Dean Baker Defuses Gregory Mankiw's Loaded Question

The political right in the US is very successful because it feels no constraints. Any tactic is "legitmate" in their political struggle: inuendo, lies, character assassination, rewriting the past, etc.

Here is an excellent example of the right, the economist Gregory Mankiw who was Bush's head of the CEA, posing loaded questions like "When did you stop beating your wife?", to try and distort the discussion of the economy. From Dean Baker's Beat the Press blog:

Gregory Mankiw's Pop Quiz on the Economy

In his weekly column in the NYT, Gregory Mankiw gave a three question quiz for economists. His questions are:

1) How long will it take for the economy’s wounds to heal?

2) How long will inflation expectations remain anchored?

3) How long will the bond market trust the United States?

Let's start with questions 2 and 3, because these are easier.

The answer to question number 2 seems obvious -- as long as there is no inflation. Why should people expect inflation when they are not seeing any. There is no evidence of generalized cost pressure in the economy as all indexes of wages are showing the rate of wage growth remaining pretty much constant. Commodity prices did rise, but this was mostly just a return to pre-recesssion levels, and it is not clear that these prices are even sticking at their higher level. This question is sort of like asking in the middle of a drought in the desert, when will people expect rain? Presumably when they see clouds on the horizon and not until then.

The answer to question 3 largely follows the answer to question 2. After all, the real threat to those holding U.S. government bonds is inflation, not insolvency, unlike euro zone the countries that Mankiw refers to in his piece. The United States can always print more dollars to meet its obligations. Greece cannot do the same with euros.

The idea being pushed by many in policy circles, that some point the bond markets will lose faith in the ability of the U.S. government to pay its debts is absurd on its face. This would be like saying that if I issued iou's, that were payable in my iou's, that the markets would be worried about my ability to meet my commitments.

Ultimately there can be an issue of inflation, where the markets would worry that the United States might print so much money as to seriously reduce the value of its currency, but this just brings us back to question #2. With inflation nowhere on the horizon, it is difficult to see why the bond markets would have this concern any time in the near future.

Okay, on to question #1. This is obviously a trick question, since it depends on what policies the country pursues. If the deficit hawks get full control over the levers of government and we start cutting spending rapidly, then it will take many many years before the economy recovers.

Similarly, if inflation hawks at the Fed can force increases in interest rates, like their counterparts at the European Central Bank, then recovery can take a very long time.

On the other hand, if we could get another big jolt of stimulus, a more aggressive monetary policy, or a big fall in the dollar to boost net exports, then we could see the economy recover fairly quickly. However, this is a political question, not an economic one, so Mankiw is being tricky slipping it into his econ quiz.

Mankiw's slips in a cheap shot against the Obama administration in framing this question. He tells readers:

"When President Obama took office in 2009, his economic team projected a quick recovery from the recession the nation was experiencing. The administration’s first official forecast said economic growth, computed from fourth quarter to fourth quarter, would average 3.5 percent in 2010 and 4.4 percent in 2011. Unemployment was supposed to fall to 7.7 percent by the end of 2010 and to 6.8 percent by the end of 2011.

The reality has turned out not nearly as rosy. Growth was only 2.8 percent last year, and the first quarter of this year came in at a meager rate of 1.8 percent. Unemployment, meanwhile, lingers well above 8 percent, and according to Ben S. Bernanke, the Federal Reserve chairman, is expected to keep doing so throughout this year.

Economists will long debate whether President Obama’s policies are to blame or the patient was just sicker than his economists realized."

Actually, the forecasts were not so much wrong about the pace of the recovery as they were about the severity of the downturn. The first forecast from the Obama team assumed that in the absence of any stimulus the unemployment rate would peak at around 9.0 percent in the first quarter of 2010. Instead, with the economy losing more than 600,000 jobs a month at the time President Obama took office, the unemployment rate soared to 9.3 percent by the second quarter of 2009, just as the stimulus package was first having an impact.

One needs to only compare the projections to the actual data at the time when the Obama program first went into effect to know that there is no doubt that the "patient was just sicker than the economists realized." It is difficult to understand how honest economists could debate this proposition.

Nor is easy to understand the purpose of the comparison to the growth following the 1981-82 recession:

"But there is no doubt that the pace of this recovery will come nowhere close to matching the one achieved after the last deep recession, when President Ronald Reagan presided over a fall in the unemployment rate from 10.8 percent in December 1982 to 7.3 percent two years later."

That was a classic Fed induced recession. The recession came about because the Fed pushed interest rates through the roof. The answer was easy: lower interest rates. When the Fed did lower rates, there was enormous pent-up demand for houses and cars, which sent the economy soaring. This recession was not started by high interest rates and there is no pent-up demand for housing (maybe to some extent cars) to tap. Is it really surprising that we can't follow the same path to recovery this time?

Go read the original article to get the embedded links.

Dean Baker does an excellent job of disarming Mankiw and exposing the hypocrisy of his supposedly "sincere" questions. Mankiw has an agenda and rather than argue it aboveboard and honestly, Mankiw prefers to cheat and lie his way to winning your heart. I don't deny that Mankiw is a personable fellow and very successful and doesn't strike you as somebody who would knife his own mother in the back. But let me assure you, appearances are deceiving. He is an ideologue. He will do whatever it takes to win politically.

