Tuesday, May 22, 2012

Alan Blinder, Truman's one-armed economist

After his economic advisers kept qualifying their statements with "but, on the other hand", Harry Truman famously quipped that what he needed was a one-armed economist. Well, Princeton economist Alan Blinder is Truman's kind of economist because he is happy to pretend that there is no other hand when it comes to fiscal policy.

He has a fairly dishonest piece in the WSJ today in which he argues in favor of short run fiscal stimulus. He might be right about stimulus (I don't think so, however), but his dishonesty is in pretending that the economics behind it is sacrosanct. First he claims that those who disagree with him are not able to understand the difference between the short run and the long run:
In the short run—let's say within a year or so—a larger deficit, whether achieved by spending more or taxing less, boosts economic growth by increasing aggregate demand. It's pretty simple. If the government spends more money without raising anyone's taxes to pay the bills, that adds to total demand directly.
What he neglects to say is that there is a perfectly respectable counterargument saying that, because people know that their tax bill will rise in the future, they curtail their spending today. Thus, the increase in aggregate demand from the fiscal stimulus is negated, in part, by a decrease in aggregate demand from household consumption. In the extreme, the fiscal stimulus is negated entirely. Blinder must know that this debate exists among economists, so his omission of it must be intentional.

A second bit of dishonesty is his handwaving over the composition of any stimulus package that President Obama would put forward:
A second layer of subtlety recognizes that some types of spending and some types of tax cuts have larger effects on spending than others, and similarly, that some types are more sharply targeted on job creation than others. Such details matter in designing a cost-effective stimulus package. But for present purposes, let's keep it simple: Higher spending or lower taxes speed up growth by adding to demand.
Well, let's not keep it simple because this is actually a major issue. The President's first attempt at stimulus was precisely the wrong kind of package and was destined to fail, and his stimulus proposals since then have been little better. No amount of money spent on green boondoggles, bailing out public labor unions, extending unemployment benefits, temporary tax breaks, and shovel unready projects will restart the economy.

A third bit of dishonesty is his claim that ignorance about the source of our long-run deficit is holding us back from thinking clearly about the problem:
To think clearly about how to shrink the long-run deficit, we must understand its origins. Looking ahead, the lion's share of projected future deficits comes from rising health-care expenditures.
Well, duh! Why do you think there are all those proposals out there to reform medicare and replace Obamacare, which, by the way, does not decrease costs or the deficit. Either Blinder doesn't read the papers, or he does and has decided to ignore the uncomfortable news and hope that no one notices.