Paul Krugman is a very smart and very annoying person. Over the past few years he's been hammering away at political and economic advocates for austerity policies with unmitigated glee and derision. He does so with a brio and condescension that some people can find off-putting -- but that doesn't mean that he's wrong.
After pummeling "austerians" for much of the essay, Krugman then endeavors to explain why so many policymakers and pundits still favor such policies:
The turn to austerity was very real, and quite large.
On the face of it, this was a very strange turn for policy to take. Standard textbook economics says that slashing government spending reduces overall demand, which leads in turn to reduced output and employment. This may be a desirable thing if the economy is overheating and inflation is rising; alternatively, the adverse effects of reduced government spending can be offset. Central banks (the Fed, the European Central Bank, or their counterparts elsewhere) can cut interest rates, inducing more private spending. However, neither of these conditions applied in early 2010, or for that matter apply now. The major advanced economies were and are deeply depressed, with no hint of inflationary pressure. Meanwhile, short-term interest rates, which are more or less under the central bank’s control, are near zero, leaving little room for monetary policy to offset reduced government spending. So Economics 101 would seem to say that all the austerity we’ve seen is very premature, that it should wait until the economy is stronger.
The question, then, is why economic leaders were so ready to throw the textbook out the window.…
Everyone loves a morality play. “For the wages of sin is death” is a much more satisfying message than “Shit happens.” We all want events to have meaning.
When applied to macroeconomics, this urge to find moral meaning creates in all of us a predisposition toward believing stories that attribute the pain of a slump to the excesses of the boom that precedes it—and, perhaps, also makes it natural to see the pain as necessary, part of an inevitable cleansing process. When Andrew Mellon told Herbert Hoover to let the Depression run its course, so as to “purge the rottenness” from the system, he was offering advice that, however bad it was as economics, resonated psychologically with many people (and still does).
By contrast, Keynesian economics rests fundamentally on the proposition that macroeconomics isn't a morality play—that depressions are essentially a technical malfunction.
Now this sounds a little far-fetched -- I mean, it's not as if pundits and policymakers can be that economically illiterate, right?
And then, as if Krugman planned it all along, along comes Michael Kinsley in the New Republic -- responding to a different Krugman essay that makes similar points -- with an essay titled "Paul Krugman's Misguided Moral Crusade Against Austerity." I think one of the points Kinsley is trying to make is that the policy divide between austerians and anti-austerians in Washington isn't as great as Krugman portrays. That's likely correct in Washington. During debates this year, even austerity "advocates" like John Boehner have made noises about not wanting to turn off the fiscal tap too soon, and even austerity "critics" like Barack Obama have talked about the need for fiscal rectitude. So yes, even austerity's critics sound austerity-curious at times.
Still, the guts of Kinsley's essay are … problematic. Some highlights:
It’s easier to describe what the anti-austerians believe than the austerians themselves. Anti-austerians believe that governments around the world need to stop worrying about their debts for a while and continue pouring money into the economy until the threat of recession or worse is well and truly over. Austerians want the opposite. But what is the opposite? Is President Barack Obama, for example, an austerian? To Republicans and conservatives, no: He pushed through a stimulus package of almost a trillion dollars early in his first term, and remains a symbol of “big spending.” To liberals and Democrats, yes: They feel we need a second and much larger stimulus and Obama has let us all down.…
Austerians believe, sincerely, that their path is the quicker one to prosperity in the longer run. This doesn’t mean that they have forgotten the lessons of Keynes and the Great Depression. It means that they remember the lessons of Paul Volcker and the Great Stagflation of the late 1970s. “Stimulus” is strong medicine—an addictive drug—and you don’t give the patient more than you absolutely have to.…
Krugman also is on to something when he talks about paying a price for past sins. I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners. That’s too easy. Sure let’s raise taxes on the rich. But that’s not going to solve the problem. The problem is the great, deluded middle class—subsidized by government and coddled by politicians. In other words, they are you and me. If you make less than $250,000 a year, Obama has assured us, you are officially entitled to feel put-upon and resentful. And to be immune from further imposition.
Austerians don’t get off on other people’s suffering. They, for the most part, honestly believe that theirs is the quickest way through the suffering. They may be right or they may be wrong. When Krugman says he’s only worried about “premature” fiscal discipline, it becomes largely a question of emphasis anyway. But the austerians deserve credit: They at least are talking about the spinach, while the Krugmanites are only talking about dessert. [Emphasis added.]
OK, so, a few things:
1) No Republican or conservative, anywhere in the United States, will claim that Barack Obama is an austerian. I'm just gonna assume that this is a typo and move on. [Editor's note: The typo has been cleared up on the New Republic's website, and the block quote above has been corrected.]
2) Stagflation in the 1970s was caused primarily by an inward shift of the aggregate supply curve due to a surge in commodity prices, particularly energy. Some central banks responded with accommodating monetary policies that accelerated inflation even further. Fiscal policy was an innocent bystander to this whole shebang. So I honestly don't know what the hell Kinsley is talking about.
More importantly, the current macroeconomic climate is really, really different from the 1970s. Inflation was a Big Bad Problem during that decade. It is not a problem right now. If inflation were spiking, then a genuine debate could be had on macroeconomic policy options. But that's not the case.
3) In his final paragraphs, Kinsley has managed to epitomize the exact critique that Krugman has served up.
The irony of this whole thing is that the Congressional Budget Office's recent figures put the lie to Kinsey's hidden assumption that the federal budget deficit is getting bigger and bigger. Right now it's shrinking at the fastest rate in postwar economic history.
