Economic Death by Analogy
Brian Beutler ponders the psychological underpinnings of neo-Hooverite takes on the alleged need for federal fiscal cutbacks in the face of a financial crisis:
Meanwhile, I’m not really sure where this mindset comes from, except, perhaps, from a simplistic understanding of economic hard times. When times are hard at home, after all, you scrimp and save and avoid exorbitant expenditures. You keep working hard and hold on to the belief that prosperity will return sooner than later. Maybe under different circumstances you take out a loan and start a business and hope it’s successful enough to make you rich and famous–but now you have children. You really want them to go to college. And so you can’t in good conscience take on the risk.
But countries aren’t like households. When times are tough the last thing they need is for the government to freeze out discretionary spending. And, paradoxically, the Great Men of History who so badly want to be president wouldn’t be doing their countrymen any favors by choosing this particular moment to suddenly restrain their vision.
I think that’s mostly right. Another way of making the point is that it illustrates the dangers of substituting an analogy for actually understanding what’s happening. Indeed, you hear all the time from people making an argument against deficits a line about how your family needs to live within its means and so the federal government should, too. Now as it happens, I think there definitely are situations in which deficit reduction is the right policy. But no matter what, that analogy is never right. The United States of America is effectively immortal, it can coerce people into giving it money, it can print currency, and it is in a million other highly relevant ways not remotely analogous to an ordinary family or even an ordinary business enterprise.
43 Responses to “Economic Death by Analogy”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
October 8th, 2008 at 1:32 pm
No kidding. People have been making that household = country analogy since at least Plato, and that’s if you’re generous and don’t stretch back to king = father. It has probably generated more philosophical and policy errors than any single other intellectual position.
October 8th, 2008 at 1:39 pm
The problem with Keynesian economics is that there is not a single politician will do what is required during the good times which is severe budget cuts, higher taxes, and paying off the debts. Politicians just find new ways to spend the new money during the boom cycle with new entitlements and new long term programs. I guess MY is not old enough to remember the discussions of the ratchet effect http://en.wikipedia.org/wiki/Ratchet_effect and why states like Colorado passed the Tax Payers Bill of Rights to keep politicians from getting trapped by the ratchet effect.
Maybe the time to develop crediblity is during the good times when Keynesians like MY should have been screaming for severe budget cuts instead of bigger entitlement programs.
October 8th, 2008 at 1:45 pm
Japan tried serial bank bailouts and deficit financed “stimulus packages’ repeatedly in the 1990s. Result: 18 years of stagnation, 5 recessions (going on 6) and a government deeply in debt. And Japan had/has advantages we don’t have: a thriving export trade, an indigenous source of savings thanks to a frugal household sector, and a bargain basement military.
October 8th, 2008 at 1:46 pm
Our “national household” really does need to start living within its means … stop consuming more than our income.
But that’s not the government deficit … that’s the blown-out trade deficit. Running trade deficits in the range of 4%-6% when average GDP growth is more like 3% is financially unsustainable.
Which is what makes the investment in a New Energy Economy so critical. With estimates more than twice the world average biocapacity per capita, this really is a sustainable long-term industry for the US, to both cut imports and to open up new export markets.
October 8th, 2008 at 1:48 pm
Indeed, you hear all the time from people making an argument against deficits a line about how your family needs to live within its means and so the federal government should, too.
I was disappointed to hear Obama make exactly this argument during last night’s debate. He has not attempted to make the straightforward case that during an economic downturn the government needs to increase, not reduce spending.
I actually believe that Obama knows this and will increase spending. But he also knows that dumbass know-it-alls in the news media like Brokaw and Leherer would crucify him if he started promising more deficit spending to get us out of this crisis.
superdestroyer said:not a single politician will do what is required during the good times which is severe budget cuts, higher taxes, and paying off the debts.
Actually, Clinton and the Republican Congress started down this road in the 90s. Bush and the Republican Congress just undid it all in the current decade.
October 8th, 2008 at 1:49 pm
We have seen in some debate questions a media-driven assumption that the next President won’t be able to deliver on his promises due to the cost of bailing out Wall Street. Senator Obama has been careful with his answers, probably to avoid being accused of wanting to raise taxes for a bunch of spendy liberal programs.
Maybe he could describe stuff like clean energy infrastructure investments in terms of “what’s good for the American people will be good for our economy too.”
October 8th, 2008 at 1:53 pm
Rob,
the only reason that Clinton did not increase entitlements is that the Republicans in Congress would not let him. Public Sector spending is a disincentive to private sector spending. Why start up a business when the government cold end up as your competitor?
If you want lots of new projects in West Virginia, then go ahead and start up a new round of public works. If you want a long term recovery, do not start building new things in West Virginia using illegal aliens.
