One of my favorite David Brooks columns

Here is one excerpt:

In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

Read the whole thing.  Just about every paragraph is excerpt-worthy, for instance:

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

There are, of course, ways to explain these other histories.  Monetary policies, interest rates, and exchange rates were all different in many of these studied cases.  The point is not that aggressive fiscal policy is always bad.  The point is that there are plenty of coherent models where fiscal consolidation is better than fiscal expansion.  "Lack of confidence in a nation's fiscal future" is a key condition for many of those models to hold.  Is that not possibly the case today?


Isn't context important? Deficit reduction can inspire confidence in capital markets if you have only the long run unsustainability of government budgets to worry about. But when the short run fears of surviving involuntary mass
unemployment dominate, fiscal austerity doesn't bring long run rates down
and, instead, induces fear by creating even more involuntary mass

Don't you worry who is feeding David Brooks the studies he cites and what their agenda is?

So, no. This is not 1992; the labor market is in a terrible place and interest rates are already low. Tell the teachers who will lose their jobs
because of a cyclic shortfall in revenue that they should take one for the team.

I don't know if David Brooks has his finger on the pulse of consumer behavior.

Maybe bow tie wearing consumers.

Two good places to start for cutting the deficit:

Cut defense spending
Raise taxes on the wealthy

"political leaders who ordered the painful cuts were often returned to office"

Maybe less competitive party systems (like Ireland's) allow politicians to engage in more decisive, unpopular action during crises. I hope not for the benefit of democracies everywhere, and I can see why this works as a simpler chain of causation.

Now is a good time to review in detail Japan's lost decade. The Wikipedia entry of that reads like a summary of the economic news here in the states over the past couple years.

Dean Baker nicely demolishes Brooks' column

I think he has a point. The conventional argument for running temporary deficits is that eventually the economy will return to stronger growth, enabling the deficits to be paid down. Unfortunately, it seems as if the recession is being used by some to implement permanent spending programs and new regulation that won't be temporary, and will require much higher taxes in the near future. Thus, it's reasonable to have expectations of slower growth, possible inability to pay down this accumulated debt, consequent higher interest rates, etc. We are also running several expensive wars overseas, with likely negative and unintended consequences in the Mideast on the horizon. I think the electorate is smarter than the knee-jerk Keynesians here. It's not **necessarily** the case that a country already deep in debt can borrow more to extricate itself from it's problems. Quite possibly thrift and industry are required to right the boat at this point. Why is this controversial? Because progressives like Krugman see this as a once in a lifetime opportunity to implement spending and regulatory programs that will be difficult to eliminate.

A possible exception (or seemingly at the time) was military spending during 2002/2003. I think this was mostly a good thing because it targeted the people most affected, young people, and it provided usefull training to them and instilled a work ethic.

However, in hindsight, lack of disciplin in spending caused several problems. It made the war look less economically beneficial than it is; it provided too much money to select people, creating market distortions; it was thought that overpaying at the time was OK and that correct prices would be achieved in the future and some money could possibly be recoved, this proved to be a silly assumption.

I'm now taking a break to watch the World Cup, but your readers that are not interested in soccer should read this Arnold Kling's post:
It's about why interest rates are low but more important --specially if you read it jointly with the Brooks' column that you refer in this post-- it's a good reference to think about the nonsense of macroeconomics as a theory of national accounting with no idea of what money is and what government does.
For those interested in what may happen in the next twelve months, I suggest to worry about the price of energy because of the politics of energy production. In addition to front-page news, read about what happened yesterday in the Senate:


Baker also ignores the basically unaddressed problems of future entitlement spending in the US and projected massive deficits / much higher taxes because of this.

It ain't the decade after WWII!

I didn't realize everyone was hot and bothered over the deficit/debt until Paul Krugman started incessantly complaining about people complaining about it. I wonder how many Republicans are like me. So, the echo chamber doesn't stop at alarmism, it probably doesn't even stop at alarmism over the alarmism.

Another thing I haven't heard anything about. Intelligent fiscal projects.

The error is attributing the "Keynesian" spending to a desire to prime the pump (or jumpstart the economy, etc.).

