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    Macroeconomics 101: Spending versus Stimulus II or "Who's Afraid of Amity Shlaes?"

    The following passage is from one of my all-time favorite books.  The book is Carl Sagan's The Demon-Haunted World, which was published the year that he passed, 1996.  The passage is found in the book's second chapter, Science and Hope.  In my edition, it begins at the bottom of page 36 and continues onto page 37 thusly:

    At a dinner many decades ago, the physicist Robert W. Wood was asked to respond to the toast, "To physics and metaphysics."  By "metaphysics," people then meant something like philosophy, or truths you could recognize just by thinking about them.  They could also have included pseudoscience.  Wood answered along these lines:

    The physicist has an idea.  The more he thinks it through, the more sense it seems to make.  He consults the scientifics literature.  The more he reads, the more promising the idea becomes.  Thus prepared, he goes to the laboratory and devises an experiment to test it.  The experiment is painstaking.  Many possibilities are checked.  The accuracy of measurement is refined, the error bars reduced.  He lets the chips fall where they may.  He is devoted only to what the experiment teaches.  At the end of all this work, through careful experimentation, the idea is found to be worthless.  So the physicist discards it, frees his mind from the clutter of error, and moves on to something else.

    The difference between physics and metaphysics, Wood concluded as he raised his glass high, is not that the practioners of one are smarter than the practitioners of the other.  The difference is that the metaphysicist has no laboratory.

    This is at least part of the problem in macroeconomics, though it is not the fault of the macroeconomist.  Would that there was such a lab, because then we could perhaps avoid all of the sound and fury of recent weeks.  Instead, we live in a society where people like Paul Krugman, who is well-educated and established in the field of economics, not to mention recently recognized by those prestige-bestowing Swedes, is placed alongside someone like Amity Shlaes.

    Amity Shlaes is everywhere, including the Daily Show and NPR.  She's like the Tom Joad of depression-era historical revisionism.  She has a BA in English.  She's married to the guy who founded the New York Sun.  Somehow, this qualifies her to be a "senior fellow" over at the CFR, for those of you who take that sort of thing seriously.  However, she is not now, nor has she ever been, an economist.  She does not have an education in economics and it shows.

    She has no shortage of economic dogma though.  This low-calorie Ayn Rand has been leading the recent charge to make sure that everyone knows that the New Deal did nothing to ease the economic woes of the day and may have actually made things quite a bit worse.

    Part of what's going on here is one of my top-five pet peeves, which is what modern media hacks pretend is journalism.  It's a practice that goes something like this: "Hmm.. Krugman's an economist, but he's also a liberal, so we need someone who's not a liberal to say the opposite of what he's saying.  That way we can stand guard as referees and look very serious and concerned and impartial and no one can have cause to call us bad names like liberals or weenies or liberal weenies, especially not from the ivory tower of AM radio."

    The other part of what's going on is described in the passage I've quoted above.  Macroeconomics deals with the interactions of whole nations of people over large periods of time.  It's quite possibly one of the most damnable things to try and understand.  It's also a field that's been more philosophical, and frequently treading into the nakedly ideological, in its origins, only recently getting beyond immature theoretical constructs like purely rational agents and perfect information.  Again, this is not because macroeconomists are not smart, but rather because this is the best they can do sans ideal laboratory conditions.

    This does make it more difficult for the average joe to tell who is or isn't making shit up wholesale, but it nevertheless leaves us with the equivalent of putting Brian Greene up on the television screen next to Gene Ray from timecube.com.  That would look a little something like this:

    "Mr. Greene, you're a popular explainer of contemporary physics, but today we have Mr. Ray with us, who has his own theories.  Mr. Ray?"

    "YOU ARE EDUCATED RETARDED I POSSESS CUBIC WISDOM OF NATURE'S HARMONIOUS TIME CUBE MEANING FOUR SEPARATE DAYS IN ONE EARTH'S DAY ROTATION."

    "That's very interesting, Mr. Ray.  Mr. Greene, would you care to comment?"

    "Please kill me."

    You get the idea.

    Of course, Krugman is occasionally willing to talk a bit over some heads in his lay writings.  So, nevermind the fact that there's essentially a universal consensus, if at least partially theoretical, on spending being more stimulative.  Nevermind that you can't find a serious economist to refute this (sure, Stephen Moore will do it).  It really doesn't matter because you can put Amity Shlaes on every televsion and radio program in the country and she'll say what they won't and no one, not even the venerable Neil Conan, will go to any lengths to point out that she's as qualified to analyze economic histograms as she is to analyze the water vapor content of the Martian atmosphere.

    Apologies to my fellow Dagger, Deadman, but spending is stimulative.  You rightly note that we can quibble about the details of implementation, about the long-term effectiveness of various tranches, but to flatly say that spending is not stimulative puts you in company with the likes of Laura Ingraham.  These are the same people who don't want to spend money on education, despite a Congressional study that discovered that every dollar spent on education under the GI Bill came back to the economy seven times over.

