes to the defense of the privileged class that is the public sector (or has he forgotten that 300 billion of the original stimulus went to the states to pay for raises and pensions for government employees?).

    5. Both the US and Europe got into economic difficulties after years of expanded government. So did the Soviet Union. OTOH China's economy got better when they allowed their private sector to do more. Is expanded government the real long-term economic problem? If so, then isn't stimulus guaranteed to make things worse in the long run?

    Now, Krugman may have answers to these questions. But, his article doesn't provide answers, nor does it even acknowledge that such questions exist.

    1. What Brooks ignores is that if you run 1000 randomized experiments, you will not get 1000 similar results.
      What you will get is more of a bell-curve.
      If one starts out with an ideological premise, and most economists, politicians, and citizens do, it is easy to cherry pick the ends of the curve and toss out the middle to prove one’s original thesis was correct, even if the large body of evidence in the middle contradicts the ideology of the experimenter.
      Krugman’s point, that austerity does not cure recession, is borne out by the evidence of every country that tried it and failed.
      The US attempted a moderate stimulus, which was vigorously attacked by Republicans (and still is), despite some conservative economists grudgingly conceding that things probably would have been worse without it.
      Of course, the Republicans attacked the plan not because of their vast expertise in economics, but, as Robert Draper reveals, because they agreed on the day of Obama’s Inauguration to “… challenge them on every single bill and challenge them on every single campaign." - Kevin McCarthy
      Comparing France and Germany to other EU countries doesn’t prove a general thesis because they are at the ends of the curve. France is the EU’s largest country, and Germany has its strongest economy and strongest work ethic.
      What’s more, both countries strongly supported austerity for Greece and Ireland (and the other PIIGS), not so much for themselves. Tough choices are always easier to make when they affect the other guy instead of yours truly.
      A while back, DavidinCal asked some worthwhile (but ideologically tainted) questions about stimulus during a recession.
      I didn’t have time to answer his plaints then, but saved it.

    2. The alternative to austerity is not necessarily deficit spending. It also includes increasing revenues through taxation if no other way can be found. With tax rates are record lows, why is this not included in the discussion?

    3. David in Cal wrote,

      "3. Although "austerity" is working badly for Europe, maybe "stimulus" would also work badly.
      After all the US has had stimulus and huge deficits, yet our economy sucks."

      The economy sucks because we've experienced the worst financial crisis since the 1930s. End of story.

      For stimulus to work (i.e, improve the economy), it had be large enough to meet the magnitude of the crisis. It wasn't. The $800 stimulus fell far short of what was needed at the time. Plus, spending cuts at the state level more than offset the benefits of increased federal spending. Hence, de facto austerity.

      About $2.9 trillion was the amount of stimulus needed in 2009 to bridge the output gap (the difference between what the economy could produce and what it will produce) and get us back on the road to prosperity.

      "5. Both the US and Europe got into economic difficulties after years of expanded government."

      Your argument is not borne out by the historical evidence. In fact, it's stunningly wrong.

      The US experienced the longest economic boom in its history (roughly from 1945 to 1970) after the New Deal and World War II years, when it greatly expanded the size and scope of the federal government.

  6. I understand that the rest of Europe is unsure about austerity, but are the Germans? They and the French refused to do a similar stimulus to ours saying that they did not believe that the multiplier was greater than 1. Considering the German economy they made the right decision for them so far. The rest of the EU not so much. I think the obituary for austerity has been prematurely written

  7. David in Cal.
    David in CalFeb 24, 2012 09:31 AM
    Paul Krugman is a brilliant economist. He would be a great op-ed writer if he weren't such a partisan. E.g., he brands Romney as liar for talking about Obama's apologies. It's a fact that Obama expressed regret for actions the US had taken which harmed others, although Obama didn't use the word "apologize" or "sorry". I think it's reasonable to call such statements apologies. Even if Krugman disagrees, this isn't a lie; it's just an interpretation of what the President said.

