Friday, November 4, 2011

Adam Davidson Gets Stimulus Wrong in the NYT

This is from Dean Baker's Beat the Press blog. Everyone should read his free E-book, The End of Loser Liberalism.--SS

Adam Davidson Gets Stimulus Wrong in the NYT:

Adam Davidson, the co-found 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.

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