October 8th, 2008 at 1:54 pm
Instead of saying the government should act like families, they should let families act like the government. A currency printing press in every kitchen!
Seriously, there’s a biblical anecdote that supports Keynesian economics- Pharaoh stocking up during seven prosperous years to be able to deal with seven lean ones. (I’m seriously irreligious and even I know that one from the musical.) I guess today people would argue that there should have been a tax cut during the seven good years to “let the people keep more of their own hard-earned grain.” It shouldn’t be hard to convince people to apply that to modern government.
October 8th, 2008 at 1:58 pm
Another thing Matt keeps ignoring is that much of the lending to D.C. is now done by foreigners (in contrast to the 30’s). We’re already well into the era when domestic policy decisions are being dictated by foreign creditors (e.g. Fannie/Freddie bailouts). Sure, we might be able to borrow our way into a milder reccesssion, but at what price in national independence?
October 8th, 2008 at 1:58 pm
“If you want lots of new projects in West Virginia, then go ahead and start up a new round of public works. If you want a long term recovery, do not start building new things in West Virginia using illegal aliens.”
You know, there’s honest debate and dishonest debate, and this is a good example of the latter. When you realize that you’re not making any sense you suddenly throw in something else (illegal aliens) to obscure your own idiocy.
October 8th, 2008 at 1:59 pm
During the Asian financial crisis of the late 90’s, the US and other Western governments advised those countries afflicted by the currency and banking crash were advised to undergo “austerity programs”, letting over-leveraged banks fail and drastically cutting government spending. In fact, desperately-required IMF loans were only granted with these austerity programs as preconditions. Predictably, they led to tremendous political and economic havoc, which the Western governments piously declared to be the necessary pain of doing away with “crony capitalism”.
It’s not escaped the attention of the Asians that the pious talk goes right out the window once a similar crisis besets the West. Suddenly, the solution is to spend huge sums of money, propping up failing banks!
October 8th, 2008 at 2:01 pm
I actually believe that Obama knows this and will increase spending. But he also knows that dumbass know-it-alls in the news media like Brokaw and Leherer would crucify him if he started promising more deficit spending to get us out of this crisis.
Worked for FDR. ‘Course, he didn’t realize (nobody did, really) that deficit spending was good till later in his term.
October 8th, 2008 at 2:03 pm
The United States of America is effectively immortal
The world will a truly scary place if or when we find out that this is not true. I would be extremely hesitant to test the limits of our immortality. Other countries, like Iceland, can be bailed out when shit hits the fan. Who will bail out United States? Who can?
For what it’s worth, credit default swaps on US treasuries already cost near 30 basis points.
October 8th, 2008 at 2:03 pm
Superdestroyer – Not a single politician? Try saying “Bill Clinton.” He came in after the Reagan-Bush conservatives ran up deficits, and paid them down, leaving a budget surplus. It was the Bush II conservatives that cut taxes on the rich while ratcheting up spending (on the war, on Homeland Security handouts to cronies, on prisons, on “faith-based” education enterprises, you name it). The result is that the government’s ability to respond appropriately now is diminished.
The only true Republican president we’ve had in thirty years has been Clinton. The others have been insane totalitarian kleptomaniacs dressed up in Republican outfits.
October 8th, 2008 at 2:21 pm
Bloix,
Actually the Clinton Admnistration is as close as the U.S. has gotten to a libertarin administration. Six years of no significant changes in taxes, no new entitlement programs, no new regualtory schemes, no major international adventures. Look what happens to the economy when the government leaves it alone for long periods of time.
I doubt that the Obama Adminsitration is be any more similar to the Clinton Admnistration than the Bush Administration has been.
Remember that the 2000 election was over how to spend the budget surpluses instead of cutting programs like any good Keynesian would have been talking about.
David,
Everyday in Dc i walk past a constuction site that is dominated by illegal aliens (not a word of English spoken). Creating more make work programs for illegal aliens will have no long term benefit on the eocnomy anymore than moving the FBI fingerprint facility to West Virginia had on the economy.
October 8th, 2008 at 2:27 pm
Indeed, you hear all the time from people making an argument against deficits a line about how your family needs to live within its means and so the federal government should, too.
I think this is reasonable position, provided you’re talking about government living within means over the course of the business cycle. But now’s not the time to be worrying about an increase in public sector borrowing. Indeed, I only wish state governments, too, had more freedom to engage in counter-cyclical borrowing. I believe state constitutional provisions prohibiting deficit spending as incredibly wrong-headed.