Anyhow the point I want to make is that AFAIK Krugman could do a better job of explaining what "Keynesianism" is. Here are some key points, as I understand it. I'm an actuary, not an economist, so feel free to correct me.

1. According to Keynes, government spending in excess of revenue boosts the economy. In that sense, both Bush's tax cuts and Obama's spending increases are approaches that are supposed to boost the economy. (BTW a decade of Bush/Obama deficits don't seem to have worked so well, do they?)

2. In theory, spending increases may be better than tax cuts, because they can be targeted to help the economy. In practice, tax cuts are arguably better, because spending increases seem to wind up targeted more for political reasons than for economic ones.

3. Even if one believes that an unbalanced budget will boost the economy, it doesn't necessarily follow that one should favor an unbalanced budget. Three reasons why:
-- Interest on the borrowed money will be an ongoing drag on the economy
-- The borrowed money must be paid back, a process that will slow the economy
-- If the country keeps borrowing without repayment, disaster eventually ensues. The Greek riots show where that course leads.

Point #3 is seldom mentioned, but it's obvious if you look at personal spending. Can you live better today by going into debt? Sure. You can buy more stuff. Does that mean that you should go into debt? Not necessarily, because you'll pay interest on that money you borrow, and because you'll have to pay the debt back Examples of this principle are seen in the unfortunates, who, as students, borrowed huge amounts to go to college and now find those loans hanging around their necks, deterring many other things they'd like to spend money on today.

  8. 1. Briefly, in a recession, when banks are not lending, entrepreneurs are not funding start ups, and consumers are not spending, the government can stimulate the economy by using deficit spending to put money directly into the economy as a whole. Of course, it matters how they inject the money.
    2. Deficit spending multiplies the effect of each dollar added to the economy. Across the board tax cuts are not the most effective stimulus.
    In congressional testimony given in July 2008, Mark Zandi, chief economist for Moody's Economy.com, provided estimates of the one year multiplier effect for several fiscal policy options. The multipliers showed that increased government spending would have more of a multiplier effect than tax cuts. The most effective policy, a temporary increase in food stamps, had an estimated multiplier of 1.73. Making the Bush tax cuts permanent, had the second lowest multiplier, 0.23. A payroll tax holiday had the largest multiplier for tax cuts, 1.29. Refundable lump-sum tax rebates, the policy used in the Economic Stimulus Act of 2008, had the second largest multiplier for a tax cut,1.26.

    3. Personal spending, or for that matter, business spending cannot be compared to spending by a sovereign state for the simple reason a sovereign state can control interest rates, exchange rates, and the money supply, something households and businesses cannot do.

    The point about repaying the debt contracting the economy is a valid one. It does. That’s why we should only repay the loan when business is booming.

    The fly in that ointment is that no one, be it businessman, politician or worker, has the will to do that, and economists don’t control politicians. Campaign contributions and voters do,
    The Greek example is not relevant here because as far as interest rates, exchange rates, and money supply, they are subordinate to the ECB.
    The rationale for deficit spending in a recession is not so we can “buy more stuff” now, but that the government can foster growth by injecting cash into the economy when others are unwilling or unable to do so.

    “In practice, tax cuts are arguably better, because spending increases seem to wind up targeted more for political reasons than for economic ones.”

    David, are you seriously asking us to believe that tax cuts are motivated by altruism and not for political advantage? Seriously?
    “. (BTW a decade of Bush/Obama deficits don't seem to have worked so well, do they?)
    Defense contractors got a windfall for more than a decade, but if hundreds of billions are spent (and stolen) in Iraq, and left behind there, we lose.
    Big Pharma also got huge profits: The top ten drug companies spent $24.415 billion on lobbying in 2005. Yes, lobbying. That’s why Medicare can’t bargain with drug companies, but the VA can. Lobbying gets the most bang for the buck by far. Pharmaceutical industry profits increased by over $8 billion in the first six months after the Medicare drug plan went into effect (2006). No other investment could possibly beat those returns.
    The profits were not spread around the US economy, because corporations were rewarded during the Bush administration for moving jobs overseas.
    In fact, payrolls remained mostly stagnant while there was wholesale reduction of benefits to workers.

