Blind Leading the Blind

In a post on his NY Times blog, Paul Krugman points out that the letter published in the Wall Street Journal by a group of right wing academics and talking heads has no serious economic understanding behind it. This is simply right wing ideologues calling for Bernanke to utter the standard right wing mumbo-jumbo over the chicken bones as the right way to 'cure' the economic ills:

OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either.

This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings, because Americans were doing fine thanks to rising home prices, then declared in 2007 that there was no reason to worry about the credit market?

But the real question is, what is their model of the mess we’re in? What do they think is happening?

I know what my model is: I believe we’re suffering from a severe deleveraging shock, in which the immediate problem is to get someone to make up for the loss of debtors’ spending. (The Greek-letter and funny diagram version is coming soon.) According to that view, the Fed needs to do all it can to reduce the real rates unconstrained borrowers face, and could badly use help from fiscal policy, too. Quantitative easing is literally the least the Fed can do.

If you look at the signatories, few of them are economists and the ones that are economists belong to the camp that believes that there is 14 million unemployed because these people suddenly decided they would rather have leisure time than hold down a job because their "economics" teaches them this. For example, from the Real Business Cycle camp:

Unlike other leading theories of the business cycle, RBC theory sees recessions and periods of economic growth as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and government should therefore concentrate on the long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.

So it is best to leave the unemployed unemployed in order to "teach them" that they need to retrain themselves to fit market needs. So all those 50+ construction workers should sign up for classes at MIT to become genetic scientists because the US has a crying need for more expertise in this area. The unemployed retail people should go to Harvard and get law degrees so they can help with the forclosure crisis. And all those unemployed teachers, policemen, and firemen should go to Stanford and get training in microelectronics so they can get jobs in Silicon Valley.

It drives me to fury to think that people can be so blinded by their ideology that they can't see that the unemployed are unemployed because the banking panic has caused credit to contract and for debtors to scurry to pay off debts because they fear they may lose their job and they need a nestegg to protect them from hard times. But if everybody scurries to build up a nestegg, it just means millions get thrown out of a job because the economy seizes up. This has nothing to do with "structural unemployment". This is a panic pure and simple. And if you don't treat it by pumping money into the economy to fill in for the missing spending, you get years and years of unemployement as the economy "adjusts" by getting used to not having that spending and people build up their nesteggs to the point where they are no longer terrified of the economy. It is a horrible waste of people's skill and the economy's productive potential. But the ideologues can't see this. Tragedy!