Nobel Prize winning economist Paul Krugman’s existence in the popular consciousness largely rests on ideological antagonism.  Krugman’s infamous September 2009 New York Times Magazine editorial, “How Did Economists Get It So Wrong?“, attacking University of Chicago’s John Cochrane and others, was the “Hit Em Up” of economic policy debate.

“How Did Economists Get It So Wrong?” is noted for, among other things, resurrecting the terms “saltwater economics” and “freshwater economics”, and thereby grossly oversimplifying the way economics is discussed in the public sphere and in government.  The two terms originate from 1970s discussions of economic modeling methodology vis-à-vis the rational expectations assumption.

The “saltwater” school was based largely at Harvard, MIT, Princeton, Berkeley, and other coastal schools, and supported the Keynesian-Neoclassical synthesis belief that both monetary and fiscal policy can be used effectively as economic stimulus.  The “freshwater” school consisted largely of economists from the University of Chicago, Carnegie Mellon, the University of Minnesota, and the University of Rochester who rejected the prevailing Keynesian-Neoclassical synthesis and aspired to show quantitatively that monetary stimulus is preferable to fiscal stimulus measures such as jobs creation.  Both groups generally support monetary stimulus, and have found commonality there.

Nevertheless, Krugman’s renovation of the terms for popular consumption on his blog, The Conscience of a Liberal, suggests two irreconcilable and antagonistic schools corresponding to two irreconcilable and antagonistic political parties: one urbane and sophisticated, one backwoods and boorish.  In Krugman’s world, neither heterodox economists nor heterodox politicians can work together to solve problems honestly.  This is hackery.  In reality, the economics discipline is a nuanced conglomeration of disparate ideas.  The unholy marriage of economics and partisan politics which Krugman represents only threatens to undermine the credibility of economics as rational discourse on human behavior.

Krugman recently wrote a blog post, Antipathy to Low Rates, in which he stereotyped his opponents, associated the stereotype with something unpleasant, and then quoted people he doesn’t like as representative of his odious caricature to discredit them.  This is an unacceptable rhetorical device called a straw man which charlatans (and Nobel Prize winners apparently) use when their premises cannot be built on any logical foundation.  Krugman quotes (the dead) F.A. Hayek (way) out of context to characterize today’s opponents of further stimulus as ideologues:

(Krugman:) And Hayek found it

(Hayek:)…still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.  If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.  The only way permanently to ‘mobilise’ all available resources is, therefore to leave it to time to effect a permanent cure by the slow process of adapting the structure of production.

(Krugman:) These days, relatively few economists are willing to say straight out that they regard persistent high unemployment as a good thing. But they find reasons to oppose any and all suggestions to use government policy — including monetary policy — to alleviate the slump. Same as it ever was.

Krugman knows that Hayek was not supporting “persistent high unemployment”, yet here he suggests that Hayek’s opposition to the New Deal was born out of certain disregard for the struggles of the poor.  On the contrary, Hayek’s opposition to stimulus lay in the understanding that the negative externalities of using policy to redirect such a large portion of the economy towards unproductive pursuits would ultimately snowball, and the economy would rot from the inside.

Krugman also conflates the very different oppositions to fiscal stimulus of the Austrian (Hayek) and Monetarist (Friedman) schools respectively.  Austrian economists generally oppose both fiscal and monetary stimulus on the grounds that prices convey information about the relative scarcity of goods.  To interfere with the price mechanism results in consumers making irrational decisions, widespread malinvestments, and bubble economies.  Monetarist opposition to fiscal stimulus is grounded in the idea that both fiscal and monetary policy can be used to the same effect, monetary policy is more efficient and therefore is preferable to fiscal policy as mechanism of stimulus.  In short, Keynesians and Monetarists want to steer markets.  Austrian economists want them set free.

Before this takes on the characteristics of a Krauthammer editorial: economic theories must have demonstrated predictive power to be considered legitimate.  It is often said that World War II, and not the economic growth of the late 1930s, vindicated Keynes.  However, it is more appropriate to say that the war interrupted and contaminated the Keynesian experiment.  Hayek believed that too aggressive policy had progressively distorted consumer preferences throughout the 1920s, only to be met with expansions of credit to further fuel ten years worth of central planner tinkering and malinvestments.  The economy was suddenly and viscerally refocused on reality in 1941 in the form of an economically overwhelming war effort.  Were it not for the war, perhaps only one of the two theories would be standing today.