The CBO also warns that the deficit will start to balloon up again due to entitlement spending, which suggests that Kinsley has half a point about thinking through entitlement reform. The thing is, that's a structural problem, not a business cycle problem. Kinsley et al. are acting as if the current fiscal climate demands immediate budgetary actions. And it doesn't -- it really, really doesn't.
Look, I think Paul Krugman has a few policy blind spots. His method of argumentation alienates as many people as it attracts. But he's not wrong when he's talking about austerity. In his response, Michael Kinsley has managed to embody the conventional wisdom in Washington -- and in doing so, embody every policy caricature of Paul Krugman's worldview.
Am I missing anything?
So last week was a pretty interesting one in wonkworld. Whether it was a disturbing week is in the eye of the beholder.
To recap: Last Monday the Heritage Foundation released a report claiming that proposed immigration reforms would cost north of $6 trillion. This report received a lot of pushback from liberal, libertarian, and conservative policy analysts.
As the debate fragmented into myriad sub-debates, one eddy focused on one of the co-authors, Heritage senior policy analyst Jason Richwine. As the Washington Post's Dylan Matthews unearthed, Richwine's Harvard University dissertation was titled "IQ and Immigration Policy." In it, he made the arguments that 1) Hispanic immigrants have lower IQs than white Americans, 2) that difference is partly due to genetic differences between the races, and 3) these differences will not dissipate with successive generations. You can figure out Richwine's policy conclusions for yourself. Dave Weigel at Slate also discovered that Richwine had contributed to a "white nationalist magazine" on the side.
Needless to say, Heritage started backpedaling as furiously as possible from Richwine. They made it clear that Richwine's dissertation was not a Heritage work product and that they didn't endorse it. Then, last Friday, the final boom came: Richwine "resigned" from Heritage. I put that in quotes because, given the circumstances, there's no earthly reason he would have resigned without some serious pressure from those above him at the think tank.
So, what does this all mean? Three thoughts:
1) Hey, so it turns out that ideas do matter in public policy. Not just any ideas either, but the quality of the ideas. This isn't to say that politics aren't involved in what happened this past week -- this is totally about political self-interest as well -- but the incomplete and distorted analysis that Heritage provided left it very vulnerable to pushback.
2) A few immigration skeptics on the right, such as Rush Limbaugh and Michelle Malkin, have decried what they see as intellectual PC-thoughtcrime run amok. Malkin in particular decries the "smug dismissal of Richwine's credentials and scholarship." Now, to be blunt, this is just a little rich coming from someone who has not been shy when it comes to smug dismissals of Ivy League credentials in the past. That said, whenever someone goes from anonymous to the focus of a white-hot media scrum to fired inside of a week, I get queasy. Was there a rush to judgment here?
I'd break this down into two steps: First, whether Heritage acted appropriately, and second, whether Richwine's work merits the mantle of brave truth-teller. On the former, well, this is a key difference between a think tank and a university. Think tanks are trying to influence public policy, and the taint of having someone dabbling with the racist fringe on the payroll is a difficult one to erase. So, yeah, it shouldn't be all that shocking that Richwine is no longer working at Heritage, whereas university professors who say or write controversial things stay on the payroll.
As for the quality of Richwine's dissertation, the primary defense that Malkin et al. offer appears to be the caliber of Richwine's dissertation committee. From Malkin's post:
No researcher or academic institution is safe if this smear campaign succeeds. Richwine’s dissertation committee at Harvard included George Borjas, Robert W. Scrivner Professor of Economics and Social Policy. The Cuban-born scholar received his PhD in economics from Columbia. He is an award-winning labor economist, National Bureau of Economic Research research associate, and author of countless books, including a widely used labor economics textbook now in its sixth edition.
Richard J. Zeckhauser, the Frank P. Ramsey Professor of Political Economy at JFK, also signed off on Richwine’s dissertation. Zeckhauser earned a PhD in economics from Harvard. He belongs to the Econometric Society, the American Academy of Sciences, and the Institute of Medicine (National Academy of Sciences).
The final member of the committee that approved Richwine’s "racist" thesis is Christopher Jencks, the Malcolm Wiener Professor of Social Policy at Harvard's JFK School. He is a renowned left-wing academic who has taught at Harvard, Northwestern, the University of Chicago, and the University of California, Santa Barbara. He edited the liberal New Republic magazine in the 1960s and has written several scholarly books tackling poverty, economic inequality, affirmative action, welfare reform, and yes, racial differences (The Black White Test Score Gap).
The willingness of Republican Gang of 8'ers to allow a young conservative researcher and married father of two to be strung up by the p.c. lynch mob for the crime of unflinching social science research is chilling, sickening, and suicidal.
These are serious people doing serious work.
I must confess that Malkin's lament made me think of this:
This is not to denigrate Richwine's dissertation committee. Still, as someone all too familiar with the Ph.D. life, let's just say that an argument based solely on authority is not convincing. I've perused parts of Richwine's dissertation, and … well … hoo boy. Key terms are poorly defined, auxiliary assumptions abound, and the literature I'm familiar with that is cited as authoritative is, well, not good. It's therefore unsurprising that, until last week, Richwine's dissertation disappeared into the ether the moment after it was approved. According to Google Scholar, no one cited it in the four years since it appeared. Furthermore, Richwine apparently didn't convert any part of it into any kind of refereed or non-refereed publication. Based on the comments that Weigel and others have received from Richwine's dissertation committee, one wonders just how much supervising was going on.