    The worst part about our system is that people who are obstructing action, the people willing to tirelessly flog others with their expired ideology, will not count themselves among the over half a million newly jobless in January.

    Welcome to February.

    PS - You're not really supposed to love the bomb.  Kubrick didn't either.

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    Comments

    Nice post, as usual. Did you see today's NYT article about Japan's experience with stimulus? The closest thing that you can get to a laboratory in economics are historical parallels, and Japan is the only example of heavy stimulus spending by an industrialized country in the past few decades.

    I have to say that while I get that Japan might not have done stimulus in an effective way and that their stimulus may have had more of an effect than was realized, it disturbs me that they remained mired in recession for a decade despite massive infrastructure spending.


    Krugman addressed this very topic on Morning Joe.  According to him, it's because they really didn't get behind the stimulus in terms of committing enough in funds for a long enough period.  It's definitely disturbing either way.  OTOH, is there any strong indication that they would have been better having not done so?

    Will Scarborough ever tire of trying to sound like he's more well-versed in topics like economics and foreign policy than people like Krugman and Brzezinski?

    Something else I've been thinking about is a remark that Murray Rothbard made about the job of an economist.  He essentially said that in good times, there really isn't anything for an economist to do but to sort of explain why things are working out.  If that's true, and we also don't heed what economists say when we're most in need of their advice, then the field is pretty much useless.

    Krugman did write a book about Japan's lost decade that he's recently revised.

    Also, in light all of this, I found this Onion video to be very funny:

     


    In The Know: Should The Government Stop Dumping Money Into A Giant Hole?


    The Times article also quoted people who, like Krugman, argued that Japan didn't do stimulus effectively. Two points:

    1) This argument undercuts your broad "spending is stimulative" claim b/c it suggests that some spending isn't very stimulative, which has been Deadman's point.

    2) The argument makes me queasy. It smells of ex post facto rationalization. I'd be surprised if Krugman and others were making such fine distinctions before Japan's stimulus attempts.

    Frankly, Japan was fairly aggressive in both its monetary and fiscal policies, and no one has come up with a satisfying explanation for why neither worked very well. The only thing that Japan didn't do was let its companies fail, which also goes to Deadman's point about clearing out the dross. I'm reminded of my November post on Japan in which I wrote:

    One reason for Japan's sustained recession was the government's policy of propping up struggling banks and corporations which it deemed too large to fail (and which had too much influence in the government), leaving large, inefficient, debt-ridden companies to mutely weigh down the sputtering economy. Sometimes, change is a good thing even when it hurts.


    From that chart in the article showing Japan's debt to GDP ratio - it certainly seems like the country committed itself to increased spending. What's important is what Genghis said and the article barely glossed over: Japan is STILL mired in almost a no-growth situation. Yes, so far they've avoided a Great Depression-like meltdown, but at what expense. Their economy and stock market have been dead zones now for more than a decade, and they have the largest amount of public debt in the developed world, according to the article.

    What we are going through now is unprecedented, and I just recoil when I listen to people (on both sides of the argument) who seem so sure of what will resolve our issues. Sure there are corollaries to previous downturns, including the Great Depression, but there are also plenty of differences (that I've discussed in previous columns).

    All I know is that we are in the current mess because we consumed too much and took on too much debt. It boggles my mind, just from a logical point of view, that the solution is to immediately try and restimulate that type of activity. If we went through a more prolonged period of pain, I believe the money we spent would be more effective in stimulating the economy, dollar for dollar, not less. the main thing we want to avoid is a systemic collapse of our financial infrastructure as that could cripple our economy for decades. but barring that, we should be very careful about what actions we take and what resources we use.

    You are right, DF. All spending is stimulative, and the degree of stimulation all depends on velocity. i have no problem spending money, even if the primary purpose isn't stimulative, if it is for programs or projects that we need in areas we have neglected. Broadband. Damaged highways and bridges. Health care. Education. Alternative Energy. There is an unending list of things that I think could be improved if the money is spent wisely. But the key is to spend it wisely and efficiently, not jusst quickly. unfortunately, I am also very skeptical that government will not waste a great deal of the money they end up spending.


    btw, hilarious video, DF. Please do not close the money hole!!


    You raise some excellent points here.  Of course, we don't know what's going to happen.  No one really does, but there are people who have spent seriously time and effort trying to understand it.  To me, that incomplete understanding is preferable than one that starts with a doctrine and then figures out a congruent way to read history.

    There's definitely more introspection due to how we got here.  When you say "restimulate that type of activity", it seems obvious to me what you're referring to.  There's a very important discussion to be had about this.  Figuring out what the shape of our economy will be going forward demands it.  However, this is the part that I don't quite understand: If we went through a more prolonged period of pain, I believe the money we spent would be more effective in stimulating the economy, dollar for dollar, not less. Why is that you believe this?  Is it punitive, like being on economic time-out so we can think about what we've done wrong?  How much more effective do you believe it would be and on what time frame?