Keynes believed that, if the war had never happened, the economy would have continued growing steadily, government planners would have compensated for New Deal stimulus during subsequent boom periods, and the economy would ultimately return to equilibrium with the number of people negatively affected by the natural trough of the natural business cycle minimized.  Perhaps he was correct.

Hayek believed that, if the war had never happened, New Deal stimulus would have continued to imperfectly direct production towards probably value-less pursuits, government planners would grow complacent and forgetful during subsequent boom periods or that there would be a change in policy as the result of electoral replacement, and America would suddenly discover that, instead of using the bust to clean house and purge unproductive entities, it had merely prolonged a disaster made worse by the further concentration of economic power in either corporate or government hands.  Perhaps he was correct.

Whatever shape the economy was in when the United States entered World War II, whether steady recovery as Keynes hypothesized, or deceptive crash course as Hayek hypothesized, this all changed when the nation’s resources were redirected towards the (very real) war effort.

World War II was effectively a reset button, and for this reason, economists still remain divided on the efficacy of intervention.  Paul Krugman at least knows this, and despite the need to pander to his audience, should not assume malicious intent, indifference to the struggles of the poor, or stupidity in those with whom he disagrees on the efficacy of interventionism.  Paul Krugman should stop being a ringmaster and go back to being an economist.

Today, as we in the United States debate the merits of additional stimulus measures and watch asEurope vascillates, intellectual honesty takes on a new importance (as if it wasn’t important before).  One doesn’t have to agree with Hayek to value his insight.  One doesn’t have to agree with Krugman to know he’s one of the brightest minds in economics.  But there is room for economists and non-economists alike to disagree amicably, recognize the absurdity of orthodox opinions on stimulus, realize there is a trade-off, and work together to effectively solve problems in pragmatic and dispassionate ways.

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David Brooks is mostly making sense in his latest column. He’s absolutely correct that more and more indiscriminate stimulus spending is a dubious economic fix at best, and has long-term implications including new unfunded ‘temporary’ government programs and a bailout for public workers while the private sector continues to suffer. He’s right that more debt now means higher taxes later.

Likewise, his ideas to keep extending unemployment benefits and to create a ‘Race to the Top’ for states enacting budget-balancing measures are both decent. I would add that the federal government probably ought to take over Medicaid, which it could manage much better and more efficiently than state governments, and which would free up much needed state funds for other programs. There is really no reason Medicaid should be a state-based program to begin with.

However, toward the end Brooks wades into the vague middle-ground waters of easy moderation. “Focus on the fundamentals,” he writes, in an imaginary address to the Leader of the Free World. “Cut programs that don’t enhance productivity. Spend more on those that do. You don’t have the ability to play the economy like a fiddle. You do have the ability to lay some foundations for long-term growth and stability.”

Now, why didn’t I think of that? Spend less on bad programs, and more on good ones! You taking notes, Mr. President?

I realize that the Op-Ed column is not the best place for in-depth policy suggestions – but still. Brooks can do better than this. To spend the bulk of an Op-Ed criticizing the proponents of stimulus for being too vague in their solutions, too sure of their ideas, and too reliant on dubious models, and then to end on such a murky, indefinable note is a bit unsatisfying. Not as unsatisfying as the end to Blazing Saddles but not anything to brag about either.

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I would probably describe myself as a libertarian conservative. I’m pretty sympathetic to the ideas of limited, decentralized government, free markets, and a decent respect for history and the culture. One thing I can’t muster, however, is the righteous certitude that seems to characterize so many critics of this Administration. Take, for example, this editorial on the stimulus from The Washington Examiner:

Today nearly a year later, unemployment stands at 10 percent. The actual total is closer to 17 percent when you include people who gave up after months of fruitlessly searching for work. The Obama stimulus program has become the butt of jokes on late-night talk shows, thanks to revelations by this newspaper and others of the phantom nature of more than 100,000 of the 640,000 positions claimed by Obama to have been created or saved, as well as revelations about jobs saved or created in congressional districts and ZIP odes that don’t exist.