3) This whole affair should be a cautionary tale to Ph.D. students and profs alike. For the grad students -- particularly those planning on going into the policy world -- your dissertation will follow you for the rest of your life. Don't think you can just grind one out barely above the bar and it won't matter. And if you're puzzled why your advisor or a member of your dissertation committee is acting all anal retentive about some aspect of your thesis, there's a good reason. Our dissertation students follow us for the rest of our careers. The last thing we want as advisors is to get a phone call from a reporter asking us why we let some dubious piece of work skate through. It's our asses on the line as well.
Am I missing anything?
Margaret Thatcher has passed away. I could try to talk about Thatcher's place as a world historical figure, but let's face it, there's going to be an orgy of columns on that very point over the next week or so -- anything I write on the topic would be second rate at best. I could write about my own memories of living in London during the late Thatcher era, but to be honest, that's not terribly interesting -- it's a tale of fading political popularity and really strident left-wing art.
So, instead, consider the following two ways in which Thatcher has left a legacy in international relations theory:
1) Diversionary war. There's a large literature in international relations on the notion of using war against a foreign adversary as a way to distract domestic opposition and/or bolster domestic support for a leader (see Chiozza and Goemans for the latest iteration of this literature). It's a little-known fact, but International Studies Association rules prohibit any paper on this topic from being published without a Thatcher reference.
I kid, but only barely. The Falklands War represents the paradigmatic case of diversionary war theory for two reasons. First, almost every analysis of the conflicts attributes the Argentine junta's growing domestic unpopularity as a key cause of their decision to launch the conflict (though, of course, it's a bit more complicated than that). Second and more importantly, absent the Falklands War, Margaret Thatcher would be remembered as a failed one-term prime minister. Victory over the Argentines in the South Atlantic enabled Thatcher to win re-election.
In truth, it's far from clear that diversionary war is all that common a practice (if it was, we'd be drowning in conflicts since 2008). The Falklands War, however, does provide the paradigmatic case.
2) The spread of ideas. It's fitting that the New York Times ran a story over the weekend about the boomlet in history about studying the growth of capitalism. Thatcher's role in advancing the spread of free-market ideas to other policymakers was crucial. To explain why free-market capitalism became the pre-eminent idea in economic policymaking over the past few decades, you have to look at Thatcher. She preceded Reagan, becoming the first leader in the developed world to try to change her country's variety of capitalism. Even after Reagan came to power, one could persuasively argue that Thatcher mattered more. As some international political economy scholars have noted, ideas and policies spread much faster when "supporter states" embrace them vigorously rather than reluctantly. Thatcher embraced capitalism with a near-religious fervor, acting as a vanguard for the rest of Europe on this front. For more on the role that Thatcher and her advisors played, see Yergin and Stanislaw's The Commanding Heights, or Jeffry Frieden's Global Capitalism.
OK, readers, in what other areas of international relations and comparative politics did Margaret Thatcher leave her mark?
A little more than a year ago I blogged that global policymakers had reached a "focal point" moment on the merits of austerity as a macroeconomic policy during a global recession. Namely, central bank authorities had concluded that the policy doesn't really work well at all. If true, this was a big deal. One could argue that from the May 2010 Toronto G-20 summit to the end of 2011 was a period where the austerity policies were widely touted and occasionally implemented. If this was the wrong policy, and there was a shift, that's kind of a big deal.
So where are we now on this?
On the public commentary side, I'd say we're approaching near-consensus on the failures of austerity for large economies. The passing of time has allowed for a comparative look at the data, and the results are not pretty for austertity enthusiasts. Martin Wolf sums up the indictment rather neatly, riffing off of a paper by Paul De Grauve and Yuemei Li:
[T]he chief determinant of the reduction in spreads over German Bunds since the second quarter of 2012, when OMT [the ECB pledge to open up its monetary taps] was announced, was the initial spread. In brief, "the decline in the spreads was strongest in the countries where the fear factor had been the strongest."
What role did the fundamentals play? After all, nobody doubts that some countries, notably Greece, had and have a dreadful fiscal position. One such fundamental is the change in the ratio of debt to gross domestic product. The paper makes three important observations. First, the ratio of debt to GDP increased in all countries even after the ECB announcement. Second, the change in this ratio turned out to be a poor predictor of declines in spreads. Finally, the spreads determined the austerity borne by countries.
On the policy output side, there's been a demonstrable but partial shift. In the past year, the European Central Bank, Federal Reserve, and Bank of Japan have rejected austerity policies in favor of greater levels of quantitative easing. Furthermore, contrary to the outright hostility developing countries directed at quantitative easing in the fall of 2010, the reaction to the past half-year of quantitative easing has been far more muted. When the latest G-20 communique said:
Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates. We commit to monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes.
That was code for "hey, G-7 central banks, you gotta do what you gotta do. We get that." Which is demonstrably different from yelling "currency wars", a meme that seems not to have caught fire this time around.
Top central bank authorities have also been willing to speak truth to power -- in this case, GOP members of Congress. John Cassidy recounts Ben Bernanke's testimony from yesterday:
Departing from his statutory duty of reporting to the Senate Banking Committee on the Fed’s monetary policy, Bernanke devoted much of his testimony to fiscal policy, warning his congressional class that letting the sequester go ahead would endanger the economic recovery and do little or nothing to reduce the country’s debt burden.
"Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant," Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. "Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run."
Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. "To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run," Bernanke said. "Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget."
