Saturday, November 5, 2011

Say What You Will About Supply Side Economics, At Least it's an Ethos

Tom Levenson, over at Balloon Juice, read this article, written by Adam Davidson of Planet Money, at the New York Times and asked someone to do a thorough Fisking of it. Well, it looks like that someone is me. For the uninitiated Fisking is when a blogger copies over another writers work into their blog post while adding their own comments debunking the original writers points. Without any further ado, lets dig in: 

The current economic downturn has been called a housing crisis, a financial crisis and a debt crisis, but the simplifying logic of the political season has settled on what is really more a result than a cause. We are now, according to nearly everyone running for office, in a jobs crisis. Every politician currently has a “jobs plan,” very often a list of vague proposals filled with serious-sounding phrases like “budget framework” and “regulatory cap” that are designed, for the most part, to mean both everything and nothing at all.

So far nothing too crazy in here. I wish he would point out that the Democrats' job plan is actually a number of specific proposals which independent economists agree will create a large number of jobs in a very short period of time. He gets around charges of outright mendacity with the phrase "very often". He also seems to be dismissing the idea that the fact that unemployment is hovering around 9% by claiming the "simplifying logic of the political season has settled on what is really more a result than a cause." Here, Mr. Davidson misses the point. Right now, we know what caused the Great Recession, but the important thing now is to get unemployment back to a reasonable level. If the financial crisis was something that happened several years ago, but unemployment was low, no one would care about it. The important thing right now is the very real jobs crisis.

Starting this week, I’ll be writing a regular column in the magazine that tries to demystify complicated economic issues — like whether anyone (C.E.O.’s, politicians, people running for the presidency) can actually create jobs. The fact is that creating them in a far-too-sluggish economy is practically impossible in our current capitalist democracy. No corporate leader is rewarded for hiring people who aren’t absolutely required. Most companies hire only when its workforce can no longer keep up with the demand for its products.

Evidently Mr. Davidson will be get to put out a column every week filled with poor economic analysis. Oh goody! The most striking thing about this paragraph is that Mr. Davidson actually stumbles upon the problem with the current state of our economy with this sentence:

No corporate leader is rewarded for hiring people who aren’t absolutely required. Most companies hire only when its workforce can no longer keep up with the demand for its products.

Right now, no one wants to hire, because there isn't enough demand. This is actually a relatively simple problem to fix. A large enough actor, or group of actors, in the economy simply need to give people money to spend. That's all demand is, people spending money on various products. This is central to Keynesian economics and it's really not all that difficult a concept to grasp. The part of this paragraph which is so incredibly wrong is Mr. Davidson's assertion that creating jobs in a sluggish economy is "practically impossible". Nothing could be further from the truth. It's actually easier for an independent actor (like the government) to create jobs in a sluggish economy than it is in an economy which is already operating at full employment.

Even with all the attention on hiring, the government’s ability to create jobs is pretty dispiriting, no matter who is in charge. The most popular types of jobs programs involve state tax breaks or subsidies that seek to seduce a company from one state to another. While this can mean good news for “business-friendly” states like Texas, such policies don’t add to overall employment so much as they just shuffle jobs around. This helps explain Rick Perry’s claim that more than one million jobs were created under his watch in Texas while the rest of the country lost more than two million.

Here is where Mr. Davidson's article really goes off the rails. While it's probably true that the most common types of "jobs programs" today come from individual states, and they do involve the things he describes, Mr. Davidson ignores the largest, and most successful jobs program implemented in the past few years. I am, of course, referring to the famous stimulus package. This package came with a price tag of about $800 Billion. Maybe Mr. Davidson has heard of it? Contrary to what many Republican politicians would have you believe the stimulus actually did exactly what it was advertised to do; it created between 2 to 3 million jobs. That's pretty fantastic. Why Mr. Davidson doesn't mention the stimulus bill, I don't know. It was only the largest most successful job creation effort in recent memory. Surely that would have some bearing on his central argument that no one can do anything about jobs. As to the other jobs programs Mr. Davidson rightly dismisses, this is what economists refer to as chasing smokestacks, and it's generally regarded as a bad idea.

The federal government does something similar when it decides, for instance, to regulate oil drillers and subsidize windmill makers. Such a policy might help the environment but it just moves jobs from one sector to another without adding any. And while both Perry and Mitt Romney propose that further oil and gas drilling in the U.S. will transform the jobs picture, only 30,000 Americans work in oil and gas extraction, and about another 125,000 in support occupations. With more than 25 million Americans unemployed or underemployed, it’s unlikely that any changes in that part of the energy sector would make a real dent.

