Never a good day when Stolid Joe Stiglitz thinks we’ve been brainwashed.
The fact that the 1 percent has so successfully shaped public perception testifies to the malleability of beliefs. When others engage in it, we call it “brainwashing” and “propaganda.” We look askance at these attempts to shape public views, because they are often seen as unbalanced and manipulative, without realizing that there is something akin going on in democracies, too. What is different today is that we have far greater understanding of how to shape perceptions and beliefs — thanks to the advances in research in the social sciences.
I incorrectly identified Noah Smith as a “center-right” economist, while he claims to be “center-left” or even full-on liberal. Maybe I caught him on some supply-side days and drew the wrong conclusions. His thesis adviser does appear to be claiming to be a “Supply-Side Liberal,” though so far I have found less agreement with him personally than I do with Noah, generally. What is important is that Noah Smith takes a reasonably “scientific” approach to economics, which is why I liked him even when I thought he was further from my particular views than he is(?). The importance of this cannot be overstated. If you are not going from the empirical data to the model, validating the model, making predictions and confirming your analysis in a peer-reviewed way (not just to an uncritical chorus of hallelujahs) then you are not doing science.
…Because as nice as it is to have a team, I have a stronger and deeper allegiance, which is to science. And by “science” I basically mean rational skeptical empiricism. My dad raised me on these ideas; they’re very important to me, and I believe they are the best. So if I think an idea makes sense, I’m going to say why. If I don’t buy a theory, I’m going to say I don’t buy it. I believe that only by being intellectually honest can we find the best answers and the best policies.
Now here you may cross your arms and say “Economics isn’t a science! Hrmph!” But if so, you’re missing the point, which is that it can be a science and (according to Noah Smith’s value system) it should be a science, and when it’s not a science that’s bad.
Anyway, just wanted to correct the record. Also, to give you an example… When the crisis first hit, I had no idea what a liquidity trap was. I naively assumed that in all cases, at all times, if you increased the supply of money beyond the expanded need for more (say, simply, population growth) then there would be an automatic supply & demand type of inflation / currency devaluation. I was not a regular reader of Paul Krugman until I started looking into some of the underlying dynamics of the crash. I had no dog in this fight – no intellectual edifice to defend; no academic career built on a particular set of economic models; I just wanted to know what was going on. Now, there are still some deep questions surrounding the structure of “money as such” and “credit issuance” and how that has changed significantly over the past several decades, but the fact remains that if any of the people had been right about their simplistic fiscal / monetary theories, we would have seen very different results. See this litmus test:
The policy response to financial crisis has, in effect, given us a great natural experiment in macroeconomics — an experiment that can and should be viewed as a test of two views of the economy. One view — which includes both freshwater macro and much of what Austrians say — is in effect classical macro as Keynes described it, in which the economy is always constrained by supply. The other is a more or less Keynesian view in which a depressed economy is constrained by demand, not supply.
These two views had strong implications on three fronts. One was interest rates: would large budget deficits drive rates up, as a classical view implied, or would they do no such thing under depression conditions? A second was the effects of austerity (which has been much larger than the weak efforts at stimulus, and therefore provides the real test); would austerity policies release resources to the private sector, as per the classical view, or lead to economic contraction? Finally, a third implication involved inflation: would large increases in the monetary base produce soaring inflation, again as classicists of all kinds claimed, or do no such thing under depression conditions?
All that being said, I did run across a truly disturbing article while drinking my morning coffee – Finance and the Mafia State. The premise seemed to be – and there is quite a bit of evidence that this has been going on – that we are moving from a Nation-State based organization to a one world “market-based-politics.” I often take the long view on things. Sure, we have not always had nations. In fact, nations arose out of specific needs – we humans organized as society got more integrated, trade increased and city-states became too disorganized and restrictive – or so the story goes. Most historical accounts get a little more nuanced about power factions and power grabs, etc, etc… But the idea remains the same – a bigger umbrella for more interconnected people. Now, I can see certain organizations gaining in power on a more equitable global power distribution over time – we are a much more connected world yet again – though certainly the US and a few other powers are not too keen on giving up any power just yet… But a “One World Market Economy???” That scares the be-jeesus out of me. To my mind – and the evidence seems clear – that means a world dominated entirely by bankers.To the extent that democracy and self-governance exist and are possible, surely they are possible through government organizations, not market “organizations.” Yikes.
As I have argued before, it is impossible to deregulate financial markets because money is rules about value and obligation. So what happened instead when financial markets were “deregulated” is that the governments’ role as the setter of rules was handed over to traders, who made up their own rules: more than $700 trillion of derivatives, intense high frequency trading and so on. It results in a weird contradiction: governments trying to save their systems from the new rules being created by the traders, yet the traders relying on the state’s rules about finance to overlay their games of meta money. Meta money traders have to have conventional share trades between buyers and sellers to apply algorithms to manipulate the markets at high speed.
You need conventional commerce in commodities to use derivatives to play commodity futures, for example. It is why governments are constantly attacked by players in the financial markets who are simultaneously hard at work exploiting those “errors” to make money. Meta hypocrisy to accompany the meta money, I suppose.
The tsunami of this meta money, which is borderless, stateless and has no thought for its effect on governments or polities, still relies for its very existence on the rules set up by governments. And as has been obvious since the GFC, governments and tax payers are expected to clean up the mess when it inevitably all goes wrong. That can be done once. When it goes wrong a second time, the firepower will not be there, as is increasingly evident in Europe. The conventional rules will have been weakened too much by the rules invented by the traders of meta money.
It represents a comprehensive failure of government, and will not lead to the creation of a new type of state. It is rather a new type of chaos. It is especially pernicious when governments start to dabble in the meta money, as Greece did when the government covered up its debt by using derivatives. That is wholly unforgiveable. It is bad enough that governments have allowed traders to make up their own rules with money, in effect playing Russian roulette with money itself. But when they, too, start using the same tricks, then the road back to sanity becomes long indeed.
