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Home Publications Blogs Beat the Press The Arrogant David Brooks Tells Readers That Stimulus Will Risk National Insolvency

The Arrogant David Brooks Tells Readers That Stimulus Will Risk National Insolvency

Tuesday, 06 July 2010 03:27

David Brooks has decided to jump into the debate over stimulus with both feet. In a column in which he warns against arrogance he tells readers that additional stimulus would: "risk national insolvency on the basis of a model."

Mr. Brooks doesn't tell readers how he has determined that further stimulus carries this risk. He doesn't explain how raising the country's debt to GDP ratio by 4-8 percentage points over the next few years would jeopardize the creditworthiness of the U.S. government. This is certainly a rather strong assertion, given that even with this additional indebtedness, the debt-to-GDP ratio in the United States would still be far lower than it had been at prior points in its history.

Even after a decade of accumulating debt at a rapid pace, the U.S. would still face a lower debt burden than countries like Italy do today. Italy is currently able to borrow in financial markets at very low interest rates. Projections for 2020 show that the debt burden of the United States would still be less than half of the current debt burden of Japan, which still pays less than 2.0 percent interest on its long-term debt.

Financial markets also don't seem to share Mr. Brooks view that national insolvency is a serious concern. The people who are putting their money on the line are willing to buy 10-year Treasury bonds at just 3.0 percent interest rates. That would seem to suggest that insolvency is not a real concern, but Mr. Brooks insists that President Obama should hesitate on stimulus because he thinks that insolvency is a problem anyhow, and the people who disagree with him are arrogant.

There also is a basic question of logic that Mr. Brooks neglects. If the country really did start to face insolvency (i.e. no one would buy its debt), why would the Fed not simply step in and buy up government debt itself, as it has been doing to some extent over the last year and a half? This could cause inflation, which could be a serious problem, but then the issue would be inflation, not insolvency.

Of course, as a practical matter, it is more than a little far-fetched to believe that we will have to worry about inflation any time soon. All the measures of inflation are in the 1-2 percent range and headed downward. With the unemployment rate still near double-digit levels and huge excess capacity in nearly every sector of the economy, it would take some real magic to spark inflation. (Since Brooks is anxious to argue that central banks and international financial institutions, who all missed the housing bubble btw, agree that insolvency is a real concern, it is probably worth mentioning that Olivier Blanchard, the chief economist of the IMF, believes that the economy would benefit from a somewhat higher rate of inflation.)

After inventing a crisis of national insolvency to concern the president (should President Obama also worry about invading Martians?), Mr. Brooks tells readers that:

"The Demand Siders don’t have a good explanation for the past two years."

Hmmm, is that right? Seems to me that we have a very simple theory to explain the past two years. There was a huge bubble in housing that burst beginning in 2006. This led to a plunge in residential construction that cost the economy more than $500 billion in annual demand. In addition, the loss of $6 trillion in housing wealth, coupled with the loss of around $7 trillion in stock wealth, has cost the economy more than $500 billion in annual consumption demand. This is the result of the wealth effect on consumption, a phenomenon that economists have been writing about for close to a century. In addition, there was a bubble in non-residential real estate that collapsed about a year after the collapse of the housing bubble. This cost the economy about another $150 billion in demand. That gives a total loss in annual demand of around $1.2 trillion. All of this was completely predictable and predicted by at least some demand siders.

It was also easy to see that the stimulus approved by Congress was inadequate. Demand siders rely on something called "arithmetic" to reach this assessment. After pulling out the $80 billion fix to the alternative minimum tax, which had nothing to do with stimulus, and the $100 billion or so designated for later years, the stimulus provided for roughly $600 billion in spending and tax cuts over the years 2009 and 2010. This comes to $300 billion a year. Roughly half of the federal stimulus was offset by cutbacks and tax increases at the state and local level, leaving a net stimulus from the government sector of roughly $150 billion a year.

Demand siders did not believe that $150 billion in annual stimulus from the government could offset the contractionary impact of a reduction in annual spending by the private sector of $1.2 trillion ($1.2 trillion > $150 billion). That is how demand siders explained the failure of the stimulus to have much impact in reducing the unemployment rate. Perhaps this explanation is too complicated for Mr. Brooks (he repeatedly complains about the high IQs of the demand siders), but it actually seems fairly straightforward. If he wants to be honest, he could at least say that he doesn't understand the demand siders' explanation, rather than asserting that demand siders do not have an explanation.

