Articles 22 (Economics: Contrasting Liberal & Conservative Approaches)

The New York Times “The Two Cultures” November 15, 2010
By David Brooks

Many of the psychologists, artists and moral philosophers I know are liberal, so it seems strange that American liberalism should adopt an economic philosophy that excludes psychology, emotion and morality.

Yet that is what has happened. The economic approach embraced by the most prominent liberals over the past few years is mostly mechanical. The economy is treated like a big machine; the people in it like rational, utility maximizing cogs. The performance of the economic machine can be predicted with quantitative macroeconomic models.

These models can be used to make highly specific projections. If the government borrows $1 and then spends it, it will produce $1.50 worth of economic activity. If the government spends $800 billion on a stimulus package, that will produce 3.5 million in new jobs.

Everything is rigorous. Everything is science.

Conservatives, who are usually stereotyped as narrow-eyed business-school types, have gone all Oprah-esque in trying to argue against these liberals. If the government borrows trillions of dollars, this will increase public anxiety and uncertainty, the conservatives worry. The liberal technicians brush aside this soft-headed mush. These psychological concerns are mythological, they say. That’s gaseous blathering from those who lack quantitative rigor.
Other people get moralistic. This country is already too profligate, they cry. It already shops too much and borrows too much. How can we solve our problems by borrowing and spending more? The liberal technicians brush this away, too. Economics is a rational activity detached from morality. Hardheaded policy makers have to have the courage to flout conventional morality — to borrow even when the country is sick of borrowing.

The liberal technicians have an impressive certainty about them. They have amputated those things that can’t be contained in models, like emotional contagions, cultural particularities and webs of relationships. As a result, everything is explainable and predictable. They can stand on the platform of science and dismiss the poor souls down below.

Yet over the past 21 months, it has been harder to groove to their certainty. To start with, the economy has not responded as the modelers projected, either in the months after the stimulus was passed or this summer, when it was supposed to be producing hundreds of thousands of jobs. It has become harder to define how much good the stimulus package is doing. An $800 billion measure must leave a large footprint, but it is hard to find in a $70 trillion global economy.
Moreover, it has been harder to accept that psychological factors like uncertainty and anxiety really are a mirage. The first time a business leader tells you she is holding off on investing because she is scared about the future, you dismiss it as anecdote. But over the past few years, I’ve had hundreds of such conversations.

It’s been harder to dismiss morality as a phantom concern, too. Maybe in a nation of robots the government can run a policy that offends the morality of the citizenry, but not in a nation of human beings, as the recent elections showed.

Nor has the world come to look simpler and easier to manipulate since the stimulus passed. It now looks more complicated. It’s one thing to hatch an ideal policy in an academic lab, but in the real world, context is everything.

Ethan Ilzetzki of the London School of Economics and Enrique G. Mendoza and Carlos A. Vegh of the University of Maryland examined stimulus efforts in 44 countries. In a recent National Bureau of Economic Research paper, they argued that fiscal stimulus can be quite effective in low-debt countries with fixed exchange rates and closed economies.

Stimulus measures are generally not as effective, on the other hand, in countries like the U.S. with high debt and floating exchange rates. The authors of the paper pointed to a series of specific circumstances that complicate, to say the least, the effectiveness of increasing public spending: How much stimulus money ends up flowing abroad? What is the relationship between fiscal policy and monetary policy? How do investors respond to fear of future interest rate increases?

One could go on. It’s become harder to have confidence that legislators can successfully enact the brilliant policies that liberal technicians come up with. Far from entering the age of macroeconomic mastery and social science triumph, we seem to be entering an age in which statecraft is, once again, an art, not a science. When you look around the world at the countries that have come through the recession best, it’s not the countries with the brilliant and aggressive stimulus models. It’s the ones like Germany that had the best economic fundamentals beforehand.

It all makes one doubt the wizardry of the economic surgeons and appreciate the old wisdom of common sense: simple regulations, low debt, high savings, hard work, few distortions. You don’t have to be a genius to come up with an economic policy like that.

Source: http://www.nytimes.com/2010/11/16/opinion/16brooks.html?ref=opinion


The New York Times “Mugged by the Moralizers” October 31, 2010
By Paul Krugman

“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.

It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.
And that kind of moralizing is the reason we’re mired in a seemingly endless slump.

The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.

This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.

And those who should know better lack all conviction.

John Boehner, the House minority leader, was widely mocked last year when he declared that “It’s time for government to tighten their belts” — in the face of depressed private spending, the government should spend more, not less. But since then President Obama has repeatedly used the same metaphor, promising to match private belt-tightening with public belt-tightening. Does he lack the courage to challenge popular misconceptions, or is this just intellectual laziness?
Either way, if the president won’t defend the logic of his own policies, who will?