Now along comes the Associated Press with a detailed study of whether the Obama stimulus program had any measurable effect on the construction industry. The AP study was reviewed by economists at five universities. Here’s what AP found: “Ten months into President Barack Obama’s first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry,”

–

Despite the evidence that federal stimulus spending does not do what its advocates promise, Obama and his Democratic allies who control Congress are determined to take another whack at the taxpayers by passing a second stimulus program, the $75 billion Jobs for Main Street Act that will spend most of its funds on — what else? — construction projects. The House approved the proposal in December on a narrow 217-212 vote, and the Senate is expected to take it up later this month. The basic reason government stimulus spending doesn’t work is this: For the government to spend $75 billion in one part of the economy, it must first take $75 billion out of the economy somewhere else. There is another name for this process — robbing Peter to pay Paul.

You’ll excuse me if I don’t find the folk economics of The Examiner’s editorial staff – “robbing Peter to pay Paul” and all the rest – terribly persuasive.

For starters, their agenda is transparently obvious: Make things seem really bad by citing a few out-of-context numbers and then suggest the stimulus – rather than, say, a terrible economic climate – is to blame. Never mind the fact that the 17 percent unemployment rate they point to is taken out of context and wildly-inflated. Never mind the fact that botched local jobs or faulty record-keeping are indictments of individual projects, not the economic logic of counter-cyclical government spending.

The rest of the editorial is hardly better. The widely-cited AP study on construction stimulus funds is, of course, a lot more complicated than The Examiner’s editorial excitedly makes it out to be. The construction industry – the actual source of the study’s data – called the AP’s conclusions “fundamentally flawed.” As for The Examiner’s contention that “federal stimulus spending does not do what its advocates promise,” the notoriously-liberal American Enterprise Institute seems to think the bill worked pretty well: “. . . substantial support from fiscal stimulus, coupled with inventory rebuilding, boosted real GDP growth in the second half of the year to an estimated 3 percent annual rate. Without fiscal stimulus and inventory building, however, growth would have remained negative–an ominous fact because the fiscal stimulus will fade rapidly by mid-2010.”

None of which is to say that the stimulus was an unqualified success. None of which is to say that liberals aren’t guilty of similar bouts of self-righteous back-slapping.  But as someone who tends toward conservative outlets, I’m shocked by frequency of similar proclamations, which seem more akin to religious mantra than anything approaching sober analysis (Shelby Steele’s latest op-ed immediately comes to mind: “But where is the economic logic behind a stimulus package that doesn’t fully click in for a number of years?” I don’t know about the logic of the stimulus package, Shelby, but I sure as hell wouldn’t turn to someone who “specializes in the study of race relations, multiculturalism, and affirmative action” for macroeconomic analysis).

In the wake of an incredibly disorienting collapse that defies just about every facile ideological diagnosis, I don’t find absolute certainty all that attractive anymore. Call me a squish or a bad team player or someone who’s unwilling to take sides when the chips are down, but the Great Recession of ’09 has shaken my faith in dogmatic economic analysis of just about any stripe.

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In his 20 years in the business, salesman Mark Sauer has never had a tougher time finding inexpensive used cars. “It’s never been this bad,” said Sauer, buyer and sales manager of Vaccaro’s Auto Buyers of Reading, 805 Hiesters Lane. The trend is occurring nationally as well. The Manheim Used Vehicle Value Index reported that prices reached record highs in September. The consulting firm that publishes the index blamed low inventories. That’s bad news in Berks, where many shoppers seek inexpensive, used vehicles, especially during difficult economic times, said George Tabakelis, general manager of Perry Auto Service & Sales on Route 61 in Perry Township. **** “You used to be able to find a decent car for $2,500, and you can’t anymore, especially in the past two months,” said Arie Garcia, the association’s office manager. Another problem is that used-vehicle prices have quickly risen above their book values, making it tougher for customers to secure financing, Garcia said. “Cash for clunkers really hurt the used-car industry,” she said. “I think it hurt more people than it helped.”

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Like Brad DeLong, I’m a bit puzzled by Bill Galston’s theory that adopting “a meaningful shift toward fiscal restraint” would be a good strategy for the midterms. People say they want this, but I can only assume that’s because people think such a shift would improve the economy. In fact, it wouldn’t. If Democrats implement policies that tank the economy, running around the country saying “well it polled well a year ago!” isn’t going to help them.