October 8th, 2008 at 2:28 pm
Cutting spending as a percentage of GDP during “good times” is not actually all that hard, because that just requires spending growing at a slower rate than the economy. In fact, that really is one of the chief lessons of the Clinton/Gingrich era–and yes, divided government should get credit for keeping spending growth under control during those “good times”. Unfortunately, we lost divided government in 2000, with predictably bad results for spending during those “good times”.
Anyway, the tricky bit with Keynesian stimulus in practice is not controlling spending, but rather raising tax rates during “good times”. Which is why I think we should be very cautious about decreasing taxes during the “bad times”, since those are what prove the stickiest during “good times”.
October 8th, 2008 at 2:35 pm
The problem with Keynesian economics is that there is not a single politician will do what is required during the good times which is severe budget cuts, higher taxes, and paying off the debts.
The problem with superdestroyer is that he hasn’t read a single book on Keynesian economics. During “good times” there’s no requirement to legislate higher taxes or engage in “severe budget cuts” as the rising tax revenue associated with an expansion will enable to government to gradually retire debt. Indeed, as we move forward in the business cycle, a Keynesian will want to consider lowering taxes, because accumulating budget surpluses will eventually suck demand out of the economy.
October 8th, 2008 at 2:45 pm
And Japan had/has advantages we don’t have: a thriving export trade, an indigenous source of savings thanks to a frugal household sector, and a bargain basement military.
kafka: A “fugal household sector” is anything but an advantage in staving off depression. Japan’s prolonged 90s recession was mostly the result of foot dragging by the government with respect to the necessity of restructuring its financial sector (bailouts can either help or impede this necessity, depending on how they’re structured) and an unwillingness on the part of households to spend money. And the US, too, fwiw, also possesses a “thriving export trade.” I’m certainly with you, though, on the desirability of cutting defense spending.
October 8th, 2008 at 3:08 pm
Jasper Says: October 8th, 2008 at 2:45 pm
No contribution at all from the decade long drought in investment in productive capacity as Japanese firms shifted from roughly 90% domestic value added to roughly 60% domestic value added?
October 8th, 2008 at 3:16 pm
My grandfather was a farmer in WV during the depression. With five kids and little formal education, he had few options. When Roosevelt started the Rural Electrification program, my grandfather was hired as an electrician’s apprentice and learned a trade that allowed my grandparents to live a comfortable life to the end of their days.
Remained lifelong dems, too.
October 8th, 2008 at 3:28 pm
the Brown guy working at the food court (given that white high school students no longer take part time jobs),
In the Keynesian model, you pay off the deficit spending during the boom cycle and you cut programs. Starting new programs durng the boom cycle such as new entitlement programs makes the next cycle harder to deal with. Keynesian requires that the government debt get back to zero before the next down cycle. No modern government seems able to do it and local governments seem totally incapable of doing it (See California, Colorado, Mass.
Also, governments should create set aside funds during the good times so that special appropriations are not needed during natural disasters, etc.
Yet, the federal government does not seem capable of restraining spending during the good times or setting aside money for the bad times. Remember, the federal government does not even purchase insurance.
October 8th, 2008 at 3:36 pm
Worked for FDR. ‘Course, he didn’t realize (nobody did, really) that deficit spending was good till later in his term.
It didn’t work for FDR. While we had a mild recovery for a time in the mid-to-late ’30’s, only World War II actually brought the country out of the Depression.
That isn’t to say, however, that the New Deal wasn’t a good idea. It was. But not because of its Keynesian stimulus effects.
The problem with superdestroyer is that he hasn’t read a single book on Keynesian economics. During “good times” there’s no requirement to legislate higher taxes or engage in “severe budget cuts” as the rising tax revenue associated with an expansion will enable to government to gradually retire debt.
It doesn’t happen automatically. You have to raise taxes and cut expenditures to ensure that the budget is in surplus. If you don’t do that, there’s no room to run stimulating deficits without crowding out investment and canceling the stimulus effect.
We’re screwed because we ran big deficits in good times for the last 7 years.
October 8th, 2008 at 3:39 pm
the Brown guy working at the food court
shouldn’t have majored in English.
October 8th, 2008 at 3:43 pm
james,
I would know if the Brown Guy majored in English (or ethnic studies) because he would have on a tie since he would be an assistant manager of the food court. Of course, the most embarassing part is that the franchise is probably owned by a Korean guy.
October 8th, 2008 at 4:19 pm
It worked.
We had 10% average annual growth from the end of 1934 to 1937.
http://upload.wikimedia.org/wikipedia/commons/d/da/Gdp20-40.jpg
FDR haters just don’t like to give him credit, so they point to the higher growth from 41-45.
