In a recent Time magazine article, Roger McNamee offers an agitated criticism of Facebook, adapted from his book Zucked: Waking Up to the Facebook Catastrophe. Facebook “has a huge impact on politics and social welfare,” he claims, and “has done things that are truly horrible.” Facebook, he says, is “terrible for America.”
McNamee suggests his “history with the company made me a credible voice.” From 2005 to 2015, McNamee was one of a half dozen managing directors of Elevation Partners, an $1.9 billion private equity firm that bought and sold shares in eight companies, including such oldies as Forbes and Palm. U2 singer Bono was a co-founder. Other partners included two former executives from Apple and one from Yahoo. Another is married to the sister of Facebook’s COO. Such investors are not necessarily disinterested observers, much less policy experts.
Between November 2009 and June 2010 Elevation Partners invested $210 million for 1% of Facebook. That was early, but two years after Microsoft made a larger investment. Back then, McNamee and other investors had facetime with Zuckerberg.
McNamee supposedly became alarmed while perusing “Bay Area for Bernie” on Facebook and finding suspicious memes critical of Hillary. Later, he imagined the Brexit vote must be due to misleading Facebook posts (as if British tabloids and TV were silent). “Brexit happens in June,” he says, “and then I think, Oh my god, what if it’s possible that in a campaign setting, the candidate that has the more inflammatory message gets a structural advantage from Facebook? And then in August, we hear about Manafort, so we need to introduce the Russians into the equation.”
He suggests goofy Facebook ads by Russian trolls stole the U.S. election from Clinton. Actually, the Mueller indictment said the Internet Research Agency “allegedly used social media and other internet platforms to address a wide variety of topics” to inflame political debates, frequently taking both sides of divisive issues. Such political trolling for fun and profit (clicks generate advertising money) is commonplace in Russia, and also at home in the USA.
McNamee’s political agenda is partly a matter of endorsing aggressive discretionary use of antitrust prosecution, which I have analyzed at length in Regulation. But he goes much further than that. He would empower politicians to both dismantle and constrict McNamee’s suspiciously selective list of disfavored firms (which absolves Apple, Microsoft and others). He also wants government to coddle, bankroll and subsidize the sort of start-ups he’d probably like to invest in – after they’re subsidized and protected. And he wants “public health services to counter internet addiction.”
“We can create a political movement,” says McNamee; “We can insist on government intervention.” He wants “to set limits on the markets in which monopoly-class [?] players like Facebook, Google and Amazon can operate.” “The economy would benefit from breaking them up. . . I favor regulation as way to reduce harmful behavior.”
There is no coherent argument for “limits on markets,” however, since McNamee doesn’t try to explain (nobody could) how Amazon owning a newspaper or grocery store, or Google buying DoubleClick, or Microsoft acquiring GitHub could reduce competition in those markets.
Facebook owns one of many photo-sharing services (Instagram) that has to compete with email, and Facebook owns one two of many messaging services (WhatsApp and Messenger), among others from Apple and many others, that struggles to compete with texting.
Instagram, WhatsApp and Snapchat compete with others for mobile photo sharing, and with YouTube for video sharing, but they aren’t really comparable to Facebook, Twitter, LinkedIn or Google Plus for sharing opinions, news and links. “Breaking-up” Facebook by forcing the sale of Instagram and WhatsApp to different owners (e.g., private equity firms) would make no discernable difference to consumer choices or competition.
McNamee’s proposed regulation of “harmful behavior” would invite political censorship and propaganda. So too would his proposed subsidies and protection from competition for new firms deemed “civically responsible” by politicians and bureaucrats. “In exchange for adopting a benign business model, perhaps based on subscriptions, startups would receive protection from the giants. Given that social media is practically a public utility,” he claims, “I think it is worth considering more aggressive strategies, including government subsidies . . . [because] civically responsible social media may be essential to the future of the country. The subsidies might come in the form of research funding, capital for startups, tax breaks and the like.”
McNamee’s scheme for inviting ambitious political operatives to force Facebook to submit to being micro-managed as a regulated public utility is because he is confident that most common folk (unlike himself) are easily duped. It is his noblesse oblige to launch a political movement to protect the lumpenproletariat from their childish foolishness.
The trouble, as he sees it, is that people friend people they agree with, “so each persons’ News Feed becomes a unique reality, a filter bubble that creates the illusion that most people the user knows believe the same thing. Showing users only posts they agree with was good for Facebook’s bottom line,” he claims, “but some research showed it also increased polarization.” Such sharing of news and opinion among Facebook friends, says McNamee, has “aggravated the flaws in our democracy while leaving citizens ever less capable of thinking for themselves.”
Why is the tendency of like-minded people friend or follow each other any more of a “threat to democracy” (as McNamee calls it) than conservative Republicans watching Fox News and leftist Democrats watching MSNBC? Should that be banned too? And how is McNamee’s proposed Social Media Czar supposed to ban liberals or conservatives (who are said to be increasingly incapable of thinking) from using social media to befriend or follow like-minded people? After all, the FCC and FTC can’t even control robocalls and spam texts.