The administration's goal was and is to expand the scope of the federal government. You can argue whether that desire was based on altruistic reasons (i.e., they really do or do not believe that they can make people's lives better).

All along, they realized that economy would recover regardless/despite their expansion.

When I read the article, what keeps jumping to mind is if it's about confidence in the long term, the government could do a lot of good with a straightforward structural reform like raising the retirement age for Social Security. The long term numbers immediately look a lot better, and I just can't believe we can't get politically to so obvious a remedy.

So you're favorite column is where he rambles about economic matters without any kind of analysis, data, or original thought.

Blah, blah, blah. That's all I hear from both Brooks and Cowen, because neither have even a basic understanding of the monetary system, and thus don't have any clue that talking about the "fiscal future" of a currency issuer is, quite literally, nonsensical.

I can give Brooks a pass because he's paid to opine about things he know nothing about. But aren't economics professors supposed to know something about, um, economics?

Brooks makes it seem as if the deficit spending not only convinces people that growth is not real but makes it unreal. This is silly and thus belongs on this blog. It's because growth, in particular investment demand, is already weak that we need deficit spending to boost employment and allow firms to work down excess capacity.

PQuincy -

Believing that the economy will be stalled by high taxes, excessive debt and slow growth will certainly inhibit individuals from using their capital to start new enterprises.

The regulation bit doesn't help either.

Dean Baker disagrees:

Of course Dean Baker disagrees. But does he have constructive advice on how to transition from the sectors that were over-invested to the new economy?

The simplest way to cut the deficit would be to let all the Bush tax cuts expire this year. Supply-siders will predict economic disaster but that did not occur when they were raised in 1993. They also did not care when Bush made drugs for seniors a federal right. Why shouldn't we start paying for it now instead of piling on more debt?

I quickly read a number of the papers of the authors cited last night before retiring for the evening. A few thoughts:
1) I don't see how this works in Debt-Deflation. It would have meant more unemployment and lowering wages. I need some proof that smaller paychecks and higher unemployment than we have now would have resulted in higher confidence.
2) The basic idea of at least a few papers seems to be that lowering labor costs is the key. This will lead to more investment and hiring. Again, in Debt-Deflation, I need to see how this would work. I don't think it would.
3) While they recommend cutting govt spending, they also seem to favor a robust social safety net that is much stronger than the one we have. Since I'm for a Guaranteed Income, I'll take their arguments as supporting my general approach to the social safety net.
4) At least one author cited, Von Hagen, is a big supporter of the QE that various Central Banks used in this crisis, and credits them with saving our collective asses. I agree, but since I see a stimulus as reinforcing QE, I'm not sure his views contradict my views so easily.
5) Germany is, in essence, trying this. Of course, they mean to get out of their mess through exports, to people like us. I'm sure everybody's ready to ramp up spending and borrowing again to help Germany et al out. Indeed, I think their problems with leverage caps has to do with wanting to allow their banks to increase lending to sell more stuff to us.
6) Assumptions, again. I found their assumptions hard to follow. And since all I saw was the plotted results, I couldn't really figure out how the individual countries accomplished what these views suggest. They seemed to cancel out various other causes much too quickly.
7) I took their main point to be that the main problem of the country was fiscal. I don't see that in our case. We have plenty of ways of dealing with this problem going forward. In fact, already, as I said, people are looking into the problem of costs going forward on the health plan. There is still lots to be done on that front.
That's a quick take.

I am a reader, sort of loyal. I do believe that Brooks isn't smart enough to
decide to get a research assistant to search out econometric studies and then
to decide which are the most relevant to write about. It's like reading
a "news" story and asking who leaked and how did the leak serve their
interest. So whose interests were being served by Brooks' column?

deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon.

So getting a job because the government is spending to stimulate the economy makes people less confident than if they were unemployed? A business owner who gets orders for the same reason, instead of having his shop idle, and his warehouse full, gets scared?

Why the assumption by Brooks that stimulus reflects "a political system out of control?" That is plain wrong. All he's saying is that he thinks stimulus is unwise. Well, he's entitled, I guess, but why anyone should really care about David Brooks' views on macroeconomic policy is a mystery.

"Is it your position that the government can spend infinitely and it's a free lunch?"