Meanwhile, the administration’s mortgage modification program — the program that inspired the Santelli rant — has, in the end, accomplished almost nothing. At least part of the reason is that officials were so worried that they might be accused of helping the undeserving that they ended up helping almost nobody.

So the moralizers are winning. More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe.

The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.
But they don’t know that. And because they don’t, the slump will go on.

Source: http://www.nytimes.com/2010/11/01/opinion/01krugman.html?ref=paulkrugman


The New York Times “The Election That Wasn’t” October 23, 2010
By Thomas L. Friedman

In the past two weeks, I’ve taken the Amtrak Acela to the Philadelphia and New York stations. In both places there were signs on the train platforms boasting that new construction work there was being paid for by “the American Recovery and Reinvestment Act of 2009,” that is, the $787 billion stimulus. And what was that work? New “lighting” — so now you can see even better just how disgustingly decayed, undersized and outdated are the rail platforms and infrastructure in two of our biggest cities.

If we were a serious country, this is what the midterms would be about: How do we generate the jobs needed to sustain our middle class and pay for new infrastructure? It would require a different kind of politics — one that doesn’t conform to either party’s platform. We will have to raise some taxes to generate revenue, like on energy or maybe a value-added tax, and lower others, on payrolls to stimulate work, and on multinational corporations to get them to bring the trillion dollars they have offshore back to the U.S. for investment. We will have to adjust some services, like Social Security, while we invest in new infrastructure, like high-speed rail and Internet bandwidth; the U.S. ranks 22nd in the world in average connection speed. And, most of all, we will have to have an honest discussion about how we got in this rut.

How we got into this rut is no secret. We compensated for years of stagnating middle-class wages the easy way. Just as baseball players in the ’90s injected themselves with steroids to artificially build muscle to hit more home runs — instead of doing real bodybuilding — our two parties injected steroids, cheap credit, into Wall Street so it could go gambling and into Main Street so it could go home-buying. They both started hitting home runs, artificially — until the steroids ran dry. Now we have to rebuild America’s muscles the old-fashioned way.

How? In the short run, we’ll probably need more stimulus to get the economy moving again so people have the confidence to buy and invest. Ultimately, though, good jobs at scale come only when we create more products and services that make people’s lives more healthy, more productive, more secure, more comfortable or more entertained — and then sell them to more people around the world. And in a global economy, we have to create those products and services with a work force that is so well trained and productive that it can leverage modern technology so that one American can do the work of 20 Chinese and, therefore, get paid the same as 20 Chinese. There is no other way.

Sure, more countries can now compete with us. But that’s good. It means they’re also spawning new jobs, customers, ideas and industries where well-trained Americans can also compete. Fifteen years ago, there were no industries around Google “search” or “iPhone applications.” Today, both are a source of good jobs. More will be invented next year. There is no fixed number of jobs. We just have to make sure there is no fixed number of Americans to fill them — aided by good U.S. infrastructure and smart government incentives to attract these new industries to our shores.

But not everyone can write iPhone apps. What about your nurse, barber or waiter? Here I think Lawrence Katz, the Harvard University labor economist, has it right. Everyone today, he says, needs to think of himself as an “artisan” — the term used before mass manufacturing to apply to people who made things or provided services with a distinctive touch in which they took personal pride. Everyone today has to be an artisan and bring something extra to their jobs.
For instance, says Katz, the baby boomers are aging, which will spawn many health care jobs. Those jobs can be done in a low-skilled way by cheap foreign workers and less-educated Americans or they can be done by skilled labor that is trained to give the elderly a better physical and psychological quality of life. The first will earn McWages. The second will be in high demand. The same is true for the salesperson who combines passion with a deep knowledge of fashion trends, the photo-store clerk who can teach you new tricks with your digital camera while the machine prints your film, and the pharmacist who doesn’t just sell pills but learns to relate to customer health needs in more compassionate and informative ways. They will all do fine.

But just doing your job in an average way — in this integrated and automated global economy — will lead to below-average wages. Sadly, average is over. We’re in the age of “extra,” and everyone has to figure out what extra they can add to their work to justify being paid more than a computer, a Chinese worker or a day laborer. “People will always need haircuts and health care,” says Katz, “and you can do that with low-wage labor or with people who acquire a lot of skills and pride and bring their imagination to do creative and customized things.” Their work will be more meaningful and their customers more satisfied.

Government’s job is to help inspire, educate, enable and protect that work force. This election should have been about how.

Source: http://www.nytimes.com/2010/10/24/opinion/24friedman.html?ref=thomaslfriedman