Tuesday, October 11, 2011
From the Frontlines of Krugman's Army (Part 1)
While Krugman today indicated that he wont be speaking at Zucotti Park, his reason is that due to his position at the NY Times he can't cross the line between advocate and activist, it is clear that he has provided a very necessary service in terms of keeping the columns coming that educate the public.
One of the most basic requirements of being knowledgeable about what's going on in the world-clearly for meaningful political action of any kind this is necessary-is having a basic literacy about economics. For my part I want as much knowledge and insight about economics as possible. I'm not a big fan of uninformed opinion mongering no matter what your opinions are. Krugman-and others like him: Ezra Klein, Joe Stiglitz, Scott Sumner(at The Money Illusion) Matt Iglesias, Rogoff and Reihard, et al. There are many other names I could add like Eggersston(at the NY Fed) or Robert Reich...
I don't restrict myself to only those I agree with either. I just finished reading Friedman's Capitalism and Freedom over the weekend and currently am reading Thomas Sowell's Basic Economics: A Citizen's Guide to the Economy." While Sowell is a conservative and I am a liberal I can already see there is a lot to learn in this book . As he says economics is not just a matter of opinion but like in any real science "there are basic propositions and procedures in economics on which a Marxist economist like Oskar Lange did not differ in any fundamental way from a conservative economist like Miltion Friedman.."
To understand basic economic principles is one thing that I am always seeking. Right now there is a pretty good discussion that was started by a piece Klein wrote on his Wonk Blog on Saturday, October 8 entitled "Could This Time Have Been Different?"
He sifts through the body of work of both the Obama Administration and Bernake's Fed. The question itself references a book Carmen Reinhart and Ken Rogoff wrote in 2008 called "This Time it's Different" which took a look at nine centuries of financial crises. The punchline of the title of course is that during a crisis the authorities and policy makers always think it will be different in their case but it never is.
In grading the Obama Administration there is no question that on the one hand they wanted to be bold not timid and believed that it was better to do too much than too little and that finding long term solutions was more important than facing short term pain-which is what many liberal critics have accused them of not doing-but yet in the end their chances were already greatly handicapped by the fact that their projections were-according to many knowledgeable economists-Reinhart and Rogoff as well as Krugman and many others-way too optimistic.
These overly optimistic projections have come back to bite them. In Obama's transition team's “The Job Impact of the American Recovery and Reinvestment Act" which they released on January 10, 2009 they projected that with a recovery plan, unemployment would peak at 8 percent in 2009 and fall back beneath 7 percent by late 2010.
Even worse, they had projected that even without a recovery plan unemployment would peak at 9 percent in 2010 and falling below 7 percent by the end of this year. Again this is the worst case scenario.
There were those in the Administration who thought this was way too optimistic like Jared Bernstein the labor economist who became Biden's chief economist told the Times in 2008, “We’ll be lucky if the unemployment rate is below double digits by the end of next year.”
Of course in 2009 it did get to 10 percent. These overly optimistic views have enabled the Republicans to sneer about "the failed stimulus" and argue that somehow the economy would have been better without it. While this is false and even some of the better Republican economists like Doug Hatz-Eakin have no patience for it-for his part Hatz-Eakin when working for the McCain campaign in 2008 had urged a much more aggressive mortgage relief plan then the Obama Administration would ultimately propose-it did seem plausible particularly to the many Americans who are not economically literate.
Then, even for the way too optimistic scenario they believed, the stimulus, that ended up beneath $800 billion dollars-much of which were tax cuts which Eggertsson has shown to be much less effective with the Fed Funds rate as low as it is-was a third less than the 1.2 trillion the head of the Economic Council of Advisers, Chrisina Romer, had believed was necessary. As it happens even this was not as much as may have been needed though it would have been a good start particularly if less of it was in tax cuts to businesses that had so little pay off. Part of this was political-Congress had let it be known they didn't want to see a stimulus bill that was over one trillion dollars. Now we know that the true bucket the economy faced was 3 and half times the stimulus at about 2.5 trillion,.