Brooks has also developed his own theory of consumer and investment behavior. He decided that consumers are not spending because of concerns about the debt. This is an interesting theory. Consumer spending is probably still somewhat higher than would be expected given the loss of stock and housing wealth. (The savings rate is between 4-5 percent, compared to a long-term average that is more than 8.0 percent.) Furthermore, with many experts and media pundits (like Mr. Brooks) insisting that the government must cut Social Security and Medicare, it is really surprising that the huge cohort of baby boomers approaching retirement is spending as much as they are. In short, it doesn't seem like the evidence fits Mr. Brooks theory very well.

Mr. Brooks also insists that concern about future tax burdens is depressing investment. This is also an interesting theory. Of course, given the extensive research showing that demand growth is the primary determinant of investment most economists might be hesitant to accept Mr. Brooks' theory.

Brooks also tells readers that:

"it’s very hard to get money out the door and impossible to do it quickly."

Is that really true? Suppose the government gave a tax credit that allowed firms to shorten their workweek while keeping pay nearly the same. Would this take a long time to get out the door? This policy of work sharing has prevented the unemployment rate from rising at all in Germany during this downturn and allowed the Netherlands to keep its unemployment rate close to 4.0 percent. Is it arrogant to suggest that this sort of approach could pay dividends in the U.S.?

President Obama and the Democrats are being blamed for the poor state of the economy and high unemployment. This means that the worse the economy performs, the more the Republicans benefit. If stimulus will benefit the economy, then anything the Republicans can do to block stimulus will help their election prospects. In this respect, raising doubts, even if there is no basis for these doubts, can be a very effective election strategy for the Republicans, especially if the doubts can obstruct effective stimulus not just in 2010, but up through the next presidential election.

Comments (15)Add Comment
Reducing unemployment is the priority now.
written by AndrewDover, July 06, 2010 5:45
Brooks wrote: "Only 6 percent of Americans believe the last stimulus created jobs, ..."

However, you could also describe the poll as 47% believe that the stimulus has or will create jobs.

See http://www.cbsnews.com/htdocs/...021110.pdf

6% Has created jobs
41% Has not, but will create jobs
48% Will not create jobs

written by Calgacus, July 06, 2010 5:55
The insolvency risk of US debt is zero. The Fed would not have any choice in paying bondholders, or in supporting US Treasury Debt. Mr. Brooks should look at section 4 of the Fourteenth Amendment: "The validity of the public debt of the United States, authorized by law,... shall not be questioned." On this, the Supreme Court said in 1935 in PERRY v. UNITED STATES, 294 U.S. 330: "... the government is not at liberty to alter or repudiate its obligations".

So Mr. Brooks should stop questioning the validity of US debt, or people will start calling him unconstitutional, and soon after, UnAmerican.
written by izzatzo, July 06, 2010 6:02
Brooks says in the NYT column:

There is no way to know for sure how well the last stimulus worked because we don’t know what would have happened without it.

In economics, no one knows whether the glass is half empty or half full do they. It could be half empty from the demand side or half full from the supply side, or as Brooks says, half empty because of the demand side which should be replaced by the supply side to make it half full, and he's not even talking about the starting point of extremely low demand from a very empty glass after the bubble burst.

No, Brook's is on the same train as everyone else. It all started with trying to fix the deep recession. Never mind how we got here. Stop the blame game and let's move on. There's no mistakes from the bubble from which we can learn. It's like the teabaggers. Everything started with Obama.

This is really a great mystery isn't it, which requires normative should-be interpretations rather than positive-is interpretations. It's not about what demand is, it's about what it should be, which opens the door wide to just about any interpretation one can pull off the moralistic shelf doesn't it.

That way we can paint the demand siders, for example Mark Zandi, as flaky wanna-be free riding intellectual snobs devoid of economic reality for recommending more stimulus spending rather than slamming on the brakes with an austerity package. And when Zandi says it, of course that makes Baker a hard left commie pinko of the highest order.
The GOP Pitch for Additional Tax Cuts
written by Ron Alley, July 06, 2010 8:12
In a rather confused piece, Brooks is trying to assert that additional tax cuts are the preferred form of stimulus and that additional spending is a risky strategy to stimulate demand. That is exactly how the GOP block in the Senate wants to characterize their egregious failure to move jobs and unemployment bills. The conclusion is that Obama can have his stimulus if only he will accept stimulus in the form of tax cuts.

The truth is that the American workers have asked a hand and the GOP Senate has only extended a finger.
NYTimes fail!
written by nancycadet, July 06, 2010 3:05
Yes, I agree with Dean and appreciate his trying to counter David Brooks' nonsense with facts. Unfortunately, facts rarely if ever faze him or his editors at the New York Times. Brooks simply purveys GOP talking points, and pretends to show a little empathy for an underdog now and then, or upbraids an evildoer, but he's given a big megaphone for his vacuous 'thoughts' on radio, TV and in the Times. What a shame! What a waste!
written by Wes Cain, July 06, 2010 5:16
I've been describing Brooks as "vacuous" for years.