    As always, your point about being deliberate in how we go about this is well taken.  Perhaps it can't be said often enough given that so often we've seen government carry on its recklessness so carefully.  I also agree that there are plenty of necessary projects out there that should be getting this kind of attention.  Everything you've mentioned is essential and represents an area in which we've fallen behind in world standing.


    To me, that incomplete understanding is preferable than one that starts with a doctrine and then figures out a congruent way to read history.

    Totally fair point, but i caution that many people who have studied the situation probably do have a doctrine as well, and were likely inclined to come to a certain kind of conclusion based on those preconceived ideas (you know what they say about statistics).

    As far as what i mean about my statement "If we went through a more prolonged period of pain..." i just believe that balance sheets need to go through a retrenchment period and extra resources need to be absorbed. It's a natural process to go through after the consumption/credit orgy we had during the last decade. until those things happen, anything we forcefeed into the economy will just be sopped up and immediately absorbed (it's exactly what happened with last year's $150 bln stimulus plan).

    Again economies just don't collapse for no reason, they usually collapse - and in this case, most certainly did collapse - because there was too much capital being produced to be absorbed given the demand. So it's kind of like an economic time-out - not so we can think about what we've done, but just so some of those imbalances can be fixed.

    i don't know the time frame of course, but my fear is that it should probably be somewhat commensurate in terms of length and degree to the excess that created it. It's not a pleasant thought, and not an easy one for politicians to deal with, but I think that kind of period of pain will be necessary if we are to avoid a prolonged period of economic stagnation like Japan, or perhaps worse, set us up for a bigger fall later.

    but like i said, I sure as hell don't know if I'm right or not. So as far as I'm concerned, it's by now a political inevitability that something gets done, and probably a whole lot of somethings, so I just want to make sure that we put real thought and care into what we do. I don't understand the enormous rush except for the fact that Obama and his team have made it priority no. 1 and will see the current fight as a huge challenge to his mandate.


    Everyone has a point of view.  Personally, I prefer that sort of thing to be more naked we seem to like it at this point, but there's still a world of difference between someone like Krugman, who has put much honest effort into study, and someone like Shlaes who wrote a book that re-tells depression era history the way she wants it told.  Krugman has a point of view, but he also has a valid claim to know something about the subject.  It reminds of what Richard Feynman had to say about cargo cult science.  Krugman might not know the exact right thing to do, but he's at least engaged in a process that might enlighten that choice.  Shlaes, and many others who are busily parroting the same lines everywhere, have merely become conversant enough to make a convincing analog.  It's a transparent ideology and, worst of all, it's a big part of exactly why we're where we are right now.

    The rush, as I understand it, is because we stand to be in a much worse situation if conditions are not stabilized.  Perhaps that's unavoidable, either in part or entirely, but that's not what consensus seems to be.

    The way you describe it, it almost sounds like a Newtonian sort of law about reflexive economic periods, but I'm not aware of any such law.  Is this just your general sense of things or is there some principle at work here of which you're aware?


    It's my general sense, which I detailed pretty fully in this post from mid-December, "What goes up, must come down ..."

    I just think sometimes we don't consider common sense. We focus so much on the math and the theories when the answer is staring us in the face. Very, very few economists saw the shitstorm about to hit us, even after some of the subprime mortgages started to go bad.

    But common sense and a little bit of experience is why I correctly predicted much of what's happened over the past year (alas, I wasn't sure enough in my convictions to make money off of my predictions).

    But because I am intimately aware of bubbles, having been involved pretty closely with the dot-com one (you know, the one that happened way back in the early 2000s). I just saw a fair amount of parallels between the two bubbles, and I knew that once it popped, it wasn't going to end neatly.

    I had friends with very limited means investing in real estate, with no money down and little to no dcoumentation. I saw investors using unheard of amounts of leverage to take companies private at valuations that would normally have been unthinkable. I didn't know or understand about at least half of the crazy shit we were getting ourselves caught up in, the complicated derivatives and securitized mortgages and credit default swaps and auction-rated securities, but I knew enough to see that things were not normal and risk was hardly being considered.

    It was just common sense to know that when pendulums start swinging away from one extreme, they don't then stop in the middle. they don't stop until a lot of damage has been done and everyone is crying uncle and no one thinks any money will ever be made again. as far as i see it, the credit consumption cycle is over, and all of humpty dumpty's men are not going to be able to put that egg back together.

    now there have certainly been downturns that have been rather mild compared to the booms that preceded them, so I'm not going to suggest this is a hard-and-fast rule that can never be broken, but the likeliest scenario in my opinion is things get a lot worse before they get better and we'd be better off taking our medicine and let the market resolve the overcapacity issues we now face.

    btw, thought you guys could find this interesting. I think they're way understating the effect, but even the CBO admits the stimulus impact will have a depressing effect on GDP in the out years - http://cboblog.cbo.gov/?p=205


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