  9. Anyone who reads Paul Krugman's blog regularly know that he backs up his assertions with actual numbers. The Obama stimulus barely covered the spending lost by reduction in state and local government jobs. In other words, we never really tried stimulus. Luckily, we did increase federal spending thus averting an actual economic disaster as reflected in current UK GDP numbers. Welcome to the UK's double dip recession, thanks to austerity policies. As for today's Krugman column, I read that as a statement that now reputable and knowledgeable economists are no longer afraid or embarrassed to acknowledge the obvious - austerity policies have failed and too-timid stimulus has lengthened the US depression. Paul has endured years of mockery and snark from lesser minds thanks to the group-think that has dominated our public (i.e., political) discourse.

  10. Has total government spending, exclusive of "automatic" increases such as unemployment benefits, increased in the USA?

    I mean, have we actually had a NET stimulus at all??

    If we wanted to know, wouldn't we want to include state and local governments in the total also?

    How can we explain this graph showing the change in government employment under three recent administrations -- http://krugman.blogs.nytimes.com/2012/04/25/american-austerity/ (Summary: After the same number of months in office, under Clinton public employment increased 600K, under Bush 700K, while under Obama public employment has decreased by 600K) ???

    Stimulus? What stimulus?

    Frankly, I think that while our host offers praise to Krugman, it is only slight praise.

    You may be familiar with the phrase "damned with faint praise." The comparison with Brooks is instructive for exactly this reason.

    If you are asking yourself whether Somerby is suggesting that there should be no "diversity of opinion" or, more idiotically, whether "there is only one 'truth' that should be apparent to all, and must be reported in the way the new Bob Somerby says it should be reported" then you are missing the point catastrophically, perhaps intentionally in the case of some of our usual suspects/trolls.

    The point is not that there should be no diversity of opinion.

    It is that one can *still* write as idiotically as Brooks does, because Krugman is sadly wrong: the lessons are *not* obvious. We have failed to learn them, we are still easily distracted. Our press has not served us, we do not understand what has happened with our economy.

    Fools like David in Ca can continue to pretend that the European crisis was due to profligate government spending. Why can they do this?

    Because, Krugman to the side, we simply have not been told the facts. Excluding Greece, the nations in crisis had their public spending quite in order before the disaster came. Public spending excess was *not* the cause

    We have been taught to be obsessed with public spending, but we do not know the facts about it. So an idiot can say "Both the US and Europe got into economic difficulties after years of expanded government" without much fear of contradiction.

    The fact that, for example, Spanish debt as a percentage of GDP was low and in a period of *long decline* before the crisis does not embarrass such idiots, they simply ignore it, because they are sure you do not know it.

    I will leave it there since it's getting long, and, as I have been typing this I see marlouc has contributed a needed note of sanity to the discussion -- many thanks for that!

  11. Swan may be falling for a Bait-and-Switch. S/he asks, "Has total government spending, exclusive of "automatic" increases such as unemployment benefits, increased in the USA?"

    First of all, why exclude the "automatic" increases. Shouldn't they have just as big an economic impact as any other spending increases?

    Second, Swan doesn't address total government spending, with or without increases. Instead, Swan switches to number of employees.

    So, let's answer Swan's original question (inclusive of automatic increases), and put the figures in context. When Clinton left office, federal spending was around $2 trillion/year. Eight years later, it was around $3 trillion a year. Now, it's almost $4 trillion a year. Federal spending almost doubled in 12 years.

    Now Krugman comes along and says, well if federal spending had, say, tripled since 2000 our economy would be OK. I'm dubious. We had a great economy when Clinton was spending $2 trillion, a so-so economy when Bush was spending $3 trillionn and a bad economy when Obama was spending $4 trillion. The trend of real results sure doesn't support the idea that even higher federal spending would have fixed our economy.