It feels good that it now seems a popular description.
written by Brett, July 06, 2010 6:11
I very much enjoyed this thrashing of Brooks. Krugman was much too kind to him on his own blog, though I'm sure Krugman would like to have said more, but had to be civil due to their common employer. Thankfully Dean Baker has no conflict of interest and can just lay into him.
written by diesel, July 06, 2010 7:12
"They have total faith in their models."..."Are you really willing to risk national insolvency on the basis of a model?"

Uh, David, "models" is how we think. All thought is "models". To number and count is to model. This one has a stripe down the middle of his forehead. This one is spotted. This one has lost a leg. But their all sheep. Not identical, but representitives of a "model" sheep. To add one to one is to employ a model, because "one" is an idealized member of a set. Higher order models lawfully relate sets to sets. Higher/higher order models relate higher order models to one another. There is no thinking apart from modeling.

His argument appeals to the same level of intellectual attainment as that used by the creationists who dismiss evolution as just a theory.

Roughly 25% of the adult population is capable of "formal operational" reasoning. This is thinking in terms of variables or symbols, as in logic and algebra where formal rules govern the manipulation of symbols independently of their content. Brooks' "But you're not a theorist, you're a practical executive." describes an adult capable of "concrete operational" thinking. They can reason, but only in terms that can be apprehended with the senses. I can't believe that this description fits any concrete executive in America.
The simple explanation...
written by mudgrrrl, July 06, 2010 11:59
...is always the best, as we know from learned philosophers and our moms.

When my single mom was raising my sis and me, she was in debt without end. She owed Montgomery Wards, Sears, for the stove and the phone, and she rode a bus to work--the debt was wide and the scrimping went deep. But she never let us wear old run-down shoes or go to a prom without a stunning handmade gown she designed and sewed herself. She cooked good, healthy meals. We had many friends over for dinner and parties.

Once we were raised, she paid off the debts, and by the end of her life was even able to leave us a little money.

So it goes. Sometimes you have to live in debt, through hard times, then you recover. Had my mom been hysterical over the debts, she might have terrorized my teen years. Thank goodness she was no David Brooks. She looked at the longer picture.

Thanks mom.
written by Lee A. Arnold, July 07, 2010 1:37
The Reaganic alchemical formulary continues to implode for U.S. conservatives, and so now David Brooks lectures us about psychology.

Perhaps we're actually watching another real educational moment for the Republicans. This one directly concerns the fact that it is impossible to deny that a short-term stimulus is the best thing to do at this very moment, and that even a huge stimulus ends-up being a tiny bump in the long-term scheme of things.

This reality poses intellectual stumbling-blocks in the conservative Republican argument, along several conceptual avenues.

So their argument has already moved to what happens after the stimulus: that it must be likely to have a bad outcome.

Pursuing this, we shall find again that handful of remarkable mental double-binds they have talked themselves into, endearing them to pathologists everywhere:

(1) The Republicans are saying people don't have confidence because we can't trust politicians, but THEY are the politicians we can't trust. Indeed the Democrats recently performed a great service, although none of their idiotic supporters appears to have noticed: according to the new CBO report, the long-term budget outlook is more or less in balance with revenues. Clinton did it before. The Republicans have never done this.

This current long-term budget balance depends on Congress not doing anything to upset it -- no extension of the Bush Tax Cuts, no loopholes to anybody else. To be sure, the CBO assumes that politicians keep their current word, and also the CBO couldn't analyze Obamacare more than 20 years out -- perhaps they even underestimate its savings.

But hey, the long-term budget is in balance! Shout it from the rooftops!

So what is the Republican political strategy now? Is it to convince people to say "This will be hard to achieve" so the Republicans say "Vote for us, we'll do something else"? But what, exactly, are they going to do? St. Ronnie and Dubya are the two recent Presidents who blew the long-term deficits up bigger than anyone else with their long-term policies. Bush policy put us into deficits and is responsible for well over half of the CURRENT deficit. Republicans are now officially the worst of the spendthrifts. So if the Republicans have already insisted that Congress will be giving out loopholes and destroying the budget in the future, then aren't they the ones who can't be trusted?

In essence the Republican position is, "Business is always smarter than government, but WE became politicians." Do you really want these people in charge?
written by Lee A. Arnold, July 07, 2010 1:38

(2) Which brings us to their only solution, and another big Republican contradiction: the steady mantra that deregulation and tax cuts are better for the economy. The trouble is, that's only sometimes true, as it clearly isn't true right now. So the Republican pundits are turning inside-out to avoid saying it. You will be expelled from cocktail parties for contradicting this dogma.