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I knew they’d find a way to punish Ford: The new UAW contract with Ford apparently does not give America’s surviving non-bankrupt automaker parity with GM and Chrysler, reports Bloomberg: “The plan doesn’t include cuts to retiree benefits, such as vision coverage, that were granted to GM and Chrysler.” Rather, the pain seems even more concentrated on future hires (if there are any) than with the GM/Chrysler deals. … TTAC wonders whether the UAW had an extra incentive to resist giving concessions that might make Ford more successful now that the union owns a large chunk of its main domestic competitors. [emphases original]

Yes, now you have the UAW and the government as stakeholders in GM and Chrysler, while members of the UAW work for Ford.  This certainly seems like an awkward situation.  Writes Joyner:

It is, to say the least, problematic for a labor union to own competing firms.  But to the degree that the conflict of interest hurts Ford’s UAW employees, they could presumably divest and start a new union.

The real issue is the antecedent to this situation:  The federal government picking winners and losers between firms.  The federal taxpayer bailed out two of the Big 3 and now has powerful incentive to assure the success of those two companies at the expense of the third.  Not only is Ford much less likely to get government contracts now but they’re much more likely to come under higher regulatory scrutiny.  That they also have a more hostile union — one that no longer ultimately needs them to stay in business — is mere icing on the cake.

Picking favorites is key here.  This is what happens when the government intervenes in the markets to the advantage of specific corporations or special interests.  Unlike a stimulus check cut for every American to spend as they please, this sort of bailout rewards failing companies and punishes the one US automaker that was actually not in trouble.  Intentions aside, this seems pretty antithetical to capitalism and fairness and how we ought to be running our economy.

Now walk over to health care for a moment.  We hear a lot about insurance companies – and sure, they’ll make out pretty good under the new legislation, since it doesn’t require them to really compete any more than they do today – but what about Big Pharma?  And we know that the big unions are opposing any move to wrest health insurance from employers – even though liberals and conservatives alike think that’s the only way to really reform our muddled system.  So we can rest assured that the unions will be winners, too.   So let’s see, that’s Big Pharma, Big Insurance, and Big Labor in the Winners Column.

Who should we put in the Losers Column?

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Consumer debt is high, and with plummeting home values, rising unemployment, and falling wages, the road to recovery is hardly obvious.  We may be in something of a balance-sheet recession, but I think it goes beyond that, and it’s made all the worse by the housing burst.  As consumer spending continues to fall – due both to people hoarding over uncertainty, to lost equity, and to people paying down personal debt – so does employment.  As employment falls uncertainty rises, consumer spending drops off, and we find ourselves in a spiral.  Decreased spending leads to higher unemployment leads to decreased spending and so on and so forth.  Furloughs and wage cuts force people to limit spending, which leads to more furloughs, more wage cuts, and increased unemployment.  It goes on and on.

At this point, Keynes would argue that the government should intervene – that it should replace consumer spending with government spending in order to keep employment numbers high.  When the spiral is ended, and spending and employment have returned to normal levels then the government will have served its purpose.  Business as usual can resume.

As Posner writes:

An ambitious public-works program can be a confidence builder. It shows that government means (to help) business. “The return of confidence,” Keynes explains, “is the aspect of the slump which bankers and businessmen have been right in emphasizing, and which the economists who have put their faith in a ‘purely monetary’ remedy have underestimated.”

Of course, there is the question of revenue:

But for a confidence-building public-works program to be effective in arresting an economic collapse, the government must be able to finance its increased spending by means that do not reduce private spending commensurately. If it finances the program by taxation, it will be draining cash from the economy at the same time that it is injecting cash into it. But if it borrows to finance the program (deficit spending), or finances it with new money created by the Federal Reserve, the costs may be deferred until the economy is well on the way to recovery and can afford to pay them without endangering economic stability. When investors passively save rather than actively invest, government can borrow their savings (as by selling them government bonds) and use the money for active investment. That is the essential Keynesian prescription for fighting depressions.

Now all of this makes sense to me, though I worry about two points.  First, it is very difficult to scale back government spending once the floodgates are open.  Government, like any other enterprise, is loathe to scale back for both good and bad reasons.  It’s one thing for the state to step in to keep employment numbers afloat (though our current stimulus doesn’t seem to be doing that) and quite another for the government to indefinitely replace consumer spending with public spending.

