Whither the American Economy?


Paul Krugman, writing in today’s New York Times, ”The Story of our Time”, says that “this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again”.  On the other hand, Bill McNabb, the Chairman and CEO of the Vanguard Group, writing in today’s Wall Street Journal, “Uncertainty is the Enemy of Recovery”, says that “there is…most significantly, uncertainty about U.S. fiscal policy and the national debt.  Until a sensible plan is created to address the debt, America will not fulfill its economic potential”.
So there you have it, our country’s two premier outlets for news and opinion putting forward contrasting views of what needs to be done to restore vitality to the world’s leading economy.  Do we ramp up government spending indefinitely in order to increase demand, paying little if any attention to the size of the national debt, until hopefully, before too long, private industry is willing to increase spending and investing for the future?  Or do we instead concentrate on establishing those policies which will directly and immediately give business leaders confidence that political leaders are willing to make the tough decisions needed to get our fiscal house in order?
This question is indeed the story of our time.  Getting the answer right will determine our country’s (and the whole world’s) fate for many years to come.

4 thoughts on “Whither the American Economy?

  1. Well, you’re correct that “Getting the answer right will determine our country’s (and the whole world’s) fate for many years to come.” However, your analysis is highly faulty. Your first mistake is to consider the WSJ op-ed page as a “premier outlet for news and opinion.” They are partisan hacks that mostly just pass on conservative misinformation.

    In this case it’s Bill McNabb spewing the intellectual pollution. He’s carrying on the old, well-debunked conservative meme that uncertainty is a major obstacle to recovery and job creation. So let’s look into his argument to see if it holds water. Apparently you just took him at face value with no critical analysis at all (par for the course with the It Does Not Add Up blog), but in this exercise I will use arithmetic and sound data analysis as the tools to test the quantitative claims McNabb makes.

    McNabb uses as the basis of his argument work by Baker, Bloom, and Davis that develops a metric for uncertainty and claims that that uncertainty really matters in our current economic slump. However, the methods used to develop that metric have been seriously questioned:


    On top of that, it appears that a good deal of the run-up in uncertainty has not come from the “…uncertainty about regulatory policy, uncertainty about monetary policy, uncertainty about foreign policy and, most significantly, uncertainty about U.S. fiscal policy and the national debt” that McNabb cites. Rather it has come from Republican shenanigans related to the debt ceiling:


    Even McNabb, when introducing the research done at Vanguard, says that “our economists at Vanguard isolated changes in the U.S. economy that we determined were specifically due to increases in policy uncertainty, such as the debt-ceiling debacle in August 2011, the congressional supercommittee failure in November 2011, and the fiscal-cliff crisis at the end of 2012.”

    I.e., Republican shenanigans. So why does he, a few sentences earlier, claim that the uncertainty tax is due to “stalled debates in Washington and missed opportunities to tackle the debt?” How did debt reduction come into this?

    Looking further, we see that an independent analysis by the Cleveland Fed has shown that, while real, the drag of uncertainty on the economy is small when compared to the lack of demand:


    And even Baker, Bloom, and Davis themselves conclude in their original paper that “While we cannot say that economic policy uncertainty necessarily causes these [recent] negative developments – since many factors move together in the economy – we can say with some confidence that high levels of policy uncertainty are associated with weaker growth prospects.”


    That’s a very measured and reasonable conclusion– and very different from how McNabb is interpreting it. To put it more baldly, McNabb, who was a Romney supporter (http://www.investmentnews.com/article/20121021/REG/310219997), is lying about the paper and its conclusion.

    Even if we take McNabb’s analysis at face value, look at the numbers he comes up with; $261 billion cumulative since 2011, or about $130 billion/year. That is a pretty small number in the context of a $15.7 trillion economy. Yes, it would account for about 1% of growth, but so would about a thousand other things in that size range. For example, a $15/barrel increase in oil prices (not that big of a change) would do the exact same thing. Basically $130 billion is small enough to be considered noise– there are hundreds, maybe thousands, of economic factors of that magnitude.

    But that’s only if we take him at face value. In fact the topic of uncertainty has come a quite a bit lately, and I would say the consensus (outside the WSJ op-ed page) has been that, while real, it’s not that big of a deal and certainly nothing compared to the lack of demand we have in this deflationary environment.



