Friday, September 7, 2007

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The political demand for crackpot economics

There's a raging debate among The Atlantic's bloggers about crackpot versions of supply-side economics and to what extent GOP politicians embrace them (the contemporary Democrat version of this, by the way, is that a protectionist approach towards China will be a net benefit to the U.S. economy and U.S. employment).

Alex Tabarrok weighs in with the following question:

[A] more fruitful question which I'd like to see Yglesias, Chait and others grapple with is why discredited, crackpot ideas can become central elements of a winning political party in the world's most important democracy. Explain the demand side and give us your policy prescriptions.
I don't really have an answer to this question that can be fit into a blog post, but I can link to this disquisition by Alan Blinder.

posted by Dan on 09.07.07 at 09:08 AM


1 - It sounds good (lots of meme power).
2 - It's presented as cost free.
3a - Weakness of the opposition.
3b - Strength of the conservative communication network.
4 - Actual costs of policy were minimized by deficit financing and backtracking (reagan and bush1 tax increases)
5 - Via deficit financing the cost of policy failure was projected forward in time.

The genius of the Laffer Curve was that is was an idea that everyone had an incentive to believe in. Libertarains loved it, because it promised smaller governemnt. Liberals and Centrists loved it because it promised stable or increased government revenues. It was presented as win-win and due to point 4. the idea was never challenged in the public mind by economic failure. Policy people knew it didn't work, that revenues as a whole would always remain less, but the general public didn't know.

The demand side - everybody loves a free lunch.
The policy perscription - better economics reporting. You and Chait are the policy perscription, internet based expert opinion as opposed to WSJ type editorial based political opinion.

posted by: Northern Observer on 09.07.07 at 09:08 AM [permalink]

C'mon Dan -- "Democrat version"?

posted by: Beth on 09.07.07 at 09:08 AM [permalink]

The answer is very simple--the discrediting of ideas by intellectuals is often simply not noticed by the population at large. There is often a very large intellectual lag time between an idea triumphing or being destroyed by those who are specialized in an area and the public noticing the idea's triumph or destruction.

If you held a gun to the average American's head and told them to define the Laffer curve or die, you'd shoot a lot of people.

For that matter, if you killed every American who doesn't grasp how supply and demand works, you'd have to stack the bodies to the ceiling.

Ideas need to very visibly fail in easy to understand and observe ways for them to sink into people. Many lost faith in Bush only after Katrina because it was an extremely visible sign of failure.

posted by: John Biles on 09.07.07 at 09:08 AM [permalink]

"crackpot economics" fits perfectly with crackpot foreign policy. You will never go broke betting against the intellect of the american public.

posted by: centrist on 09.07.07 at 09:08 AM [permalink]

Or maybe's the dynamic of "The Persistence of Myths"?

posted by: Robert Bell on 09.07.07 at 09:08 AM [permalink]

Well, the Clinton guys claimed -- and still do -- that the economic growth of the 90's was produced by a balanced budget, to which (they claim) the 1993 income tax increase was a major contributor.
That's a lot of BS too, on several levels.

In the first place, I don't think the tax increase by itself amounted to more than about a half percent of GDP. Then, the budget didn't really come into balance until after 1997 , when the late 90's craziness produced a lot of temporarily inflated taxable incomes, and federal spending restraints really bit (which current Democrats have no interest in reproducing).

But the important point is that, over the long haul, none of this stuff makes any difference. The fact is, over ever economic cycle since 1973 (three complete ones so far) the economy has grown from peak to peak within a smidgen of 3% annually. That's through Nixon and Carter economic foolishness, Reagan tax cuts and Clinton tax increases. I'll be surprised if this experience doesn't repeat in this cycle.

posted by: Tony Aldrich on 09.07.07 at 09:08 AM [permalink]

The first of Tabarrok's commenters summed it up perfectly: "Peopole like the idea of free money." It's the same reason why (since Keynes inadvertently broke the first dam of tradition and Reagan broke the last one) any administration that runs up the deficit to the size of the Crab Nebula will be wildly popular with the public, while any administration that tries to clean up the resultant mess afterwards will be wildly unpopular. (Which, by the way, is also why we very much need a Constitutional amendment requiring a Congressional supermajority to run a deficit. This is something that the people have proven they simply cannot be trusted to control remotely competently by themselves.)

posted by: Bruce Moomaw on 09.07.07 at 09:08 AM [permalink]

Whoah Dan -- since when did the defense of free trade become synmomous with the defense of China's export subsidy regime? those subsidies are done through the central banks' balance sheet, but still are still subsidies and are having a rather profound impact on the global economy -- and i thought orthodox liberals didn't like subsidies and the resulting distortions, period ...

now you can make a case that China's export subsidies are good for the borrower and consumer (i.e. those in the US who borrow and those in the US who consume chinese goods without producing goods or services that also feel price pressure from china, or without competing in a labor market that includes folks on the market b/c they have been displaced by Chinese goods) and bad for the provider of the subsidies (i.e. China), and thus a net gain to the US. But it is hard to deny that they have the effect of distorting the composition of US output (away from tradables, toward interest-sensitive non-tradeables) and employment (in the same way). I personally think taking on external debt -- even if the debt is available on subsidized terms -- to finance a shift out of tradables production does raise some real concerns --

now the shift out of tradables has been mitigated by the $ euro, tho even now us exports to GDP are around 11% of GDP, basically where they were 7 years ago. and the debt taken on has been offset to a degree by valuation gains and the subsidized terms made available by China. but there is no guarantee those terms will be available when hte debt is refinanced, as it must be eventually (the US is in no position to pay it down) and the valuation gains from the euro are a one off associated with a move from .85 to 1.40 (unless you think the euro will soon trade like the pound) ...

in any case, I am curious what policy you would recommend toward China. The scale of Chinese reserve growth has truly reached enormous portions -- with china's $ reserve growth now equal to about 1/2 the US current account deficit. that is a fair proxy for China's subsidy to us borrowing and consumption (and china's subsidy to its own exports relative to those competing with it). china is increasingly producing goods that overlap with goods produced in the us (machinery, auto parts, auto assembly, even higher -end electronic components, furniture), so the old argument that china just does stuff that we no longer do doesn't work that well.

Is the right approach just to say to China -- as long as you want to subsidize our borrowing and our consumption, we are happy to do so?

And to say to those hurt -- b/c there is an impact on the composition of us output -- sorry, your loss is for the overall economy's gain, and we don't really have any good way of reallocating gains from the winners to the losers, so deal?

posted by: bsetser on 09.07.07 at 09:08 AM [permalink]

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