J. Bradford DeLong: August 18, 2009
We Must Defeat the Mammon of Unrighteousness! Debate with Ed Leamer at the Los Angeles Times J. Bradford DeLong University of California at Berkeley and NBER delong@econ.berkeley.edu August 18, 2009
Back at the start of October, when it became clear that the recession was not going to be a mild “rolling readjustment” and when it began to become clear just how frozen the financial system was and how much damage the freezing-up of the financial system was about to do to investment and spending, economists began talking about how it would be a very good thing to pass a fiscal stimulus–to boost the federal deficit by about $200 billion in fiscal year 2009 (i.e., October 2009-September 2010), $200 billion in fiscal 2010, and $100 billion in 2011 to put more people to work and cushion the rise in unemployment. Thus $500 billion in total—to be divided, say, with $125 billion in aid to states so they would not have to cut programs and throw yet more people out of work, $125 billion in tax cuts to relatively poor people feeling liquidity constrained who would spend and not save the additional cash, $125 billion to shovel-ready and near-shovel-ready infrastructure projects, and $125 billion for congress to distribute to projects individual representative regarded as worthy because assembling legislative coalitions to pass anything is very hard. By the end of December it was clear that the recession was going to be at least twice as big as the early October forecasts. Economists lamented the
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J. Bradford DeLong: August 18, 2009
failure to pass a stimulus at the start of October, and upped estimates of the appropriate amount of stimulus to $1 trillion or so—with $250 billion in aid to states, $250 billion in tax cuts to people strapped for cash who would spend the money, $250 billion in infrastructure, and $250 billion in projects individual members willing to join the coalition to pass the thing found worthy. And it turned out that we have: (a) a recession not twice but three times as large as forecast in October, (b) a stimulus package of about $600 billion in real and semi-real stimulus, and (c) a stimulus package passed in February rather than October—four months later than it should have been. Democratic stalwarts say that it is in part Obama’s fault. The strategy of the Obama administration—in the stimulus, in climate change, in health care, in national security—appears to be: (a) decide what good policy is, (b) take two giant steps toward whatever position the Republicans are setting out, (c) extend the hand of non-partisan technocratic governance and say “we should come to an agreement,” and then (d) get kicked in the face. Republicans, you see, don’t have a policy but rather an attitude: they remember that in 1993-1994 they opposed everything Clinton proposed no matter what it was and won the 1994 election, and hope to repeat that. Reality-based Republicans are quiet. They know full well that had McCain won the election in November he would have proposed and congress would have passed a similarly-sized stimulus package (fewer spending
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J. Bradford DeLong: August 18, 2009
increases, fewer tax cuts for the middle class, and more tax cuts for the rich—they are Republicans). Fantasyland-based Republican stalwarts talk about how the stimulus package is ruining the country. And the Obama administration points out that it could not have passed anything at all without the votes in the Senate of Republicans Collins, Snowe, and Specter and Democrats Nelson and Landrieu, that the stimulus that was passed was the biggest and most effective that those six gatekeeping senators would ever vote for. The Obama administration has a definite point. Thus Ed Leamer is right when he says that the stimulus was in large part a wasted opportunity: it could have been much more effective had it been better designed—better timed, better targeted, and better sized. But Ed Leamer is wrong when he hints that the stimulus was not worth doing. Mark Zandi, a former senior McCain advisor and as good an economic forecaster as Leamer, thinks that the stimulus package boosted the rate of GDP growth by 3% in the spring and by another 4% this summer—meaning that the $80 billion in stimulus spending in this third quarter of 2009 is boosting production and incomes by $65 billion. Since the $80 billion is being used to buy useful goods and services that in normal times have a value of some $60 billion, the stimulus package looks like a clear win: the government is losing $20 billion by being a hurried and hasty shopper, but we as a country are gaining $65 billion in incomes and production—that is a benefit-cost ratio of better than 3-to-1. And I believe that Ed Leamer is way, way wrong—lost in the gamma quadrant with Captain Janeway and the starship Voyager wrong—when he says that this recession is what the economy needed: a much-needed break from many years of unsustainably high levels of building of homes and cars and offices and retail stores, a much-needed reality check regarding how wealthy we are, and a long-overdue realization that our financial institutions have been taken over by gamblers. Though it’s a painful process, we will emerge in a better place...
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J. Bradford DeLong: August 18, 2009
We do need sectoral readjustment: to move workers out of overfull industries like finance and construction and real estate transactions and into (hopefully) growing industries like health care and import-competing manufacturing. But we don’t need a big recession and unemployment to spike to ten percent: that doesn’t help but rather retards and freezes the needed rolling process of sector readjustment. This is an old, old argument. Back in the Great Depression Joseph Schumpeter argued that the economy was undergoing a “healthy cold douche” and that there was “a presumption against” the government lifting a finger via expansionary monetary policy or New Deals to try to keep things from getting worse. John Maynard Keynes disagreed, writing: Some austere and puritanical souls regard [the depression] both as an inevitable and a desirable nemesis on so much ‘overexpansion’, as they call it.... It would, they feel, be a victory for the mammon of unrighteousness if... prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a ‘prolonged liquidation’ to put us right.... I do not take this view.... And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...
I think Keynes was a smart guy: right then, and right now.
1112 words; August 18, 2009
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