It is important to note another key feature of my frustration with economics (as practiced in the realm of public policy theater): the “elite opinion makers” seem to keep recycling their arguments, even when reality keeps delivering them evidence to the contrary. We’ll talk labor mismatches and union busting, but then we see that labor mismatches don’t work and the economy is definitely being dragged down by public sector job losses (in Red states, primarily), so we switch to the regulation and government policy schtick for awhile – and when that falls apart under scrutiny, we are back to the government debt and “invisible bond vigilantes” or some obtuse version of magical pixie dust and the “confidence fairy.” On and on and on we go. And the beauty of it is that each time we confront the arguments all over again, as if seeing them for the first time. As a purely intellectual exercise it ceases to hold any meaning after awhile, but as a delay tactic – if delay furthers your agenda – it is sublime excellence.
So, here is a new twist on an old game, and a fresh look at the “new conservative position” – that is to say, having forgotten their position that stimulus doesn’t work (I’ll give them credit for almost abandoning “expansionary austerity” under the groaning weight of reality) but having reversed their position on stimulus (without admitting as much) they are hanging onto the idea that long term debt reduction must be tied to short term stimulus. The truth or falsity of that claim is not at all clear to me (or anybody else crunching numbers dispassionately) but it has become the “common wisdom.” This is an example of just how dangerous these “elite opinion makers” can be. Anyway, let’s get started with Mike Konczal’s excellent debunking.
The question posed is simple: “If short term stimulus is a good idea, why isn’t a good idea devoid of other constraints?” Why should we tie our hands and offer up any kind of long-term concessions or give any bargaining power to that camp if we all agree we need short term stimulus? First Konczal gives two examples of “Very Serious People” and their proposals along these lines, then he asks and answers the question of why these two different proposals (short term stimulus and long term debt reduction) must supposedly go together:
Take the Domenici-Rivlin Restoring America’s Future plan. In the overview it states, “First, we must recover from the deep recession that has thrown millions out of work… Second, we must take immediate steps to reduce the unsustainable debt … These two challenges must be addressed at the same time, not sequentially.” (The deficit hawk Comeback America Initiative report is similiar, with $500 billion dollars in infrastructure over two years tied to focusing on long-term deficit reduction.)
It’s never very clear why these two must move together. The more aggressive argument is that the market will panic and raise interest rates if the long-term deficit is not addressed, immediately canceling out the stimulus. The more widely used version is that stimulus now would increase the longer-term debt, hence making the longer-term challenges worse and the crises and challenges occur more quickly.
So first we have the aggressive version: beware the bond vigilantes, despite having been proven wrong again and again, and then – in case you’ve wised up to that little piece of unreality – we’ll give you the “more debt means scarier stuff sooner argument,” which sounds reasonable by comparison… But is it? Konczal quotes a paper by Delong & Summers:
This is why something like Delong-Summers paper “Fiscal Policy in a Depressed Economy” is so important. It finds that “under what we defend as plausible assumptions of temporary expansionary fiscal policies may well reduce long-run debt-financing burdens.”
Yes, THAT Larry Summers. The more you look, the more you find that what passes for “common sense” is actually opposed by some very heavy hitting, right leaning economists (plus all the usual lefty suspects). You have to be increasingly radical in your Free-Marketeer beliefs to ignore the reality. Konczal is arguing with an Elite Opinion Maker in this piece, Peter Orszag.
Here’s where Peter Orszag’s “Barbell Approach Only Way to Lift Heavy Economy” enters the picture. Orszag argues that that Delong-Summers approach is flawed because it ignores this two-deficits (or what he calls the barbell) problem, which argues that even if short-term stimulus is a good idea it should be linked to long-term deficit reduction…But these stimulus-only proposals, by not lifting the other side of the barbell, are incomplete for three reasons: First, substantial stimulus-only proposals have no chance of being enacted. Second, even if they could be, they would accelerate the date at which we again run up against the debt limit — and their proponents have no strategy for dealing with that impediment. Finally, even if the debt limit were simply assumed away (an ivory-tower approach that might prove appealing to some stimulus-only proponents), the impact of any stimulus would be stronger, and our international credibility enhanced, if it were combined with specific, but delayed, actions to reduce the deficit.
The third is an economic argument, which says long-term deficit reduction measures would increase the credibility of the United States. Normally that translates into lower long-term interest rates for government borrowing. Would that help? Here’s Peter Orszag arguing against QE2 in December 2010: “a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future.” Would a few basis points gained through credibility help now, especially if the long-term effects were painful? Even if it did, it may bolster the case for the barbell approach, but it still doesn’t necessitate it.
The starting point for understanding social democracy’s slow collapse since the 1970s is to grasp the economic underpinnings of its success in the Golden Age. As the Dutch political scientist Ton Notermans documents in Money, Markets, and the State, a penetrating history of social-democratic economic policy since World War I, the precondition of left governance under capitalism has always been the ability to reconcile full employment, requiring expansionary monetary policy, with price stability; and this depends on the availability of mechanisms to control inflation directly at the source, by repressing or moderating wages or prices without having to resort to the weapon of unemployment.
In the absence of such price-repressing instruments, maintaining a tolerable level of inflation requires the bludgeon of permanently high unemployment achieved through tight money. Social democracy under such conditions is impossible, since the only tools that politicians can now credibly claim to boost employment are microeconomic: “reforms” that attack union bargaining power, minimum wages, job protections, social insurance contributions, and the like. To make matters worse, the regime of high interest rates necessitates chronic austerity, as public debt increases faster than national income and social spending has to be constantly cut back.