No, I am saying that the penalty for spending too much (beyond full employment) is inflation. It is not some fear that your creditors will "call in your loans". A currency issuer in a floating exchange rate regime has no creditors, properly understood, since interest-bearing (bonds) and non-interest bearing (reserves) liabilities are just two different forms of the same thing. A sovereign currency issuer can always pay for anything offered for sale in it's currency of issue, since it spends by marking up bank accounts - the money doesn't "come from" anywhere.

But to understand this, you need to understand how the financial system operates, and most economists (to say nothing of the rest of the population) has never bothered to do so.

Clear rebuttals:

Would love to read your response to these, Tyler.

@ Mesa; (who wrote): "Believing that the economy will be stalled by high taxes, excessive debt and slow growth will certainly inhibit individuals from using their capital to start new enterprises."

You may be right, but look at the number of steps based on no evidence or contrary evidence that it takes to get to your conclusion:

1. "Believing that..." With this, you give away that your version of macroeconomics is a matter of faith and perception, not of data and experience. Fair enough, but it disallows any future arguments on your part about the allegedly 'objective' operations of markets, fiscal policy, etc. You might just as well say that "Fear of the imminent apocalypse will certainly inhibit individuals...", and therefore say that evangelical Christians are likely to do less capital investment. (Is there any evidence of this?)

2. "...the economy will be stalled..." Economists and political scientists will argue, but I don't see strong empirical evidence. Tax rates have been much higher in American history in the pass without any noticeable stalling. The record of the past decade is one of extraordinarily low taxes, as a percentage of GDP, after all.

3. "will inhibit individuals". Here, too, you argue without much evidence that the perception that the future economy might be stalled -- which is NOT what Brooks argued, since he said that it was the fear of higher taxes in the future that people feared -- will inhibit private individuals' use of capital for investment in small businesses. Again, it's possible that some such effect exists (those evangelical Christians expecting apocalypse), but my argument is that people with capital considering investing it in small businesses are much more likely to consider current sales and demand of products, and their estimate of the potential desirability and sales of the product involved, and weigh these more heavily than vague general fears of a large-scale future economic slowdown caused by excessive government deficits.

Most sane non-economists, in short, tend to say "the economy in 10 years will be what it will be, and none of us -- macroeconomists at the head of the line -- have the foggiest idea what that will be. It will be better sometimes, and worse sometimes. The pragmatic response is to consider whether I can sell my product tomorrow, not whether tax rates will be higher in a decade."

In short, you have convinced me that businesspeople with little data, poor understanding of macroeconomics, and a penchant for depressive projections might be affected in their current investment decisions, as well as those who read vaguely worded doomsaying about deficits written by economics-challenged NYT pundits.

Only someone who has never worked in construction would think that government spending doesn't matter. Brooks is a man who hasn't talked with a blue caller worker in decades. Only a fool would make a claim like this - blue collar families quite well when federal spending comes to town. I know it was on the front page of the NWI times for years when the Borman expressway was modernized - federal spending made a material difference to the economy in NWI.

It is remarkable that this page will quote articles about the high wages of federal workers in one post and then claim that government spending doesn't make workers richer in another. Which is it?

E. Barandiaran - when are you starting your own blog? It is the hilarity that never ends with people like Kling as they simply ignore national accounting identities. Accountants are the people who tell the lawyers to serve the notices. The fact that macro is so far divorced from national accounting is the tragedy of our times.

Then, when I look at debt reduction, it is hard to ignore the facts of US and Japan. We had budget surpluses in the 1990's and the 1920's. The decades following periods of deficit reduction in the US have been associated with bad economic times. How about the 1970's - during the 1970's, we had the lowest federal debt to GDP in post war. We only began to grow significantly when Regan began defense spending in earnest.

It is hard to take a paper seriously when they look at the time frame that was used as the same time frame that derivatives experts used to prove that real estate prices never go down on across an entire nation. Then I don't see anything that references the national accounting identity: PSFB + GSFB + RWFB = 0 In other words, they are ignoring the primary accounting rules that must define money flow through an economy. It would be like studying if a light switch turns a light off or on while ignoring the fact there is a circuit breaker leading into a house - and then claiming that the light switch didn't seem to have much effect on the light being on or off.

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