At some point deficit spending is unsustainable, and so higher taxes are required – which has a negative “draining” effect on the economy.  (I’m not against returning tax rates to the very reasonable rates of the late 90′s, but there is always the temptation to just keep raising taxes to keep up with increased spending.  At a certain point tax increases will harm productivity which will, ironically, cause revenues to fall.)  Add to this all the other government efforts, from two wars to health care reform to efforts to save the world from global warming, and it’s increasingly tricky to see how we can sustain any government financed recovery short of outright plunder.

I’m not sure if public works are the best stimulus either.  Certainly they can be excellent job creators over the long haul.  An ambitious high-speed rail or interstate project, for instance, would create many jobs but would not do so quickly.  The bonus to the infrastructure and to long-term employment would be tangible, but in the immediate do very little.  Direct payouts to consumers might make more sense – though if we are indeed in a balance sheet recession, that money would likely be spent on paying down debts rather than buying more stuff – which isn’t a bad thing, but isn’t particularly stimulating either.

In any case, to put it all bluntly, I remain somewhat agnostic on the stimulus, on the proper path forward, and on many of these big economic questions.  I’m trying to frame this through Bastiat’s broken window, but the “seen” and “unseen” remain elusive.  Absolutists on both sides of the aisle harangue us with empty words and hollow ideological arguments – either too confident in the abilities of government to save us, or too utterly certain that it is government itself at the root of the mess.  To be perfectly frank, I’m just not sure.  I imagine there’s some truth in all these claims.

And now for some South Park to help frame the debate.  The whole episode can be seen at South Park Studios.  The last bit (not shown below) has Kyle taking a fairly straightforward approach to consumer debt – a sort of jubilee, if you will.

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First, cars are too expensive.  Basically all the “basic” models were sold-out by the time we got there.  So the Honda Civic advertised at $7999 after discounts and the government rebate – well, there was nothing even close.  The lowest we could get anything was about $14,000.

Second, cars are too fancy for the regular buyer.  These cars are all chalk-full of extras: Blue Tooth; storage organizers; plush interirors; stereo-systems; fancy bumpers; computers and navigation systems.  I don’t want any of this stuff.  I want a car, damnit.  One that runs and doesn’t cost me a fortune.  Preferably one that isn’t so computerized as to be almost entirely inaccessible to a mechanic or tinkerer without a diagnostic computer.  I want durability.

Third, this program’s success speaks directly to the price and fanciness of new cars these days.  If car companies want to sell more cars, they need to start selling more cars that are at least $4500 cheaper.  Basic models with no frills, brand new off the lot for six or seven or eight thousand dollars.  They don’t need to be super fuel-efficient, though that wouldn’t hurt.  (I’m all for bringing back diesel, myself.)  If car makers want to see their numbers go up, they need to manufacture cheaper vehicles.  They won’t always have the government around to offer cash for clunkers.

I think we’ll just go buy something used and sell our P.O.S. to the highest bidder.  A friend of ours recently went out and bought a 95 Civic because it was pre-computerization and he wanted something he could work on himself that got good gas mileage.  Unfortunately it doesn’t have AC.  And he lives in Phoenix, AZ.

Note: I never considered an “American made” vehicle at any point and still don’t.  Both my current cars are “American made” and they’ve convinced me to go Asian this time.  We’re thinking Subaru for the AWD.  That’s another point that can’t be made enough – not only are these cars too expensive, they’re often far less reliable than they should be.  Back to the basics!

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Michelle Malkin, donning the unquiveringly brave voice of the people, writes:

The opposition will not be silenced.

Right, until the opposition happens to be those protesting unnecessary wars or disgraceful acts of torture.  Then said opposition is “un-patriotic” and defeatist.

I’m sorry, this little charade is just too much for me.  This guy, for instance:

Yeah, where were you the last eight years?  Where was your “ethics and honor?”

In any case, here we see the new face of GOP populism once again.  The boggart is out of the bag.  The fiscal conservatism dragon has woken from its long sleep.  Now is the time for snarky signs and sarcasm, with the economy in tatters, with two wars still on, with record job losses.  No introspection needed.  Just bring out the attack dogs and let them do their worst.

UPDATE:  The chart below is via Balloon Juice.  John Cole writes:

And none of these graphs include the violence done to the budget in the last year of the Bush administration. Long story short- even during the years of Republican Jesus Ronald Reagan, Republicans were never “fiscal conservatives.” It took me some time to come to terms with it, too, because I deified Reagan with the best of them and still have my ‘Peace Through Stregnth’ buttons from the 80’s, but you just can’t argue with the facts.

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