Syria & Human Rights

It is interesting to note that while Syria is slaughtering hundreds of its citizens in order to suppress popular dissent, it is on track to join the United Nations Human Rights Council. From Fox News:

The brutal crackdown by Syrian President Bashar Assad may finally be getting the attention of world leaders -- but apparently not enough to stop Syria from becoming the newest member of the U.N. Human Rights Council.

And despite calling for an independent investigation into the crackdown, which has left hundreds dead, U.N. Secretary-General Ban Ki-moon apparently won’t do much about blocking Syria’s path to the human rights group.

"That's not really for the secretary general to suggest to a member state," said Martin Nesirky, a spokesman for the secretary-general, when asked if the U.N. chief would ask Syria to drop out of the running for the post. When asked if Ban had brought up the point during his telephone conversation April 9 with Assad, Nesirsky told Fox News, "that's not really something the secretary general would raise specifically, because it's for other member states to decide on the membership of the Human Rights Council."

CBC news says that the US hasn't withdrawn its ambassador despite all the killings. And, oddly enough, CBC which is a Canadian national news source didn't mention whether Canada is withdrawing its ambassador. So assume the Canadian is also staying in Damascus. So much for hypocrisy.

It looks to me that Bashar al-Assad is busy trying to top his father Hafez al-Assad and his infamous massacre in Hama:

Initial diplomatic reports from western countries stated that only 1000 were killed. Subsequent estimates vary, with the lower estimates claiming that at least 10,000 Syrian citizens were killed, the majority civilians, while others put the number at 20,000 (Robert Fisk), or 40,000 (Syrian Human Rights Committee).

The US and NATO went after Gaddafi because he was a "wild man" who openly supported terrorism until quite recently. The Assad family has quietly supported terrorism and quietly has muzzled and smothered Lebanon, so they get a pass. Isn't "international justice" wonderful?

Five Dots from Robert Reich

This is an excellent speech about the state of the US economy and the current political situation:

Fame without Money

Maybe this guy will start a whole new trend... fame without money...



You can find more about this story here.

Sadly, if Noam Galai was a big corporation like McDonalds, he would be suing the pants off everybody for illegally using his photography. But the little guy can't use the legal system to enforce "property rights". The property rights laws are a tool for big corporations to control us, not us to control the big corporations.

How to sum this situation up? As pointed out by Anatole France:

"The law, in its majestic equality, forbids the rich and the poor alike to sleep under bridges, to beg in the streets, and to steal bread."

Yes, the little people have rights, the same rights as the big corporations, except that the little people don't have the money to make their rights "stick".

Washington's Dirty Little Secret

Bill McBride writes an excellent blog on the US economy, Calculated Risk. The following is a bit from a post about the May unemployment numbers entitled "Employment: A dirty little secret and more graphs":

Second, I was reminded of a "dirty little secret" when I read Paul Krugman's column this morning. Krugman wrote about how the "D.C. economic discourse is saturated with fear" of "invisible monsters", but that no one seems to care about the very real plight of the millions of unemployed.

Actually it really isn't much of a secret that Wall Street and corporate America like the unemployment rate to be a little high. But it is "dirty" in the sense that it is unspoken. Higher unemployment keeps wage growth down, and helps with margins and earnings - and higher unemployment also keeps the Fed on the sidelines. Yes, corporations like to see job growth, so people have enough confidence to spend (and they can have a few more customers). And they definitely don't want to see Depression era unemployment - but a slowly declining unemployment rate (even at 9%) with some job growth is considered OK.

I just want to be clear: I don't think 9% unemployment is OK. It is pretty $%^# far from OK. (think Marsellus Wallace in "Pulp Fiction" for my non-G rated reaction). I'm amazed that unemployment isn't the key topic in D.C., but the unemployed don't make political contributions. (Ok, enough rant).

The politicians simply aren't doing their duty. They are meant to represent "the people" and the people are hurting. But instead the "representatives" are busy representing the money under the table from lobbyists for corporations which are quite happy with things as they are. The great tragedy is that in 2008 the American people voted for "hope" and "change you can believe in" thinking that the Democratic standard bearer would again bring focus to "the little people" but Obama sees himself as a centrist, a conciliator, and really values those big corporate donations, so they aren't getting any movement on the economy. Obama has calculated that by late 2012 things will be better, not great, but improving enough so that voters will happily return him to power. As a politician he is interested in only one employment number: who holds the presidency.

Don't get me wrong. I like Obama. He is a breath of fresh air compared to the crazy Bush. He has done good things including taking the risk that Clinton and Bush never would to get Osama bin Laden.

But Obama pulled a fast one on the American people. He had a chance to be a truly great American leader, a new FDR, by following through with his election promises as well as fighting hard for an economic policy that would have led to a fast recovery from the Bush-generated financial catastrophe of 2008. But Obama hasn't. He's a nice guy, but not a great guy. He has fallen short of the greatness he envisioned for himself as he spent all those hours reading about Lincoln and seeing himself as the one who would bind up the wounds and heal the nation. He forgot that before you heal, you've got to get the patient back on his feet and you've got to get rid of the miasma of pro-business lobbying and corruption in politics. Sadly, Obama will be remembered as a "fine" president, maybe even a "good" one, but not a "great" president.

