Wednesday, November 23, 2011

Thomas Friedman Goes Big Getting It Wrong, Again

Thomas Friedman Goes Big Getting It Wrong, Again:

There are many people in the country that have very little understanding of economics. As an economist, I would like to see everyone be at least somewhat literate in the area, but this is the way of the world. It's not really that big of a problem in most cases, but it is when they write pieces on economic policy for the New York Times.

Yes, Thomas Friedman is at it again, bemoaning the fact that President Obama hasn't embraced the big cuts to Social Security and Medicare proposed by former senator Alan Simpson and Morgan Stanley director Erskine Bowles. (Friedman wrongly attributes the proposals to the commission that they co-chaired. The commission did not produce a report, Friedman is referring to the proposals of the co-chairs.)

The Simpson-Bowles plan is great if you think the country's biggest problem is high-living seniors. Of course very few people from any political perspective accept this view. Even large majorities of Republicans and self-identified conservatives oppose cuts to Social Security and Medicare. In fact, almost no one other than the Wall Street gang and people who write columns for the New York Times and Washington Post support cuts to these programs. This probably explains why President Obama did not follow Friedman's advice and embrace the Simpson-Bowles plan.

This is a matter of personal taste, some folks think that the best way to address whatever budget problems we might have is to fix the broken health care system, tax Wall Street, and place the burden on the big winners in the economy over the last three decades (i.e. the one percent). Then you have people like Thomas Friedman who think its better to take money from seniors with a median income of $31,400.

But once we get beyond the questions of taste, we have Friedman's economics. He quotes Maya MacGuineas, the president of the Committee for a Responsible Federal Budget:

"'a free-standing stimulus that is not combined with a credible multiyear plan that truly stabilizes our fiscal imbalances would not solve our problems, .... because if nobody knows what is waiting around the corner, after the stimulus runs out,' many people will just take that money and stuff it in a mattress 'rather than in investments or spending.'"

Okay, so the argument here is that we will see high savings rates and low investment spending as long as we don't have a credible deficit plan. Let's think about this one for a moment. How many people are basing their decision on whether to take a vacation or buy a car on the government's deficit prospects for 2020?

I don't know many people who think this way, but let's suppose that my friends are atypical. Suppose that people are worried that come 2020 we will have some big tax increase because something really bad happens in the world due to our runaway deficits. Wouldn't it make sense for people to invest and make money now, since the future could be bad news?

Or, to take the other side of the coin, suppose that we all knew that our Social Security benefits will be lower 10 years from now due to the Bowles-Simpson cuts and that we will have to pay more for our health care because of cuts to Medicare. Wouldn't we then decide that we better save more (i.e. spend less) so that we would have more money to support ourselves in retirement? Doesn't that go the wrong way if the point is stimulus?

Maybe logic isn't Friedman's strong suit. Let's just look at the evidence. If we buy the Friedman story, then investment and consumption should be low today since people are worried about the deficits ten years out. Unfortunately the data do not support Friedman's story. Investment in equipment and software is nearly back to its pre-recession level measured as a share of GDP. This is pretty impressive, since there are huge amounts of excess capacity in large sectors on the economy. (Firms tend not to invest much when they already have more capacity than they need.)

The saving rate in the most recent quarter was under 5.0 percent. This compares with a post-war, pre-bubble, average of more than 8 percent. This suggests that, contrary to Freidman's economics, people are not putting money under their mattress, they are actually spending at a pretty good rate.

But so what if Friedman's got no theory and no evidence? That is no excuse not to be cutting Social Security and Medicare.

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