Here Mr. Davidson makes a good point. The government won't get us out of this problem by catering to any one particular industry. The problem with his analysis though lies in his first sentence. Why does he think that the regulation and subsidy have to be exactly equal to one another? Why can't we ignore the oil industry for now and just subsidize windmills? Wouldn't that create jobs? This is never addressed. It is just given as fact that regulations kill as many jobs as we can subsidize.... for some reason.

One reason we have so few ideas about job creation is that up until recently, the U.S. economy had been growing so well for so long that few economists spent much time studying it. (They’re trying to make up for it now. See this chart.) With no new theories, Democrats dusted off the big idea from the Great Depression, John Maynard Keynes’s view that government can create jobs by spending a lot of money. The stimulus, however, has to be borrowed, and it has to be really, truly huge — probably something like $1.5 or $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels. The goal is to goad consumers into spending again. And President Obama’s jettisoned $400 billion jobs package, hard-core Keynesians argue, is nowhere near what it would take to persuade them.

And now we reach the paragraph that convinced me to undertake this project in the first place. There are so many bad arguments in this paragraph it's hard to know where to start. First of all, Mr. Davidson dismisses Keynesian economics basically by saying it's too old to be any good. Seriously? That's an argument worthy of a column in the Times? That's like saying Einstein's Theory of Relativity doesn't hold up because he came up with it back before World War I. Just like the Theory of Relativity, Keynes's ideas have been expanded upon in the intervening years, but even so, the basic idea, that government can create jobs in a recession, is as true today as it was 80 years ago. In the next sentence, Mr. Davidson seems to be complaining that a Keynesian solution would be too expensive. Note that he doesn't actually claim it wouldn't work, just that it would cost lots and lots of money. Never mind that right now the US can borrow money at historically low rates, fixing this problem would cost too much. Sorry poor people! Guess you'll just have to suck it up. I would also like to point out that Mr. Davidson mentions that President Obama "jettisoned" his jobs plan. He didn't just give up on it. Republicans kept it from even coming up for a vote. There's a big difference.

Many Republicans follow the more fiscally conservative University of Chicago School, which argues that Keynesian stimulus can’t heal a sick economy — only time can. Chicagoans believe that economies can only truly recover on their own and that policy interventions only slow the recovery.

First of all, Mr. Davidson seems to be making the Chicago argument in his column. Remember earlier when he said it's "practically impossible" for anyone to create jobs? That's the Chicago School's position. The Chicago School is based in Austrian Economics, which is the nihilism of the economics profession. The Austrian way of thought, in a nutshell, is that everything must be deduced, and nothing can be proven by empirical evidence. Since no experiment or data set can ever hope to be comprehensive, no data can ever prove anything. In this way, Austrian Economics can be neither proved or disproved, and is therefore worthless. Say what you will about Supply Side Economics, at least it's an ethos (hey, that's the name of this post!). 

It’s a puzzle of modern politics that Republicans have had electoral success with a policy that fundamentally asserts there is nothing the government can do to create jobs any time soon.

It's not a puzzle. It's really, really not. In fact, modern political science predicted that Republicans would win this last election considering the fact that the Democrats were presiding over a period of poor economic growth. The explanation really is that simple. Also, the Republicans used Mediscare tactics that got seniors voting for them in bigger numbers than ever before. This really isn't a big mystery, and Mr. Davidson is wrong to make it seem like it is.

Of course, Romney, Perry, Herman Cain and the rest won’t come out and say, “If elected, I will tell you to wait this thing out.” Instead, Republican candidates fill their jobs plans with Chicagoan ideas that have nothing to do with the current crisis, like permanent cuts in taxes and regulation. These policies may (or may not) make the economy healthier in 5 years or 10, but the immediate impact would require firing a large number of America’s roughly 23 million government workers.

How bad might that be? The U.K., as part of its austerity measures, is in the process of firing about a half-million government workers under the notion that the private sector would be so thrilled by low taxes and less regulation that it will expand and snatch up all those laid-off public servants. But this plainly isn’t happening. The British economy continues to grow slowly, if at all, and few former government workers have found new jobs in the private sector.

Hey, these arguments are actually correct! And they're basically Keynesian economics! What a strange coincidence considering the fact that Mr. Davidson dismissed Keynesian economics just a few paragraphs ago... It's almost like he has no idea what he's talking about.