So does this mean some additional policy shifts? Alas, probably not. The consensus against austerity seems pretty strong on the monetary policy side of the equation. On the fiscal policy dimension, however, austerity remains the de facto policy for a lot of economies. This includes the United States, which is conventionally depicted as not having embraced austerity. The New York Times' Binyamin Appelbaum outlines the current fiscal austerity in his story today:
The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war.
And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years.
The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back.
Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.
Total government spending continues to increase, but those broader figures include benefit programs like Social Security. Government purchases and investments expand the nation’s economy, just as private sector transactions do, while benefit programs move money from one group of people to another without directly expanding economic activity.
The reason for this split does not require rocket science. Monetary policy is a tool of politrically insulated central bankers. Fiscal policy is a tool for elected politicians. The public might dislike specific budget cuts, but damn if they don't love austerity in theory.
So, in retrospect, I think early 2012 was a focal point -- but only for central bankers and commentators. As Cassidy notes, there remain elected politicians who are super-keen on austerity:
Corker, a former builder who is a long-time critic of Bernanke’s expansionary policies, called him "the biggest dove since World War Two." Toomey, a former head of the conservative lobbying group Club for Growth, questioned whether the sequester would have any real impact on the economy. Bernanke shrugged off the criticisms, calmly and methodically laying out the realities of the situation.
David Brooks' New York Times column this AM is a riff off of a Peter Thiel lecture about the odd relationship between capitalism and competition. Thiel's point is that our meritocratic society conditions individuals to compete -- for admission to good schools, good jobs, and so forth -- when, in fact, the goal of the capitalist should be to innovate their way to the capitalist holy grail -- a temporary monopoly.
Brooks takes this argument and runs with it:
students have to jump through ever-more demanding, preassigned academic hoops. Instead of developing a passion for one subject, they’re rewarded for becoming professional students, getting great grades across all subjects, regardless of their intrinsic interests. Instead of wandering across strange domains, they have to prudentially apportion their time, making productive use of each hour.
Then they move into a ranking system in which the most competitive college, program and employment opportunity is deemed to be the best. There is a status funnel pointing to the most competitive colleges and banks and companies, regardless of their appropriateness.
Then they move into businesses in which the main point is to beat the competition, in which the competitive juices take control and gradually obliterate other goals. I see this in politics all the time. Candidates enter politics wanting to be authentic and change things. But once the candidates enter the campaign, they stop focusing on how to be change-agents. They and their staff spend all their time focusing on beating the other guy. They hone the skills of one-upsmanship. They get engulfed in a tit-for-tat competition to win the news cycle. Instead of being new and authentic, they become artificial mirror opposites of their opponents. Instead of providing the value voters want — change — they become canned tacticians, hoping to eke out a slight win over the other side.…
You know somebody has been sucked into the competitive myopia when they start using sports or war metaphors. Sports and war are competitive enterprises. If somebody hits three home runs against you in the top of the inning, your job is to go hit four home runs in the bottom of the inning.
But business, politics, intellectual life and most other realms are not like that. In most realms, if somebody hits three home runs against you in one inning, you have the option of picking up your equipment and inventing a different game. You don’t have to compete; you can invent (emphasis added).
Now, there's definitely a strong element of truth to Brooks' point. True innovators in many fields are searching for the genuinely new idea, and then run with it. I, for one, have a (temporary) monopoly in the international relations theory and zombies market. So I get what Brooks is trying to say here.
And yet, in the end, I think this is a crap argument, for a few reasons:
1) Brooks too neatly divides the innovation from the competition elements of market life. Indeed, the company that made Thiel super-rich -- Facebook -- is exhibit A for this point. Facebook didn't really innovate anything that MySpace or other social networking sites hadn't done already. Rather, because social networking is an arena where greater size means greater profitability, Facebook managed to beat its competitors at gaining market share. It did this through a few bells and whistles, but Facebook did not "create a new market and totally dominate it," as Brooks would put it.
2) Brooks has a tendency to conflate different dimensions of social activity as if they're one and the same, and that bolded sentence is exhibit A of that. In point of fact, a politician usually can't invent a different game -- or, if s/he does, it's often called a coup or a revolution. Brooks is clearly disgusted with the ticky-tack, news-cycle, tweet-length tactical fights of politics, and I can't say I blame him. But Brooks of all people should know that politics is also about Very Big Arguments that cannot be avoided. Say what you will about either Barack Obama or the GOP House of Representatives, but over the past two years they've been having The Big Argument. I don't think either of them can risk abandoning the intellectual competition (though maybe this is another option).
Similarly, as someone schooled in intellectual life, walking away from an argument means you've lost the argument. That's not the end of the world, but given that arguing about ideas is what intellectuals do, it's not great either. I think Thiel's argument works well for business -- but business is manifestly not like other spheres of life.
3) It's worth noting that Brooks and Thiel mistakenly conclude that if the meritocratic system was adjusted, the best and the brightest would become better entrepreneurs. I question that hypothesis. Here's the pithy Larry Summers observation that's worth remembering. Summers was actually making an argument consistent with Brooks and Thiel, pushing back against the Amy Chua "Tiger Mom" silliness:
"Which two freshmen at Harvard have arguably been most transformative of the world in the last 25 years?" he asked. "You can make a reasonable case for Bill Gates and Mark Zuckerberg, neither of whom graduated." If they had been the product of a Tiger Mom upbringing, he added, their mothers would probably have been none too pleased with their performance.
