Stimulus Debate Heats Up
You have to love it when a politician starts rambling on about Keynesian economics. Even when he’s wrong. Today’s Financial Times has this quote in it:
‰ÛÏI thought the outdated and discredited Keynesian economic theory behind the effort was misguided, and I was convinced it wouldn‰Ûªt work,‰Û? he said. ‰ÛÏUnfortunately, recent economic data has validated my opposition.‰Û?
The quote is from Darrell Issa, the lead GOP member of the House oversight committee, and was made at a hearing on the ‘failure of the stimulus’ package.
Well, Darrell, nice try.
But you’re still way off base.
Let’s set aside the fact that it is still too early to tell whether the stimulus is working since it has only just started to filter out into the economy. I suppose that’s too easy for the media to research. Instead let’s focus on how there can even be a debate about stimulus.
The discussion is taking place because of the confluence of three things:
- Media ineptitude
- Republican opportunism
- Administration passivity
The media has done a frustratingly poor job of discussing the economic situation. It has framed everything in typically small sound bite types of analyses, along with ‘deeper’ thought pieces all of which appear to have been written by conservatively inclined authors. There has been a remarkable homogeneity of opinion in the media: the stimulus was an expensive folly, it may have been unnecessary, and it was certainly too expensive given the federal debt. These three criticisms have shaped the ‘debate’. None of this should surprise anyone who is familiar with the state of economic theory. I have argued here before that the overwhelming bias in economics education is to teach what is called neoclassical orthodoxy. This theory is the source of most of the theoretical attacks on the kind of expansionary fiscal policy we have implemented. Orthodoxy argues that a recession can only be reversed using monetary policy actions, which means reducing interest rates in order to spur investment and other expenditures. The textbooks most often exclude the rare caveat that orthodoxy allows: that there are very odd circumstances in which monetary policy is ineffective, and therefore fiscal policy should be employed. Presumably all the media pundits now leading the argument against stimulus didn’t get that part of the standard theory.
Because we are exactly in that very rare circumstance.
This is the whole point: monetary policy cannot work because interest rates cannot be lowered any further. According to internal Federal Reserve Board calculations the Federal Funds rate, which is the benchmark rate they use to manipulate overall rate levels, should be at -5%. Yes that’s right: minus 5%. But you can’t have negative interest rates. Think about that: a negative interest rate implies that a lender pays the borrower to induce them to borrow. That’s nuts. It won’t happen. So when interest rates get down to zero or even close enough to zero, there is no more room for ‘conventional’ monetary policy. The text book goes out the window.
I give the Fed huge credit. They have been pursuing ‘unconventional’ policy and have invented all sorts of ways with which to pump cash into the economy: the Fed has tripled its balance sheet and has printed money like crazy. The result? We avoided an all out depression. At least so far.
The Republicans are naturally trying to pick apart any seams in the administration’s cloth, and the media’s misinformation about the stimulus has provided them fertile ground for criticism.
By misleading the public relentlessly about the stimulus, and in particular by focusing on its cost and its apparent ineffectiveness, the media has enabled the GOP to start the current debate as if it a serious discussion about policy options. It isn’t. It cannot be. There are no options.
My frustration is heightened by Obama’s extraordinary quiescence. His economics team is filled with top class academics who know the flaws in the textbook theory. Yet they are very poor at staging strong push backs against the Hooverite opinions being thrown up by the opposition. More importantly they have failed to disabuse the media of its wrong headed thinking.
This recession is diabolically bad. It’s trajectory is scarily like that of the Great Depression. We are nowhere near safety. Any debate about the ‘failure of stimulus’ should be thoroughly and totally thrashed. We simply should not be having discussions about this.
On the contrary: we are most likely going to need further stimulus.
There are signs that the administration is slowly realizing this and is trying to set the ground rules for what will, at the current rate, be a very tough argument to make. Why else would Joe Biden make his inane comment last weekend that the recession was ‘worse than we thought’?