Keynesians and Chicagoans, however, do agree on two important points. First, in economics, unlike politics, there’s no middle ground: You can’t simultaneously cut and increase government budgets. The only shot we have at truly transforming our economy is a one-party sweep in the 2012 elections that would lead to radical legislative changes. Still, either path — lots more debt or lots of fired government workers — will only inflame more Americans.

Somehow I doubt Americans will become inflamed if there's a lot more debt, but low unemployment. The deficit is only something Americans really only care about when times are tough and it's used as a scapegoat for the country's problems. Debt exploded throughout the first half of the '00s and no one seemed to care. As Dick Cheney famously said "...deficits don't matter."

The second area of agreement is the most important: an economy is truly healthy only when its people know how to make and do things that others will pay them a decent amount for. Jobs, in other words, are not the cause of a healthy economy; they’re the byproduct. And that’s another thing most national politicians know but will never say.

Ah, here we go. More Austrian arguments. You see, the problem right now is that not enough people know how to do anything useful. But five years ago they did I guess, since we were running at (or close to) full employment. What happened in the intervening time period? Mr. Davidson can't be bothered to say. But it was obviously very important if it left so many people completely useless!

So perhaps instead of (or, at least, in addition to) arguing over plans that aren’t going to happen, we should focus on what almost certainly will come true. 

And why aren't these plans going to happen? Oh yeah, Republicans. That really can't be said enough. The Keynesian plans which would actually work aren't happening because Republicans have created historic levels of obstruction. But Mr. Davidson never mentions that in his post. Not once.

The economy that emerges from this recession is going to be different. Without the distortion of a credit bubble, it is clear that far too many Americans don’t know how to do anything that the world is willing to pay them a living wage for. No economic theory offers them easy salvation.

Here's where Mr. Davidson gets really nihilistic. He is promoting the theory that the problem with our economy is structural rather than cyclical. The problem with the structural theory is that there was a massive change in unemployment in a very small period of time. What could have caused this change, which would leave so many workers with useless skills? This immense force is never really explained by the structuralists.

We don’t need to become a nation of app designers. An economic downturn is a great time to learn things — carpentry, say, or aerospace engineering — that others will eventually pay for: high-school dropouts should get their degrees and a year of specialized training; high-school grads who can’t afford a four-year school should get a community-college degree. Life will be tougher for liberal-arts majors if they don’t get training in how to apply a humanities education. Those who can’t find a job where they live should consider moving to places where there are more jobs than applicants — the Dakotas, Nebraska, Wyoming.

"An economic downturn is a great time to learn things"? Really? That must be very comforting advice to those who can't find work. "Hey, Adam, I haven't been able to find a job and I can't afford food for my kids. What should I do?" "Have you thought about learning how to carve a door frame?" **Blank Stare** I also like how he throws in a little hippie punching in the middle there, taking a shot at liberal arts majors. It's his last bit of advice that may be the worst though. You should just uproot your family and take them to some state where they have more jobs than applicants! Of course, how simple! What he never mentions though is that the populations of those states are tiny, and the number of jobs equally so. For instance, if everyone who's unemployed in Nevada took his advice and moved to those states, they would quickly be overwhelmed. Also, the job growth there comes largely from the petrochemical industry which he dismissed earlier in this very column. Way to do the research Davidson!

When this crisis ends, we’ll also be faced with other deep problems. Our tax code is a complex mess; we need a more effective education system; it’s hard to picture a healthy United States in 2050 without some major change in health care. Unlike the short-term jobs crisis, these are areas where we can find compromise. Let’s not do what we usually do by spending the bad times arguing over things that won’t happen and the good times ignoring the things that should.

Now Mr. Davidson is worried about 2050? Also, someone should tell him about the Affordable Care Act. It's something the Democrats pushed through a couple years back which starts to address the health care system. As he may (or may not) remember, there was a highly contentious fight around even simple reforms to Medicare, so his argument, that these are areas we can find compromise, is laughably wrong. Maybe he's been on vacation or something, but in the past few years the Republican party has gone so far off the deep end that compromise is no longer in their vocabulary.

[End Fisking]

It's disappointing that something of such low caliber was published in the New York Times. Nowhere can I see any substantial economic arguments. Mr. Davidson only dismisses both sides, which probably makes him feel good about himself, but does nothing to advance the actual conversation. His argument against Keynesian economics is that the founder is too old, and also it's very expensive. His argument against the Chicago School is that no one will like it (then he embraces the idea that there's nothing we can do to create jobs). All in all, this is a very poorly argued piece that does nothing but chide both sides about what they're doing wrong, while offering no actual solutions to the very real problems millions of Americans face.