Now, we know that tax cuts of some kinds, at some times, may boost a short-term stimulus. But the effects of tax cuts on long-run economic growth have always been modest -- both Ronnie's and Dubya's tax cuts are guilty of this -- so modest indeed, that the question always arises of the lost opportunity costs, such as in lost social welfare measures, for example. Is the total economy actually poorer off? It can be hard to say. For example, the Bush Tax Cuts have not replenished the Social Security Trust funds which they so handily drained. Did they even "pay for themselves" yet?

(3) Which brings us to another blindness. The success of the Republican rhetoric with the American public has also depended upon a confusion of "short-term" and "long-term".

This may have started-out deliberately, to control the debate, but then become lost to frontal consciousness as a mere habit of mind: a common cognitive bias, no doubt having some technical name which those who study psychology will recognize.

For example, their rhetoric depends mightily upon a confusion of the idea of "stimulus" with the idea of "growth". This is a short-term/long-term confusion. Stimulus is short term, against a business cycle. But "growth" is long-term economic growth, which depends upon innovation, which in turns depends upon education. A tax cut may give a little cyclic boost, but upon it they claim the innovative wonders of modern science and technology.

(4) Finally, because cake doesn't get more deliciously poisonous than when icing is on it: the current episode shows that the Republicans can't even claim that market prices transmit information, because if this were true, then according to Republican fears, long-term interest rates would be higher. So Republicans are either theoretically wrong, or psychologically wrong.

In short, David Brooks' column is another rhetorical straddle, engendered by the problematic premises from 1 to 4. Despite what he writes, there are demand-siders with a perfectly good working explanation of the last two years. The reason he gets this wrong is that he has to set up a straw man to oppose, in order to come to precisely the demand-siders' conclusions. This is where the evils of Republican rhetoric have driven him; it's as insidious as booze and pills.
written by Jim Tucker, July 07, 2010 1:57
This reply to Brooks points the finger at housing, so in that sense is somewhat incomplete. The problem was not the housing, it was the market of CDO, SIV, and ABS derivatives that was on top of these, leveraged at a rate of 30 to 1, to the tune of 140 Trillin Dollars or more. Goldman Sachs and others would like you to believe it was the guy with the 200K mortgage, but, if that is true, why did we offer 14.4 Trillion in bailouts?? We could have purchased all of the 11 Trillion in mortgages and restructured the whole lot with money left over. It was the greed and careless behavior of banks, and no one should be allowed to forget that. Nor should they be allowed to forget that there are no laws, even with the latest financial reform, that are going to stop it from happening again.

thanks for this
written by retr2327, July 07, 2010 1:30
Shorter David Brooks: "Why rely on those 'models,' which require 'high I.Q.s' to understand, when you can just pull your opinions out of your a** and get paid for it, like I do?"
Newton & Einstein
written by Devin, July 07, 2010 4:39
Conservative economic arguments remind me of somebody trying to disprove Einstein's theory of relativity because it's not compatible with Newtownian physics. Of course, Newtonian physics, just like the economics of the right, work just fine...within specific domains. But Relativity says, yes, that model works just fine in that specific domain, but now we have problems that aren't confined to that domain, so we need a better model. Conservatives seem unable to imagine a world (even though it's taking place all the time all around all of us) in which their tidy theories don't explain everything perfectly. So instead they simply insist it must be false because they can't understand it.
Unfortunately, Right-Wing Ideas are Winning in the "Mainstream" Media
written by Pareto, July 08, 2010 11:08
I hate to say this, because I think the world of Dean Baker and Paul Krugman and Joseph Stiglitz and Nouriel Roubini, and all the other brilliant economists and thinkers out there, who not only intuitively, but empirically understand and are explaining reality for most of us, but:

The right wing is winning hand over foot with the "mainstream" media, the Congress, and, most sadly, this White House. From their mouths to Rahm Emanuel's and Barack Obama's ears.

If there is any way to address this problem, please, Dr. Baker, can you tell us? Please, because the country is going to suffer greatly if we don't counteract the effects of this noxious know-nothingism ("the deficit!" "austerity!" "cut taxes!" "slash Social Security!" "Barack Obama is the source of all our problems!" "less regulation!" "businesses aren't investing because of the uncertainty around taxes" "unemployed people are lazy" and the newest one, from Niall Ferguson, "radical fiscal reform" is needed to prevent us from becoming the "European Union") masquerading as "serious" thought.

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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.