Half the Story

Sometimes outlets like The Next RIght, Ross Douthat’s blog, and other venues where the “new conservatives” rule makes me feel somewhat confident about the future of the American right-of-center. Other times, they devolve into the kind of trope that would easily qualify for top billing at The Corner. For instance, Jon Henke takes umbrage with the idea that “you can’t disagree with Keysianism in good faith,” and writes this:

Inexplicably, none of them appear to even consider the arguments that skeptics actually make: that (a) fiscal stimulus is a poor tool for addressing recessions, (b) fiscal stimulus and bailouts are distortionary, and (c) we can’t keep doubling down every time the previous policy bets go bad.

The case against massive government intervention isn’t tough.  The Left should be particularly aware of that after having spent the past few years attacking Republicans for doubling down on various well-intentioned but unhelpful interventions.  And the case against fiscal stimulus isn’t exactly unknown…

  • “Can we pump up the economy with additional tax cuts or temporary public spending? Not safely…”
  • “What about fiscal policy? Some liberals have recently [argued] that the economic slump is a reason to put aside promises to protect the Social Security surplus. But those liberals are making a big mistake.”
  • “[A]lmost all economists now agree with [Milton Friedman’s] position that monetary policy, not fiscal policy, is the tool of choice for fighting recessions.”

In fact, the case against fiscal stimulus shouldn’t be unfamilar to the Left, either.  Each of those quotes is from liberal economist Paul Krugman.  In fairness, there are also good economic arguments for fiscal stimulus – even massive fiscal stimulus – as “in the face of deep and persistent slumps” and when “the economy is near a liquidity trap” (both of which are possible).   Like an alcoholic taking another drink to ease the pain, though, those arguments amount to doubling down to get relief from the symptoms.

Now, it’s certainly possible to make a good-faith argument against Keynsian theories, so it’s incredibly amusing that Henke makes a very bad-faith argument. Namely, he pulls out a bunch of quotes from Paul Krugman circa 2001 to pull an “even the liberal…” argument against Keynsian policies, and bloggers advocating for large scale fiscal stimulus. This will come a quite a surprise to regular readers of Krugman (be it his column or his blog), since Krugman is among those calling for massive fiscal stimulus. Awfully flip-floppish huh?

Well, not so much. Because as most people could figure out, not all economic downturns are exactly alike, and underlyig conditions can be quite a bit different from time to time. And with that in mind, Krugman’s argument is pretty simple; in general monetary policy is a more effective tool to combat recession than fiscal policy, but in this particular case it’s not, largely because interest rates are already pretty close to rock bottom levels. Don’t believe me, take it from Krugman himself:

We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.

To see what I’m talking about, consider the implications of the latest piece of terrible economic news: Thursday’s report on new claims for unemployment insurance, which have now passed the half-million mark. Bad as this report was, viewed in isolation it might not seem catastrophic. After all, it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards (although in each case it took a long time before the job market recovered).

But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.

Hilzoy has more.

Now, there’s two possibilites here to explain Henke’s half inclusion of Krugman. On the one hand, he doesn’t really read Krugman’s columns or blog, and therefore isn’t aware of Krugman’s present argument (and his explanation of why monetary policy has little utility today), in which case he simply has no business citing 7 year old quotes from a completely different downturn. On the other hand, he could be well aware of Krugman’s writing this time around, in which case he deliberately omits it from his post because it cuts against his entire argument. All of which is to say that you can make a good faith, intellectually honest argument against Keynsian stimulus, I just haven’t seen anyone do it yet.