UPDATE: Two dudes in the WSJ just took this article down even harder with facts and information, while I relied exclusively upon my wits and brawn below.
If you're my age, you remember Nintendo sports games where you could improve your team by winning against another player-controlled team. Even the glue-eating kids figured out the trick of playing games against no one to win quickly and build a squad of Bo Jacksons.
A guy who's into the Yale Thing (Applied Math '94), David Leonhardt of the NYTimes is Player 1 and he's beating on imaginary Player 2, whose argument he made up himself and then applied to data from 80 years ago.
Bet on Private Sector for Recovery Could Prove Risky
That's the title of the article when I first read it, before the NYTimes changed it to something less suggestive of a state-run economy:
Governments Move to Cut Spending, in 1930s Echo
The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured
Recovery is not yet assured? You are mistaken, sir, for we live and love in the Summer of Recovery!
In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years.
Let me get this straight—you say the G20 is slashing spending… as a big bet… that “withdrawal” of a massive, failed, one-time expenditure… will be “made up for” by the private sector, whose taxes supply all the stimulus money in the first place? I thought it was because events finally forced them to realize welfare states are untenable, but wow, that’s tight as a Swiss watch. How will you ever poke holes in their plan?
The private sector in many rich countries has continued to grow at a fairly good clip in recent months. In the United States, wages, total hours worked, industrial production and corporate profits have all risen significantly.
Those are interesting stats for a fake pro-private enterprise argument, because if total hours worked increased at faster rate than wages, then… and uh, profitability increases when you fire people, so… hmm. I hate to throw around wild accusations, but this looks to me like someone cherry picked stats* to beat a fake argument.
On the other hand, the most recent economic numbers have offered some reason for worry
The stimulus so far produced a really shitty non-recovery, so we have to keep stimulating!
The policy mistakes of the 1930s stemmed mostly from ignorance. John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood.
Oh, there they go! There they go! Every time I start talkin 'bout economic policy, a liberal white man got to pull Lord Keynes out they ass! That's their one, that's their one: 'John Maynard Keynes, John Maynard Keynes.' Let me tell you something once and for all. Keynes was good, but compared to Thomas Sowell, J.M. Keynes ain't shit!
He got us outta the Depression!
Mothafucka PROLONGED the Depression! One time Paul Krugman came in here for a beard trim, I said ‘Paul! Just between you and me, how long that depression woulda been if FDR and Keynes didn’t fuck it up?’ You know what Paul told me, he said 'Hey- it woulda been over in 30 months!'
An internal memo from White House economists to other senior aides last week noted that policy makers “necessarily tend to focus on the impediments to recovery.” But, the memo argued, the economy’s strengths, like exports and manufacturing, “more than make up for continued areas of weakness, like housing and commercial real estate.”
That optimistic take, however, is more debatable today than it would have been a month or two ago.
NICE. Tiptoeing around fact that the world's last stimulus enthusiasts, White House economists, are idiots. “More debatable today than it would have been a month or two ago,” is a phrase right up there with “It’s as true as it ever was”. Hey, I heard Joe Biden is really sharp on foreign policy, is that true? It’s as true as it ever was.
Here are some other optimistic takes whose debatability varied over time:
1938: “Peace for our time” –Neville Chamberlain, UK Prime Minister (Debated by TIME Man of the Year 1938)
2008:“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” –Ben Bernanke, TIME Man of the Year 2009 (Debated by reality)
Yesterday: “[T]he economy is headed in the right direction.” -Barack Obama, TIME Man of the Year 2008 (Debated by everyone including the NYTimes)
As is often the case after a financial crisis, this recovery is turning out to be a choppy one. Companies kept increasing pay and hours last month, for example, but did little new hiring.
* I knew you were cherry pickin stats, son! You just think companies are for suckers and we should all work for the glorious state.
The parallels to 1937 are not reassuring. From 1933 to 1937, the United States economy expanded more than 40 percent, even surpassing its 1929 high.
Ironically, it would be damn reassuring if we were somehow parallel to 40% growth in five years. But instead we've got 3 months of shitty growth to show for our rampant spending.
But the recovery was still not durable enough to survive Roosevelt’s spending cuts and new Social Security tax. In 1938, the economy shrank 3.4 percent, and unemployment spiked.
Why would the governments of the world not base policy on this single observance of coincident spending reduction and unemployment increase?
Greece has no choice. It is out of money, and the markets will not lend to it at a reasonable rate. Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction. Spain falls into this category, and even Britain may.
So it’s acknowledged as not ludicrous, the idea that broke countries are cutting spending to avoid losing credit. They're not all making some nonsensical bet to replace stimulus? Doesn't that refute part of the basis for this article? This is like a triple reverse straw man argument.
China, until recently at least, has been worried about its housing market overheating.**
Pssssh! That’s probably no big deal.
Germany has long been afraid of stimulus, because of inflation’s role in the Nazis’ political rise.
Scared of Nazis and falling housing markets? What a bunch of pussies these foreigners are! That shit could NEVER happen!
In responding to the recent financial crisis, Europe, led by Germany, was much more timid than the United States, which is one reason the European economy is in worse shape today.
I’ll give you one guess as to the name of the country (hint- it's in that paragraph!) with the Eurozone’s strongest economy.
The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.
This from a guy who has not produced a shred of data outside a 3 year sample. And who's doing the shouting? 'Wahhhhh, those Austrian economists are so influential! Those Republicans and their powerful bicameral minority! Those damn German leaders, who won’t listen to the counsel of President Obama; a Bernankean man, too wise to have ever held a private sector job.'
Finally, the idea that the world’s rich countries need to cut spending and raise taxes has a lot of truth to it. The United States, Europe and Japan have all made promises they cannot afford. Eventually, something needs to change.
Why would a Yale Man write an article in favor of the status quo, when he could have been proposing change we can believe in? We need good ideas. Unfortunately, progressive dopes still have just one:
“We do want more, and when it becomes more, we shall still want more!” -Samuel Gompers, 1890
** “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” -Ben Bernanke, 2/15/06