The A, B and C alums at Harvard in fact could be broadly characterized thus, he said: The A students became academics, B students spent their time trying to get their children into the university as legacies, and the C students—the ones who had made the money—sat on the fund-raising committee.
The thing is, these groups are more self-selecting than Summers, Brooks and Thiel believe. Which means altering the meritocratic incentives won't change all that much.
Am I missing anything?
The term "inflection point" has become one of those overused bits of meaningless jargon in political discourse. I'm rather more fond of the notion of a "focal point" -- that is to say, an event or cluster of events in which everyone that cares about a particular problem focuses on the same set of stylized facts -- after which, they conclude that, gee, maybe the status quo set of policies ain't working so well and there should be a new status quo.
The fall of 2008 was one such focal point, during which there was remarkable consensus that a Keynesian boost in public spending was the only way to avert another Great Depression. At the fiirst G-20 leaders summit in Washington, there was consensus on expansionary fiscal policy. Oh, sure, there were grumblings about "crass Keynesianism," but even Germany reluctantly went along.
The Greek sovereign debt crisis was another such focal point. Greek profligacy seemed to be a synecdoche for excessive government borrowing and lax fiscal discipline. With the global economy seemingly still in the doldrums, a lot of Europrean governments climbed on the "expansionary austerity" bandwagon. By the Toronto G-20 summit in June 2010, the consensus had switched from Keynesian stimulus to fiscal rectitude. Oh, sure there were mutterings about "short-term austerity makes no macroeconomic sense whatsoever in a slack economy" but even Barack Obama started talking about slashing government spending.
Are we at another focal point? Consider the following:
1) According to the New York Times' Stephen Castle, European leaders now seem to recognize that austerity on its own ain't working:
Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.
A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral.
2) The data is starting to come in on governments that have embraced austerity whole-heartedly, and it's pretty grim. Cue Paul Krugman on Great Britain:
Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.
3) Even commentators who would be tempermentally sympathetic with austerity are starting to
bash Germany question whether it's a solution. Consider Walter Russell Mead:
It takes some truly talented screw ups to come up with a worse plan for Greece than the one the Greeks have developed for themselves, but the Germans have risen to occasion in fine form....
Deep reform is needed if Greece is to stay in the euro, and so far the Greek political establishment — firmly backed by public opinion — is digging in its heels. Much whining, much talk, many promises and precious little action seems to be the favored Greek approach to the crisis. On the other hand, the austerity policies the Germans favor are hopelessly biased in favor of German banking interests and are aimed more at the preservation of the reputations of German politicians than at helping Greece.
The German political establishment seems willing to destroy Europe to avoid telling German voters the truth about how stupid it has been.
[UPDATE: For exhibit B of this trend, see this Niall Ferguson interview with Henry Blodget. My favorite part of the interview is this quotation: "I think the reason that I was off on that was that I hadn't actually thought hard enough about my own work.... My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago."]
4) U.S. 4th quarter data reveals that, consistent with GOP criticisms, the government has been the real drag on the U.S. economy. Not quite consistent with GOP criticisms: the reason why the government is dragging down the U.S. economy. Cue Mark Thoma:
[P]remature austerity -- cutting spending before the economy is ready for it -- is taking a toll on the recovery. The fall in government spending reduced fourth-quarter growth by 0.93 percent; if government spending had remained constant, GDP growth would have been 3.7 percent, rather than 2.8 percent.
This is the opposite of what the government should be doing to support the recovery. We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape.
We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Austerity in the short-term simply makes it harder for the economy to recover and delays the day when you can finally address budget issues without harming the economy. The lesson is that government needs to support the recovery, not oppose it through a false promise that contraction of one sector in the economy will be expansionary.
5) Central banks are acting more gung-ho on expansionary monetary policy. The unspoken quid pro quo in Europe seems to the that the ECB will expand its balance sheet and turn on the monetary taps in return for some kind of fiscal compact. The U.S. Federal Reserve announced a zero-interest rate policy for the next three years. Even China is showing (halting) signs that its reverted back to monetary easing.
Given that the United States has been the country to move the slowest on austerity, and given that the United States is doing the best job among the OECD economies (an admittedly low bar) of restoring confidence among investors and paying down non-governmental debt, have we reached another focal point?
One could argue that Krugman and Thoma are just biased in favor of Keynesianism, that Greece and the other Club Med countries haven't really embraced austerity, that the Euromess is dragging down British economic growth, and that the long-term numbers on developed country debt are really very scary. There are some large grains of truth in many of those statements.
It doesn't necessarily matter, however. Greece was not a genuine harbinger of the fiscal problems of large markets -- but it was a useful hook for austerity advocates to spread their gospel. What matters now is not whether these perceptions about the failure of austerity are 100% accurate, but whether they are accurate enough to become the new conventional wisdom.
What do you think?
I was never formally introduced to either Vaclav Havel or Christopher Hitchens, but I encountered both of them exactly once. I was lucky enough to hear Havel deliver a speech at Stanford University in the fall of 1994. I don't remember much about the speech itself beyond a vaguely metaphysical theme. What I do remember is a specific physical gesture. At one point during the proceedings, at Havel's request, Joan Baez came on stage, played her guitar, and sang a song. After Havel spoke, everyone exited the stage, Havel last. He noticed Baez's guitar, and picked it up. As he left the stage, he looked over his shoulder and raised the guitar over his head. The expression on his face screamed, "can you believe I'm holding Joan Baez's friggin' guitar??!!!"
