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Home Publications Blogs Beat the Press Adam Davidson Gets Stimulus Wrong in the NYT

Adam Davidson Gets Stimulus Wrong in the NYT

Friday, 04 November 2011 05:41

Adam Davidson, the co-founder of NPR's Planet Money, has a new column in the NYT magazine, "that tries to demystify complicated economic issues — like whether anyone (C.E.O.’s, politicians, people running for the presidency) can actually create jobs." He is not off to a good start.

He tells readers that:

"One reason we have so few ideas about job creation is that up until recently, the U.S. economy had been growing so well for so long that few economists spent much time studying it."

I seem to recall a lot of debates about employment and output back when I was in grad school a quarter century ago. There were plenty of papers that we read from the 60s that talked about whether we could have macroeconomic policies that could increase employment. Several Nobel winning economists from that period, with names like Paul Samuelson and Robert Solow would probably be surprised to hear that they were not worried about job creation. (It is true that these economists did not expect prolonged periods of stagnation, but they certainly did think about ways to increase employment and reduce the severity of downturns.)

Davidson then goes on to misrepresent the idea of stimulus:

"The stimulus, however, has to be borrowed, and it has to be really, truly huge — probably something like $1.5 or $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels. The goal is to goad consumers into spending again. And President Obama’s jettisoned $400 billion jobs package, hard-core Keynesians argue, is nowhere near what it would take to persuade them."

While his numbers are in the ballpark if he is referring to a 2-year package (something that should have been specified), the notion that we need consumers to spend more is his invention. Spending as a share of disposable income is still higher than normal, not lower than normal. In the short-run the government must fill the demand gap that is created by the collapse of construction following the overbuilding of the housing bubble years. It also must replace the demand that had been generated by consumption that was driven by housing bubble wealth that has now vanished.

There is no reason to expect consumption to return to its bubble levels. It would also be undesirable if it did because it would mean that workers are continuing to put aside inadequate savings for retirement. This is especially problematic in a context where politicians in Washington are determined to cut Social Security and Medicare.

Over the longer term, this demand will be filled by a pick-up in construction, as the excess supply of housing is eventually reduced by population growth and by increased net exports. The latter will happen if the dollar is allowed to fall. In a system of floating exchange rates, like the one we have, a drop in the value of the dollar is the mechanism for adjusting trade deficits. Remarkably, the value of the dollar is never mentioned in this piece.

Comments (7)Add Comment
Adam Davidson Late to the Game - Beat by Teabaggers
written by izzatzo, November 04, 2011 9:44
...tries to demystify complicated economic issues...

Duh, teabaggers already did this.

Stupid liberals.
Keynes and Milton Friedman said . . .
written by Ralph Musgrave, November 04, 2011 9:46

Adam Davidson’s claim that “stimulus has to be borrowed” is pure bunk. Both Keynes, Milton Friedman and numerous other economists pointed out that a deficit can perfectly well accumulate as extra monetary base rather than as extra debt. Indeed, to a significant extent this is EXACTLY what has in effect happened as a result of QE.

As to Dean Baker’s points, I have a lot of respect for Dean, but I think his article contains a couple of mistakes. The fact that household spending is equal to or even above normal relative to incomes is irrelevant. Suppose we had an even worse recession and average US worker’s weekly income was $50 with spending also being $50. That would hardly be satisfactory.

Also, there is no reason to wait (perhaps for years) for construction to return to its former level. The solution is just to have the government / central bank machine print money and spend it into the economy (and/or cut taxes). What people spend their newly acquired cash on is their business. It might be housing or it might not. I couldn’t care less.

Over the longer term - We Are All DEAD!
written by Paul, November 04, 2011 10:21
"the notion that we need consumers to spend more is his invention"

NO. That is Keynes' invention as stated clearly on p.325 of the General Theory of Employment, Interest and Money which Dean has apparently never read.
"I should support at the same time all sorts of policies for increasing the propensity to consume. For it is unlikely that full employment can be maintained, whatever we may do about investment, with the existing propensity to consume."

"There is no reason to expect consumption to return to its bubble levels."

NO. There is EVERY reason to expect consumption to return to its previous levels and exceed those levels. To quote Keynes again:
"Consumption — to repeat the obvious — is the sole end and object of all economic activity."
The General Theory, p. 105.

The idea that consumers now need to be saving more is ludicrous to any Keynesian, but Dean has gone over to the dark side of Classical economists where the answer to unemployment is a trade war worldwide by deliberately devaluing the dollar against our trading partners. Yeah, that work great during the Great Depression.

In 1936, Keynes warned the world of what lay ahead:

"It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism (unregulated markets)."
Consumption Doesn't Rise Because Policy Makers Want it to Rise -- Keynes Knew This
written by Dean, November 04, 2011 10:36
Consumption depends on income and wealth. Keynes said he wanted to see higher rates of consumption. Wanting doesn't mean that he expected that stimulus would lead to a higher propensity to consume out of income.

We know why consumption fell, people lost a huge amount of housing wealth (also stock wealth). Wanting them to spend more even though they lost this wealth would be just foolish. We can try to replace the wealth, but we should expect people to consume just because we want them to. The world does not work that way and Keynes certainly knew this.
Look at GDP components
written by Joe Emersberger, November 04, 2011 11:24
Private consumption (denoted by "C" in the equation below) has fallen because the housing bubble burst. However, the savings rate of private individuals is now fairly low and should not be encouraged to go to zero again as in the bubbles years.

Government should make up for lost demand from the burst bubble through public expenditures ("G" in the equation below)

GDP = C + I + G + (Exports - Imports)

Dean is calling for stimulus to increase G to fully make up for lost C

Thanks to Dean, we should all understand that in order for the bracketed term above to come down the US dollar must fall.

What Keynes NEVER Said
written by Paul, November 04, 2011 11:54
"Consumption depends on income and wealth." NEVER!

To state the obvious, consumption depends on ability to borrow. My daughter, who has no significant income or wealth, is borrowing tens of thousands of dollars to pay for her education. To suggest that she should instead be saving up for her retirement is laughable.

All consumers throughout the world, but especially those with excess savings as in Japan and Germany, should be encouraged to spend and stop hoarding their wealth.

Trade wars are not the way forward; increasing the propensity to consume is the answer now that government infrastructure investment is not viable politically.

To condemn the millions of unemployed to a decade of jobless suffering is cruel and heartless, not to mention that it seriously weakens our country. The Paradox of Thrift is real as Keynes clearly demonstrated.
I thought I was the only person infuriated by this podcast
written by Shane, November 04, 2011 11:33
The only person I have ever heard interviewed on Planet Money about monetary policy is Thomas Hoenig. OMG, *epic fail*. I'm tempted to refuse to donate to public radio until they have a sensible episode on macro. Something tells me I'll be waiting a long time.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.