Excuse me. But ‘we’ thought the world could end. I don’t know how it could have been worse. Only someone avoiding reality for ‘political’ purposes could have failed to see the depth of what was then unfolding. Other ‘officials’ are repeating that Biden line. The only explanation I can offer for it is that they are trying to paper over the obvious weakness that the administration showed last January when it caved abjectly and could only get Congress to push through a $787 billion package, about $300 billion of which was known to be useless tax cut nonsense up front. They are now trying to argue that ‘no one’ could have foreseen that the current package was too small.
My father used to use the word ‘tosh’ to describe such ridiculous rubbish.
There were many very respectable economists arguing loudly that the stimulus needed to be much larger – Paul Krugman being the most well known. The administration was very well aware of the views of such folks at the time. It just chose, for those notorious ‘political’ reasons to ignore them.
So. Back to Darrell Issa.
I love his quote. It demonstrates just how much self-inflicted damage the administration has sustained. By being weak when it counted it made it much tougher to maintain the only plausible policy option we have for avoiding collapse. I also love the reference to Keynes: the economist who now stands as the only theoretician to follow. Why? Because all the rest have patently failed. They have been exposed as deeply flawed.
But we can forgive Issa: how would he know about the ongoing battle for the heartland of economic theory? The resurgence of ‘pure’ Keynesian thinking, and policies based upon his prescription, are the only remaining weapon we have. It is laughable to dismiss Keynes as ‘outdated and discredited’ just at the moment of his greatest triumph. Then again Issa is simply reflecting what he is told by the experts gathered around the right wing think tanks: they are bastions of neoclassical orthodoxy after all.
And that is the crux of the matter.
Somehow economic theory forgot the lessons of the Great Depression. Keynes, the real Keynes, was expunged from memory. What passed for Keynesian in the 1960’s and 1970’s was a cobbled together and heavily redacted version retrofitted onto neoclassical root stock – to make it acceptable to the free-market, deregulatory, anti-government economics establishment. Keynes would have disavowed it. If the hard line free market ideologue Milton Friedman can claim, as he did, ‘that we are all Keynesian now’ despite his revulsion for the core of the unadulterated version of Keynes, then we all should know that something is amiss.
So Darrell Issa may be right after all. The Keynesian theory he is objecting to is indeed ‘outdated and discredited’. That’s because it wasn’t truly Keynesian! Hyman Minsky tried to explain all this back in the 1970’s, but unfortunately no one listened.
By now I am sure your eyes have glazed over, so allow me one more bash at this. It really is important.
One of the great contributory causes to our current economic crisis was the failure of economic theory. It may sound odd, but it is true. That failure, which was completely anticipated by Keynes, has infected a generation or two of academics with wrong headed, and dangerous, thinking. They, in turn have advised politicians and media analysts. The consequence is that we have, for the past thirty years or so, pursued economic policies and have engaged in economic discussions, based upon false premises. Our entire elite has held to a world view based upon free market neoclassical dogma that is simply hollow under tight scrutiny. It fails completely under some circumstances. Unfortunately we find oursleves in those circumstances.
And the error is endemic: banks have developed risk models based upon bad theory. Regulators have applied rules created from bad theory. And the public has been misled into thinking that economists are competent to discuss the economy. Perhaps this latter point is the most weird to grasp: academic economists hew closely to a set of ideas that are literally ‘other worldly’ when studied closely. Yet they have ‘expert’ status. The public is entitled to view the economics profession as being capable of more than playing with abstract theories: they expect policy advice that helps avoid recessions. Even as recently as 2007 the neoclassicists [e.g. the Nobel Prize winner Robert Lucas] were crowing that the business cycle – the recession and recovery cycle – had been defeated by advances in economic theory.
What are they all doing now? They are defending that theory even in the face of this mother of recessions. Their credibility is shot through. And in their desperation they are feeding their political and media contacts a flood of disinformation about the one theoretician they fear the most: Keynes.
No wonder his name pops up in Issa’s speech.
Heck even my mother-in-law has been enquiring about who ‘this Keynes guy’ is. Since she only listens to standard Fox News reporting we know that Keynesian policies must be a hot topic, if only to be vilified.
This is truly Alice in Wonderland territory. You can be forgiven for being confused.
Something to think about as the stimulus debate, which should not be a debate, heats up.