My encounter with Hitchens was a little more mundane -- we were both participating at an AEI panel in early 2001 on international law. I was on a morning panel, and afterwards, Hitchens gave the lunch keynote. I can recall the standard Hitchens attributes: him reeking of cigarettes and alcohol, but nevertheless giving a very good speech. What I also remember is talking with one of the AEI assistants who was tasked with "handling" Hitchens for the day. We started chatting, and at one point she said plainly, "the minute he leaves here will not be soon enough for me."
I'd love to be able to divine some deeper meaning from their deaths, but I'm not quite as inspired a writer as either of them. It's funny to think that Hitchens started out politically to the left of Havel, swerving a bit to his right about a decade ago, but that's not a theme. Rather, this being a blog, I have two unrelated thoughts.
First, as someone who has written a thing or two about public intellectuals, Havel really was extraordinary as someone who could be trusted with power. As Mark Lilla noted in his excellent The Reckless Mind, intellectuals don't really have a distinguished track record when they actually acquire power. Havel was a notable exception -- perhaps because he never really thought he should have it. In David Remnick's New Yorker write-up of the end of Havel's (politically successful) presidency, the politics of doubt that I like so much shines through quite clearly:
At times, Havel felt thoroughly insufficient, a fraud. A familiar Prague voice, the voice of Kafka, told him what anyone who has grown up in a police state knows instinctually—that it could all end as easily as it started.
"I am the kind of person who would not be in the least surprised if, in the very middle of my Presidency, I were to be summoned and led off to stand trial before some shadowy tribunal, or taken straight to a quarry to break rocks," he told a startled audience at Hebrew University, in Jerusalem, less than six months after taking office. "Nor would I be surprised if I were to suddenly hear the reveille and wake up in my prison cell, and then, with great bemusement, proceed to tell my fellow-prisoners everything that had happened to me in the past six months. The lower I am, the more proper my place seems; and the higher I am the stronger my suspicion is that there has been some mistake."
In Havel's thirteen years as President—first of Czechoslovakia and then, after the Slovaks and the Czechs divided into two states, in 1993, of the Czech Republic—many of his advisers repeatedly begged him to delete, or at least soften, these public moments of self-doubt. What effect would they have on an exhausted people waiting for the radical transformation of their country? (Imagine Chirac or Blair, Bush or Schröder beginning a national address with an ode to his midnight dread!) Havel, however, would not be edited. The Presidential speech was the only literary genre left to him now, his most direct means of expressing not only his personal feelings but also the spirit of the distinctively human politics he wanted to encourage after so many decades of inhuman ideology. "Some aides tried to stop him, but these speeches had a therapeutic value for him," Havel's closest aide, Vladimír Hanzel, told me.
As Ta-Nehisi Coates observed recently, most people are mediocre and, if they were given power, would likely not exercise it all that benevolently. Havel was about as far away from mediocre as one could be.
Hitchens was not mediocre, but neither was he gentle, and so his passing generated a more variegated response. There was the eruption of fond memories from fellow writers at his ability to consume and produce prodigious amounts of prose and other substances -- this one is my favorite. It's also led Glenn Greenwald to grouse about the hagiography that the death of public figures ostensibly produces:
We are all taught that it is impolite to speak ill of the dead, particularly in the immediate aftermath of someone’s death. For a private person, in a private setting, that makes perfect sense. Most human beings are complex and shaped by conflicting drives, defined by both good and bad acts. That’s more or less what it means to be human. And — when it comes to private individuals — it’s entirely appropriate to emphasize the positives of someone’s life and avoid criticisms upon their death: it comforts their grieving loved ones and honors their memory. In that context, there’s just no reason, no benefit, to highlight their flaws.
But that is completely inapplicable to the death of a public person, especially one who is political. When someone dies who is a public figure by virtue of their political acts — like Ronald Reagan — discussions of them upon death will be inherently politicized. How they are remembered is not strictly a matter of the sensitivities of their loved ones, but has substantial impact on the culture which discusses their lives. To allow significant political figures to be heralded with purely one-sided requiems — enforced by misguided (even if well-intentioned) notions of private etiquette that bar discussions of their bad acts — is not a matter of politeness; it’s deceitful and propagandistic. To exploit the sentiments of sympathy produced by death to enshrine a political figure as Great and Noble is to sanction, or at best minimize, their sins. Misapplying private death etiquette to public figures creates false history and glorifies the ignoble.
Meh. I read a lot of the Hitchens write-ups, and a fair number of them were pretty blunt about his personal and political dark sides. Even critics like Corey Robin acknowledge the "consistent line" of “Yes, he was wrong on Iraq, but…” in the public responses to his death. This suggests that Hitchens has not, in fact, been a subject of one-sided requiems. even by those who liked him.
I suspect two things are going on in the public reaction to Hitchens' death, one unique to him and one that's more general. What was unique about Hitchens was that he was an archetype brought to life. Here was a real, honest-to-goodness heavy drinking, heavy smoking, occasionally rude Brit who could nevertheless dash off excellent writing on a daily basis. Where do you actually see that outside of the movies nowadays?
The more general trend is that in an age of self-publishing, perhaps the personal and the public are more fused than Greenwald realizes or comprehends. Hitchens hung around with a lot of writers, and as friends it's not shocking that their initial responses will be to talk about the private individual behind the public persona. As time passess, more strangers will push back, there will be more sober reassessments, and eventually some kind of perspective is achieved. The thing about the internet is that it amplifies these cycles of reactions and counterreactions for all to see.