    OK– now that we have established that financial executive and Romney supporter Bill McNabb is both lying about and exaggerating the magnitude of the effects on the economy of Baker, Bloom, and Davidson’s paper, let’s turn to the Krugman piece that you mention. First off, you seem to be summarizing Krugman’s position with a question as to whether we should “…ramp up government spending indefinitely…” when in fact he says the opposite in the very piece you quote. Krugman says:

    “Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity. “

    So how did you come up with “ramp up government spending indefinitely?” That was a completely dishonest reading of that piece.

    So you are correct that “Getting the answer right will determine our country’s (and the whole world’s) fate for many years to come.” However, we are unlikely to get the right answer if we follow people like McNabb and you that are either unable to understand quantitative analysis of the economy or are willing to outright lie about it.

  2. First of all, an increase in the growth rate of the economy from our current 2% to 3%, i.e. the 1% increase which could be achieved by reducing policy uncertainty, would be very significant. It would, for example, add 45,000 more jobs per month and therefore bring down unemployment at a much faster rate.
    Secondly, please refer to Krugman’s own words as I quoted above: “this is a time for above- normal government spending, to sustain the economy until the private sector is willing to spend again”. What if private business continues to be spooked indefinitely by the government’s irresponsible fiscal, monetary and economic policies? Then this “above average”, i.e. trillion dollar annual, deficit spending would continue indefinitely? This is a recipe for Greek style disaster! This is why we should implement pro-growth economic policies directly, as opposed to just waiting around and hoping that business investment will resume on its own.

    • Again, 1% growth is approximately $150 billion. Do you think that kind of increase or reduction in GDP is really all that significant? As I said, that’s equivalent to a $15 decrease in the price of oil– basically just noise.

      But if you insist, we can have it your way– $150 billion automatically translates into 1% growth with no elasticity. And you have said that if we can increase growth, we can solve the deficit. Romney was ridiculed as being crazily optimistic when he said that his policies would result in 4% growth– the level needed to eliminate the deficit.

      So given that GDP grew at 2.5% in the last quarter, according to you all we need to do is reduce spending by $450 billion and we should see growth of 5.5%! That’s more than needed, and more that even the great optimist Romney promised; in fact we haven’t seen a three year period of that kind of growth since the mid 1960’s!


      Since you have said over and over that growth is the key to deficit reduction, having the highest level of growth in nearly 50 years should fit the bill, right?

      But that means that, according to your own standard, we don’t need to erase the deficit or even cut it in half from its 2013 estimate of $973 billion. Just cut $450 billion and it will be “problem solved” according to your own logic!

      I think you know that reducing spending by $450 billion wouldn’t come even close to generating 5.5% growth– so do you still want to contend that a change of GDP of $150 billion is really all that big of a deal?

      As far as Krugman, you say: “What if private business continues to be spooked indefinitely by the government’s irresponsible fiscal, monetary and economic policies? Then this “above average”, i.e. trillion dollar annual, deficit spending would continue indefinitely? This is a recipe for Greek style disaster!”

      First of all, it’s Republican irresponsibility about the debt ceiling and fiscal cliffs that’s causing the uncertainty– don’t imply it’s just government in general. Secondly, do you really think it’s possible to be spooked “indefinitely?” That’s a straw-man argument.

      You really need to go back and read that Krugman piece more carefully and make sure you fully understand it before criticizing it.

  3. When the CEO of a large successful financial company like Vanguard makes a good case that governmental policy uncertainty, especially about our country’s staggering debt, is slowing economic growth by as much as 1%, I pay attention because I consider such a person to be a highly credible source. Maybe the effect is only half as much, but that’s still significant, and would translate into 22,500 more new jobs per month.
    Our economy has been averaging about 2% growth ever since the recession ended four years ago. Maybe the 2.5% growth from the first quarter of 2013 means that growth will continue to pick up but we can’t really be assured yet of this happening. With our public debt now at 76% of GDP, it is too risky to let our debt level grow much higher by continuing Krugman’s “above-normal” government spending indefinitely. Keynesian government stimulus is not getting the job done. We should be implementing pro-growth economic policies as well. It’s too bad that the Democratic party’s liberal orthodoxy will not allow this to happen.

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