It’s [not] the economy [that I recognize]

I’ve generally been a fan of Planet Money – and still refer people to ‘another frightening show about the economy’ for a good summary of what led people to get so panicky in Sept. 2008. So, I’m afraid I find Adam Davidson’s first New York Times Magazine column – titled “It’s the economy” and labeled an exercise in “[trying] to demystify complicated economic issues…” –  to be pretty disappointing.

He covers a lot of ground, so my list of disagreements is going to be scattershot, but here’s a quick taxonomy. First, I don’t buy his characterizations about what is generally agreed upon and what is seriously contested among economists. Second, he really undersells how well studied the concept of providing Keynesian-style fiscal support to ailing economies is. Finally, he doesn’t help readers in their attempt to make an evidence-based decision on what is easily the most important economics question today: Should Congress and the Administration be spending more to help lower today’s 9 percent unemployment rate?

Let’s start with the general – Davidson portrays economists as hopelessly divided and unsure about whether or not debt-financed spending and tax cuts (i.e., something like another Recovery Act, which I’ll just call “fiscal support” from now on) could lower today’s unemployment rate, but relatively united when it comes to how to reform taxes and education and health care systems.

This is the reverse of the truth – there is wide agreement that debt-financed fiscal support in a depressed economy will lower unemployment. Now, it’s true that there are holdouts from this position. And others who think the benefits of lower unemployment are swamped by the downsides of higher public debt (they’re wrong, by the way). But, the agreement* is much more widespread – ask literally any economic forecaster, in the public or private sector, that a casual reader of the Financial Times has heard of if, say, the Recovery Act boosted economic growth. They will all tell you “yes.”

You won’t find anywhere near such a consensus on long-run tax or education or health care policy. In fact, public finance economists can’t get unanimous agreement on if, in the long run, income accruing to holders of wealth should be taxed at all (it should, by the way). In short, anybody waiting for the current unpleasantness to pass and for economists to unite in harmony in future policy debates shouldn’t hold their breath.

Davidson also claims that there is wide agreement that “many Americans don’t know how to do anything that the world is willing to pay them a living wage for.” I’m not quite sure what this means. I guess it’s true in the strictly tautological sense that there are a lot of involuntarily unemployed workers out there, but if it is meant to be an indictment of American workers’ skills (and it’s hard for me not to read it that way) – then there’s no serious basis for this indictment.

Most distressingly, Davidson doesn’t rise above the “opinions on the shape of the world differ” review of the argument about the virtues of debt-financed fiscal support as the answer to today’s unemployment crisis. He writes as if this argument has lain completely unstudied since the Great Depression and that advocates for fiscal support in the last three years have taken a huge leap of faith in pushing it as the answer to today’s troubles. This is, again, so at odds with what has actually gone on in the profession that it’s hard to figure out his basis for claiming it. If nothing else, the experience of Japan’s Lost Decade alone has inspired thousands of pages on recessions (and jobless recoveries) driven by deficient demand. And no, a Google or Lexis search on “job creation” won’t actually capture all academic work relevant to this.

He also writes that the point of large-scale fiscal support was to “goad consumers into spending again.” Not really. A good chunk of the Recovery Act was indeed aimed at households, but it didn’t rely on some esoteric trick to bamboozle people into spending – instead it gave them money (or its near equivalent). And much of the most-effective parts of the Recovery Act actually recognized that consumers were unlikely to begin spending again and had the government spend the money directly. The recession was largely caused by consumer retrenchment, but this doesn’t mean that recovery has to come through consumer spending – instead we can provide the spending power through other sectors.

Lastly, Davidson notes that there is a rump of economists (he calls them, reasonably enough, the Chicago School) that argue that debt-financed fiscal support cannot help economies recover from recessions. But, it’s important to note that there is pretty simple evidence that can be brought to bear on this Keynesian versus Chicago debate. Nobody denies, for example, that the government could borrow money and just hire lots of people – hence creating jobs. What the Chicago school argues is that this borrowing will raise interest rates (new demand for loans will increase their “price,” or interest rates) and this increase in interest rates will dampen private-sector demand. But interest rates have not risen at all since the Recovery Act was passed and private investment has risen, a lot.

Those in the demystifying business really should point lots of this stuff out.


*Note: The Kaufmann survey describes the results wrong – any multiplier greater than zero means that debt-financed fiscal support has boosted the economy.


  • flickeringlamp

    I’ve listened to every Planet Money podcast since day 1, and my sense is that they rely on economists from George Mason for a lot of analysis.  This could certainly leave one with a skewed perspective of what is and is not agreed to by economists at large.  But it’s hard to know if that’s a cause or a symptom of the problem here.  Davidson could have misperceptions because of this, or he could have such strong a priori commitments to “fairness” that he seeks out fringe voices on the right.