Your humble blogger is down in Washington DC to attend FP's Global Thinkers gala, in honor of the magazine's annual Top 100 Global Thinker list. I look forward to seeing some of the thinkers I know (Tyler Cowen, Joseph Nye) and meeting the many that I don't know.
This list tends to beget a lot of carping from
my friends who erroneously believe that I contol the entire FP-verse like a Muppeteer in the Twitterverse about who's on the list, and in some ways, that's kind of the point -- to foster debate. I'd like to ask my readers a slightly different question: who got overlooked? Who are the BigThinkers that FP missed?
Put your answer in the comments!
So the eurozone crisis is metastasizing from really bad to even worse. Over at The New Yorker, James Surowiecki blogs that what's so frustrating about the situation is that the impediments to a solution are easily surmountable:
[W]hat’s easy to miss, amid the market tremors and the political brinksmanship, is that this is that rarest of problems—one that you really can solve just by throwing money at it....
The frustrating thing about all this is that there is a ready-made solution. If the European Central Bank were to commit publicly to backstopping Italian and Spanish debt, by buying as many of their bonds as needed, the worries about default would recede and interest rates would fall. This wouldn’t cure the weakness of the Italian economy or eliminate the hangover from the housing bubble in Spain, but it would avert a Lehman-style meltdown, buy time for economic reforms to work, and let these countries avoid the kind of over-the-top austerity measures that will worsen the debt crisis by killing any prospect of economic growth....
So the problem is not that the E.C.B. can’t act but that it won’t. The obstacles are ideological and, you might say, psychological.
As someone who agrees with Surowiecki on the economic diagnosis, the political scientist in me is forced to call a flagrant foul on this kind of analysis. In labeling the problem as one of "ideology" or "psychology," Surowiecki is explicitly arguing that it's just so absurd that the correct policy is not being pursued. If only someone could talk some sense into the key policymakers, then -- snap! -- the crisis would be resolved.
As someone who studies this stuff for a living, simply saying that political ideology, interest, or institutions can be easily changed borders on the comical. Ideas, interests and institutions are the bread and butter of politics, and all of them are far stickier than economists would like you to believe. There's more than seven decades of entrenched thinking that would require the Bundesbank and the ECB to alter their approach. Crisis or no crisis, that's not just easily dismissed.
Furthermore, looking at the Franco-German crisis bargaining, any actual deal to bolster EFSF resources, empower the ECB, and/or create something approximating a fiscal union would require that Southern Europe agree to remake their domestic economies to more closely resemble the German model. This has always been Merkel's bargain: she's been willing to cede greater power to the EU provided that EU policy preferences looks more like Germany. This makes sense for Germany, but the kind of wrenching changes and adjustments that will be asked of Spain and Italy are massive. The fact that Berlin -- rather than Brussels -- is the source of this diktat will add a fun new level of political difficulties as well.
A deal could be reached, but no one should be kidding themselves -- it is fantastically difficult, and saying that just "politics" or "ideology" or "psychology" is getting in the way doesn't make it any easier.
My National Interest review of finance books has provoked a few blog responses. Actually, it's one paragraph in particular of that review that's sparked some discussion:
[John] Quiggin thinks he’s only writing [in Zombie Economics] about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.
Now, this point is not original to me -- this was a combination of Thomas Kuhn's Structure of Scientificd Revolutions, with a dash of Alan Blinder's Hard Heads, Soft Hearts. But it's prompted something of a blog kerfuffle.
Henry Farrell in particular takes me to task:
I don’t buy Dan’s arguments here. As with most stage theories (not only Marx, but also Kuhn), the mechanisms of institutional reproduction and change in his account are sorely underspecified. ‘Contradictions accumulate’ isn’t a much more helpful empirical claim than ‘shit happens.’ To really understand what is happening, you need a proper theory of the underlying conditions for ideational retention and reproduction. Why do some ideas decay into self-parody, while others do not? After all – not all ideas decay (or at least: not all ideas decay at the same rate). Some economic ideas have continued for centuries (the limited liability corporation), while others have disappeared completely, while others yet have disappeared and reappeared. We don’t know why – but if we want to make the kinds of claim that Dan is making, we need to know why, or at the least, have some rough idea. Otherwise, what we have is at best a sometimes-observed empirical regularity melded to a smidgen of intuition, which is not enough (in my book at least) to dismiss a counter-claim (that one particular idea may have a longer shelf life than previous versions) out of hand.
I'm not sure that the idea of the limited liability corporation falls into the same category as ideas like Keynesianism or the Chicago school of economics. The former is an institutional innovation that was designed to solve a well-defined problem limited in scope; the latter set of ideas address a fuzzier but more intellectually ambitious domain of how a national economy functions. Still, Farrell makes a interesting observation.
This is a blog and not an academic journal, so I'm not going to be able to satisfy all of Henry's criteria, but here goes:
First, I do wonder if ideas in political economy function a bit like self-similarity in a Mandlebrot set, in that different sets of ideas have different lifespans but nevertheless follow roughly the same arc. It is possible that some ideas that appear to persist indefinitely are merely slower-moving in their half-life than the macroeconomic paradigms that Quiggin discussed in Zombie Economics. Now, that's just intuition -- I have no idea if it's true. But I think it's an interesting intuition.
Now, Farrell wants "a proper theory of the underlying conditions for ideational retention and reproduction." OK, if I were to sketch this out, I'd assume that the demand for ideas comes from living in a causally complex world in which intellectuals and policymakers want cognitive road maps to provide some clarity about what to do and what to say. I'd further assume that the political and social world in which we live is in a constant state of change, making it difficult to develop "timeless" theories of political economy.