October 8th, 2008 at 4:24 pm
It doesn’t happen automatically. You have to raise taxes and cut expenditures to ensure that the budget is in surplus.
Dilan: I didn’t write it happens “automatically.” I said raising taxes and cutting spending aren’t a requirement. Obviously the fiscal position of a government at any given point during the business cycle is affected by numerous variables. But all things being equal, a government that merely keeps spending constant in real terms (instead of cutting it) or even allows it to rise in real terms (but more slowly than the rise in real GDP) will see its borrowing needs decrease — and maybe even eliminated — without raising taxes rates.
October 8th, 2008 at 4:58 pm
Dilan: I didn’t write it happens “automatically.” I said raising taxes and cutting spending aren’t a requirement. Obviously the fiscal position of a government at any given point during the business cycle is affected by numerous variables. But all things being equal, a government that merely keeps spending constant in real terms (instead of cutting it) or even allows it to rise in real terms (but more slowly than the rise in real GDP) will see its borrowing needs decrease — and maybe even eliminated — without raising taxes rates.
In reality it doesn’t work that way. Certain programs will always be increased– indeed, we want them to increase. We want Medicare to keep up with the cost of health care, and Social Security to keep up with the cost of living. We want government workers to get a COLA.
So, there’s no magical way to just assume a Keynesian contractionary policy in good times. Rather, you have to cut spending and raise taxes. Bill Clinton, by the way, showed us how this is done (and got very good results).
I really react viscerally to arguments that there is a free lunch, whether from the right (tax cuts pay for themselves) or the left (we never have to worry about deficits). The one thing Milton Friedman got unambiguously right is that there is no such thing as a free lunch.
October 8th, 2008 at 5:54 pm
Certain programs will always be increased– indeed, we want them to increase.
I agree. This seems to be an argument against the possibility of cutting programs, which you apparently feel is a requirement for deficit reduction.
So, there’s no magical way to just assume a Keynesian contractionary policy in good times. Rather, you have to cut spending and raise taxes. Bill Clinton, by the way, showed us how this is done (and got very good results).
Bill Clinton did not cut spending.
I really react viscerally to arguments that there is a free lunch…
Who’s arguing on behalf of free lunches? Holding the growth of government below the rate of GDP expansion is hardly a free lunch. It involves saying “no” to the numerous, vocal constituencies clamoring for larger increases.
October 8th, 2008 at 6:22 pm
Bill Clinton did not cut spending.
Sure he did. Reinventing government cut billions. He also agreed to spending cuts with the Republicans in Congress (once Medicare, Medicaid, education, and the environment were taken off the table).
Who’s arguing on behalf of free lunches?
This is what you wrote:
The problem with superdestroyer is that he hasn’t read a single book on Keynesian economics. During “good times” there’s no requirement to legislate higher taxes or engage in “severe budget cuts” as the rising tax revenue associated with an expansion will enable to government to gradually retire debt.
In other words, you were saying “don’t worry, you don’t really have to do Keynesian contraction, the rising tax revenues will enable (your words) the government to retire the debt.
No, sorry, it won’t, because spending keeps on increasing (and as I said, in the case of some programs, rightly so).
Keynesian contraction requires a policy choice that our politicians (except Clinton) aren’t willing to make.
October 8th, 2008 at 6:56 pm
The United States of America is effectively immortal
So was Rome. It didn’t stop it from rotting away under an increasingly inept and degenerate government.
it can print currency
Which is just another hidden form of taxation on the masses and a regressive one at that.
As others have said previously, you can’t continue to run up deficits indefinitely in good times and bad. That is not to say that we shouldn’t try to do everything possible to stop the current meltdown, but at some point economic reality will sink in and the piper will be paid one way or another.
October 10th, 2008 at 2:29 pm
It is odd to label opponents of deficit spending in a time of crisis as ‘neo-hooverite’ when the federal debt increased by 15% under hoover and deficit spending had grown to 60% of all federal expenditure by the time he left office. Matt would be best advised to stick to topics on which he has some measure of expertise, whatever those are.
December 8th, 2008 at 9:26 am
NEW YORK (AP) — Better to be a broker than a baron on Wall Street if you’re expecting a big bonus this year. The decision by top Goldman Sachs executives to forgo bonuses in 2008 is forcing other investment bank bosses to consider
March 11th, 2009 at 10:35 am
Incredible site!
March 17th, 2009 at 3:45 am
Great site. Good info
tramadol
March 22nd, 2009 at 7:56 am
tramadol
Great site. Good info
April 2nd, 2009 at 11:16 am
Great site. Good info
buy cheap viagra
April 8th, 2009 at 5:35 am
I rarely comment on blogs but yours I had to stop and say Great Blog!!
viagra