David Brooks does liberal economists a favor

Conservative NY Times columnist David Brooks does a favor for what he terms “Demand Side theorists” by setting out a clear argument (Personally, I rather like his term of “Demand Side theorists” because progressive arguments against conservative drug and immigration policies have long focused on the demand side of the equation). Someone recently got me all flummoxed by making the argument that John M. Keynes came out against high wages as a stimulus. That made no sense to me at all, but as I had no idea where that statement came from or was based on, I couldn’t really argue against it. So what Brooks did was to provide an antidote to the following problem:

Not long ago, Brad DeLong was wondering how is it we have lost the debate between stimulus to deal with a stalled economy and 15 million unemployed versus deficit hysteria and advocates of inflicting further pain on the jobless and budget strangled states.

The first screaming, blaring, blatant problem with Brooks’ column is:

But all schools of economic thought have taken their lumps over the past few years.

Incorrect. There were indeed many economists who failed to see an $8 trillion housing bubble, but the Demand Side theorists (Paul Krugman, Dean Baker, the afore-mentioned Brad DeLong and many others) got it entirely right and have absolutely nothing to apologize for or to be humble about.

The Demand Siders don’t have a good explanation for the past two years.

Dean Baker responds:

Hmmm, is that right? Seems to me that we have a very simple theory to explain the past two years. There was a huge bubble in housing that burst beginning in 2006. This led to a plunge in residential construction that cost the economy more than $500 billion in annual demand. In addition, the loss of $6 trillion in housing wealth, coupled with the loss of around $7 trillion in stock wealth, has cost the economy more than $500 billion in annual consumption demand.

Brooks again:

But it is certainly true that the fiscal spigots have been wide open. The U.S. and most other countries have run up huge, historic deficits. And while this has helped save public-sector jobs, we certainly haven’t seen much private-sector job growth.

Essentially, Baker’s argument is that the stimulus has worked precisely as the demand side theorists predicted it would, there just hasn’t been enough of it. Brooks then argues that the current deficit is historically burdensome and unsustainable. Erm, not so much (Baker again):

Even after a decade of accumulating debt at a rapid pace, the U.S. would still face a lower debt burden than countries like Italy do today. Italy is currently able to borrow in financial markets at very low interest rates. Projections for 2020 show that the debt burden of the United States would still be less than half of the current debt burden of Japan, which still pays less than 2.0 percent interest on its long-term debt.

Brooks then argues:

Higher deficits will make them [entrepreneurs in Racine and Yakima] more insecure and more risk-averse, not less.

This is an old argument and it’s never been a very good one. Problem is, the deficit has always been a very highly fuzzy, abstract argument. President Reagan constantly talked about the bad, evil, awful, no good deficit, but he had absolutely zero qualms about pushing it up through the roof when he thought that a gold-plated hunk of useless junk like SDI/Missile Defense needed to be built. No conservatives or Republicans objected, just as there were no discernible objections to G.W. Bush’s extravagant spending on things like Medicare Part D and massive tax cuts for the wealthy because deficits are just too vague and abstract a problem for anyone to really grasp. A Purdue University study of budgetary deficits and Turkey’s economic situation shows that the connection is actually quite weak, suggesting that deficits are a far greater political problem than they ever were an economic one.

Finally Brooks asks:

Are you sure your theorists are right and theirs are wrong?

To which Krugman responds:

Yes, I am. It’s called looking at the evidence. I’ve looked hard at the arguments the Pain Caucus is making, the evidence that supposedly supports their case — and there’s no there there.

Krugman has still further thoughts on economic stimulus involving the enormous amounts of cash that businesses are saving in money markets ($1.84 trillion), but not investing in ventures that would create employment. As someone commented: “Poor David is not just confused, he’s way out of his weight class.”

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