With those assumptions, I'd postulate the following:
First, ideas in political economy are more likely to survive birth pangs when:
A) The theory's predicted effects appear to hold -- not necessarily via causal mechanisms internal to the theory, but the outcome is nevertheless consistent with the theoretial predictions.
B) The theory yields policy implications favorable to at least one important interest group. In other words, there's a political incentive for at least one power bloc to support this particular model.
Second, the longer the predicted effects of the theory appear to hold up, the more entrenched the idea becomes in intellectual and policy discourse. There are path dependent effects to ideas. The ones with longer pedigrees will have greater ideational power -- even if the initial conditions that led to the original theory no longer apply.
Third, the longer that a particular idea appears to explain its particular domain, the greater the incentive for intellectuals to engage in ideational arbitrage and apply the idea to more disparate phenomena. Indeed, Quiggin's book demonstrates this trend within the Chicago School, in which ideas that seemed to hold up pretty well in microeconomic price theory get applied to a whole range of other range of economic behavior.
Fourth, the longer a theory stays in circulation and the more cultural cachet it acquires, the greater the incentive for political institutions to appropriate the idea -- and in the process, adjust the content of the idea to fit their own preferences.
Fifth, the longer a theory stays in circulation, the more likely that propagandists will simplify the content and causal mechanisms of the idea. This allows for a greater spread of the model beyond intellectuals to more powerful actors: policymakers with actual line authority, journalists who write about said policymakers, etc.
Sixth, the longer a theory stays in circulation, the greater the likelihood of underlying conditions in the real world shifting to the point where the original model's empirical claims do not hold up. This will necessarily require the development of auxiliary hypotheses that might contradict some of the original arguments made in the paradigm.
The third through sixth postulates increase the likelihood that, over time, an idea's explanatory power will erode to the point when new challengers can potentially overtake it.
Now, a fully-fleshed theory of ideational change would need to state the conditions under which these dynamics are likely to be more or less powerful. Some theorie, for example, might develop expectations and behaviors that reinforce the original hypotheses. These theories would be expected to last longer. That said, I will leave this part of the model to the commenters.
*As an aside, I find it fascinating that, of all my book reviews, it's the ones when I provide a largely favorable review with a soupcon of criticism that provokes the author (click here for one past example). I've also written some not-so-nice book reviews in my day -- but never heard a peep from those authors.
This is an interesting press release:
In response to the policy challenges presented by the economic crisis and the need to develop fresh approaches to economic theory, a group of top academics, policy-makers, and private sector leaders today announced the creation of the Institute for New Economic Thinking (INET)....
The Institute was established with a pledge of $5 million per year for 10 years from Open Society Institute Chairman George Soros, a long-time critic of classical economic theory, who will fund the effort through the Central European University (CEU).
The Institute will make research grants, convene symposia, and establish a journal. A first conference will be at King's College, Cambridge on April 9-11. Scholars will explore the implications of the financial crisis for regulatory policy. The first round of research grants will be made before the end of the year to cutting-edge scholars working with leading universities around the world. INET’s Executive Director will be Robert Johnson, an economist with long experience in government, academia, and the private sector....
Speaking in Budapest at the CEU, through which INET will be funded and which will be a hub of the INET network, Soros said, “The entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices, we must find a new paradigm and rebuild from the ground up. I decided to sponsor INET to facilitate the process. I hope others will join me.” Because he is both an INET benefactor and proponent of a particular theory, Reflexivity, Soros will recuse himself from the grant-making process. “While I hope reflexivity will be one of the concepts examined, there are numerous alternatives to the prevailing dogma that must be explored.” Soros added.
Based on his track record, Soros is not very good at influencing political movements, but he is quite good at influencing the world of ideas. So, it's quite possible that this new institute will wean economists from the neoclassical paradigm.
Over at Newsweek, Michael Hirsch certainly thinks this is important:
It might be tempting to dismiss all this as a war of words among brainiacs. It's not. The critical issues being discussed in Washington about the future regulation and control of the financial industry—the very nature of Wall Street and the health of the economy—depend on this battle of ideas. What led to wholesale deregulation in the '90s and '00s wasn't just Wall Street lobbying money. It was also that key legislators and policymakers, among them Larry Summers, persuaded themselves that deregulation was sound economics and good policy, and that markets and Wall Street institutions could take care of themselves. Many of those views have been discredited by the crisis. But in the absence of a new paradigm of economics, confusion still reigns in Washington. With no new concept of the proper role of government and regulation in the economy, of the proper balance between the markets and their minders, the old school still dominates.
Similarly, Veronique de Rugy is freaked out by this Soros initiative, which suggests it might actually matter.
I think Hirsch is correct about the persistence of market-friendly ideas contained in Washington Consensus. Let's call this the zombie Washington Consensus, because it keeps moving on even after suffering politically fatal blows.
That said, real shifts in ideas only take place when one dominant idea is replaced by another dominant idea that has both intellectual and political cachet. Looking at Soros' Board of Advisors, I'm not sure there is a consensus about what paradigm should replace a free market approach.
Hopefully, this institute will lead to a mess of heterodox work that forces everyone to bring their "A" game to the problems at hand -- includind free market enthusiasts. The worst-case scenario is that George Soros is funding the economic equivalent of Ross Perot's Reform Party.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.