David Brooks, Responsibility, and the Memory Hole

In his NY Times blog, Paul Krugman takes David Brooks for his squint-eyed view of reality. Brooks wants to blame the budget deficit on the public's "irresponsibility" and lack of "realism" while ignoring the 8 year black hole of the Bush administration, a playground for irresponsibility and lack of realism. Sadly, this kind of mental warp is all to frequent in those on the right and Brooks is just another example.

Here's how Krugman takes Brooks to task:

Whenever I read pieces like David Brooks’s column this morning — pieces that attribute our budget deficits to the public’s irresponsibility and lack of realism — I find myself wondering how so much recent history went down the memory hole.

To be fair, polling on budget questions does suggest a popular demand that we repeal the laws of arithmetic — that we not raise taxes, not cut spending on any popular program, and balance the budget.

But if we look at actual policy changes, it’s hard to see that too much democracy was the problem.

Remember, we had a budget surplus in 2000. Where did it go? The two biggest policy changes responsible for the swing into deficit were the big tax cuts of 2001 and 2003, and the war of choice in Iraq.

And neither of these policy changes was in any sense a response to public demand. Americans weren’t clamoring for a tax cut in 2000; Bush pushed his tax cuts to please his donors and his base. And the decision to invade Iraq not only wasn’t a response to public demand, Bush and co. had to spend months selling the idea to the public.

In fact, the only budget-busting measure undertaken in recent memory that was driven by popular demand as opposed to the agenda of a small number of powerful people was Medicare Part D. And even there, the plan was needlessly expensive, not because that’s the way the public wanted it — it could easily have been simply an addition to traditional Medicare — but to please the drug lobby and the anti-government ideologues.

Now, a lot of historical rewriting has taken place — I’ve even seen pundits solemnly describe the Iraq war fever as an illustration of the madness of crowds, somehow erasing the fact that it was Bush and Rumsfeld, not the masses, who wanted the thing.

But the reality is that if you want to see irresponsibility and self-indulgence at the expense of the nation’s future, you don’t want to visit Main Street; you want to hang out in the vicinity of Pennsylvania Avenue.

Brooks is a very good writer with a style that sucks you into his mind set. He never bothers to pause and question his own thinking. He never warns his reader that he is casting a spell over him. He never alludes to alternative interpretations. You end up buying into a worldview that is all Brooks all the time. Great for him, but not necessarily great for the real world, for honesty, for accountability, or for a better future for your kids.

I must admit that I have this very weakness. I can fall into the Brooks orbit. But when I read other material I get jolted out of the spell and realize that I've been sold a bill of goods yet again. People like Brooks need to have signs posted around their writing saying "objects may be closer than they appear". They need to be reminded that their is a reality distortion field around Brooks which Brooks refuses to acknowledge or give hint of.

DeLong's Response to the Crash of 2008

Here is a bit from a very honest appraisal by Brad DeLong of the shortfalls in modern economic theory in the face of the banking collapse and economic catastrophe of 2008:

But I was shocked by how large a panic was produced by what seemed to me – and still does – relatively small losses (in terms of the size of the global economy) in subprime mortgages; by the weakness of risk controls at the major highly-leveraged banks; by how deep the decline in demand was; by how ineffective the market’s equilibrium-restoring forces have been at rebalancing labor-market supply and demand; and by how much core-country governments have been able to borrow to support demand without triggering any run-up in interest rates.

It is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

Yet that is not what economics departments are saying nowadays.

Perhaps I am missing what is really going on. Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s. But if I am missing some big change that is taking place, I would like somebody to show it to me.

Perhaps academic economics departments will lose mindshare and influence to others – from business schools and public-policy programs to political science, psychology, and sociology departments. As university chancellors and students demand relevance and utility, perhaps these colleagues will take over teaching how the economy works and leave academic economists in a rump discipline that merely teaches the theory of logical choice.

Or perhaps economics will remain a discipline that forgets most of what it once knew and allows itself to be continually distracted, confused, and in denial. If that were that to happen, we would all be worse off.

I don't know how any serious student of economic behaviour could waste his time in "modern" economics courses. They are irrelevant. They teach ideologically "pure" claptrap that has no utility in the real world. These courses are great if you wish to aspire to a position in a "think tank" for some right wing billionaire, but if you want to help shape the future and help the world move forward, you wouldn't waste your time of what comes out of the Chicago school or any of the other "modern" economics faculties. That is a simple, sad fact.

The "model making" of modern economics strikes me as on a par with scholasticism where academics debated the number of teeth in a horses mouth but nobody could be bothered to go out on the street and actually count them. The math is elegant but irrelevant. There is no homo economicus. The real world is filled with flesh-and-blood economic actors with incomplete knowledge, time pressures, and faulty cognitive equipment. That's not in the math currently in use.

DeLong hopes that economics will reform iself, but I'm much more pessimistic.