    1. This comment has been removed by the author.

    2. No, David. Krugman did NOT say that, you did.
      You consistently paraphrase, simplify, and remove qualifiers from other's statements, then knock down their position.
      That is classic Straw Man arguing, and you are the worst offender on this blog.

      And that's not all.
      "Both the US and Europe got into economic difficulties after years of expanded government."
      You posit this as if it describes a causal relationship. It doesn't.
      That is a classic example of post hoc ergo propter hoc reasoning.
      You are in effect denying all other contributing factors to the recession, which is a fool's errand.
      "There are none so blind as those who WILL not see."

    3. gravymeister -- I made a true statement. You rightly question whether the correlation shows causation in this case. That's a debate with economists and politicians on both sides.

      However, I'm impressed by the contrast over time, when countries had smaller governments and when those same countries had bigger ones. I'm also impressed that the contrast over the same time period between pairs of similar cultures with different types of governments: East Germany vs. West Germany. Hong Kong vs. Shanghai. Texas vs. California. Taiwan vs. Mainland China. South Korea vs. North Korea. In all these cases, the one with less government economically outperformed the one with more government, and by a big margin.

      No doubt there were individual factors involved in all these examples, so nobody can say conclusively that smaller government means more wealth. However, I think it's fair to say that there's more evidence than the other way 'round.

    4. David, what about my state, Massachusetts, that has way more government than Mississippi or Alabama, but far outperforms them. Florida isn't doing so hot, either. Texas has oil.


    5. What about Somalia? No government at all. They ought to be doing fabulously well. And of course, Afghanistan has never had much of a government.

    6. "Why exclude them?"

      Because we want to know if the administration has applied a net stimulus.

      Has some net action been taken?

      Or has what is referred to as "the stimulus" merely offset dramatic decreases in spending?



      suggests that the answer is no, there has been no net stimulus to the economy.

    7. But there WAS a massive stimulus package passed very early in the Obama adminstration. That is what we are discussing here, not whether the cuts at the state and local level has reduced the net effect to zero.

      Lordy, can you even begin to imagine what shape the economy would be in had Obama taken the "austerity" approach?

  12. David in Cal appeared about as soon as Bob Somerby introduced comments, and his role (whether this is what he intends, is paid to do, or just has the retired time to do and writes out of his genuine convictions, I don't care) has been to ensure that this comments section will be non-productive. I think if people pretended he didn't exist (and if the various Anonymouses would find a handle so others could identify consistent personae for each of them), comments here could go somewhere. Bravo, Dave.

    1. Even if you or I think he's wrong, I thinkit's better to have different opinions

    2. mch, I beg to differ. David in Cal doesn't have the power to make the comments section non-productive, and he in fact, provides a needed reminder that rightards are on balance worse than any on the left that Somerby pillories. Take DinC's excuse for Romney's serial lying: "It's a fact that Obama expressed regret for actions the US had taken which harmed others, although Obama didn't use the word "apologize" or "sorry". I think it's reasonable to call such statements apologies." Sure, if we call "regrets" apologies, then Obama apologized. If my aunt had balls, she'd be my uncle; and if she had wheels, she'd be a trolley. I'm sure we can find numerous official expressions of regret for the deaths at Hiroshima and Nagasaki but I'd be surprised to find a politician who apologized for the atomic attacks. Hey, David, why don't you just say that Obama is doubleplus ungood?

  13. “Everyone is entitled to his own opinions, but not his own facts.”
    Daniel Patrick Moynahan

  14. I find it interesting that the obvious alternative to the stimulus was to do nothing. It is hard to believe that anyone (conservative or not) can believe that in the face of this economic crisis that the federal government should do nothing. Further, to believe that austerity would have worked better, is to believe that even more unemployment and evictions would be a good thing. The economy should serve the people and not the other way around. Government spending and home owners did not cause this economic crisis.

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