Many uses of the Internet involve some personal data about identity, contacts, sometimes politics. Many “likes” might a strong clue of which party a Facebook user will vote for – but that is easier to find from public voter registration and campaign donation. Google and Apple collect and share data that may reveal your interests, though that can be largely thwarted by deleting your browser and search history. Sites like Facebook or Instagram don’t acquire sensitive data about banking, health or criminal offenses. In the case of Facebook, McNamee’s feigned hysteria about privacy and data-mining algorithms is mainly about tracking our online shopping and searches to guess what we want to buy. Personally, I find some targeted ads useful but most are easy to ignore.
If you hate commercials on TV, cut the cable cord. If you hate commercials on Facebook, close your account. Yet most Facebook users apparently find the social benefits still exceed the privacy costs. That is their choice to make. After a year of criticism from regulators, politicians and professional “privacy advocates,” Facebook’s fourth quarter earnings were up 30% from a year earlier and the number of active monthly users was up 9%.
Facebook and Google, like other enormously valuable internet services, are free because of advertising. McNamee’s vague vision of “human-driven social networks” would apparently be “based on subscriptions” and taxpayer subsidies, including some sort of federal protection from “giant” domestic and foreign competitors (which at least implies banning takeovers, even though the chance of a big buyout is precisely what motivates many start-ups).
Very few Facebook alternatives have attracted more than a few million users and survived with no ads and no fees. Vero, for example, lured three million users by offering “access to Vero free for life. . . until further notice” while adding that they “will confirm the start date and pricing of Vero subscriptions soon.” That business plan begins with early freeloaders then hopes for later suckers. Any subscription-based social medium could work only if everyone we wanted to reach was also willing to pay the fee, which is statistically unlikely. That’s why McNamee lobbies to force taxpayers to provide “human-driven social networks” like Vero with socialist start-up capital and endless subsidies.
An author’s political agenda often drives the arguments, which explains why extreme rhetoric about hypothetical “crises” in the future are typically abused to excuse extreme proposals for government meddling in the present. McNamee turns out to be just another missionary for paternalistic big government to throttle successful big tech firms, subsidize less-promising firms, and protect the gullible masses from being persuaded by Facebook posts to make what he regards as politically undesirable choices.
Business news pages are suddenly full of hand-wringing about how the rising dollar threatens to slash U.S. exports and economic growth. “The strong dollar is the biggest threat to economic recovery,” warns one reporter. Others quote White House chief economist Jason Furman saying “the strong dollar is undoubtedly a headwind” for the U.S. economy.
It’s not that simple.
The graph above compares real U.S. exports with the trade-weighted exchange rate. The dollar was rising much faster in 1995-2000, when both exports and the economy were growing at an impressive pace. Exports eventually fell with recession, as always. But it is much harder to blame the recession on exchange rates than on interest rates – the Fed pushed the fed funds rate 4.7 percentage points above core inflation.
From 2001 to 2007, the dollar fell and exports rose. That pattern might appear to justify recent lobbying for a lower dollar were it not for the familiar connection between oil prices and the dollar. As the dollar fell, the price of West Texas crude soared from $19 a barrel in December 2001 to over $133 in June-July 2008. Every postwar recession except 1960 was preceded by a spike in oil prices, and the Great Recession turned out to be no exception.
The dollar weakened at the start of this recovery, but related inflation cut average real wages by 1.5% in 2011 and 0.6% in 2012. As the dollar firmed up, by contrast, real wages rose by 0.7 % in 2013 and 0.8% in 2014.
The recent rise in the dollar has merely brought it back to about where it was in 1998 or 2006, which were not bad years. The latest exchange rate gyrations are dominated by self-inflicted wounds to the euro and yen, but U.S. exports to the EU are only 1.3% of GDP, and exports to Japan are 0.4% of GDP.
U.S. multinationals have complained about “translation losses” – the fact that profits of subsidiaries in Europe or Japan will be less valuable when translated into dollars. But that is equally true for earnings of European and Japanese firms too (and for their stock prices when translated into dollars). And multinationals often leave foreign earnings abroad, due to the uniquely foolish U.S. tax if offshore earnings are brought home.
The weakened euro and yen will raise the cost of living and cost of production for citizens of the afflicted countries (including the price of oil and other commodities). It is true that such expertly planned impoverishment of such large economies can scarcely benefit the global economy. If other countries want to make their money less trustworthy and less desirable, however, there is not much we can do about that.
Jason Furman, chairman of the Council of Economic Advisers, set out to explain “middle-class economics” in the Wall Street Journal, March 11, in an earlier Vox blog and in a presentation to National Association of Business Economists (NABE), as well as the first chapter of the Economic Report of The President.
The intent is to make the recent economy look healthier (massaging 2.3-2.4 percent growth for 2013-14 into 2.7 percent), and to claim that “subpar” 2010-14 income gains for the middle class (generously defined as the bottom 90 percent) are not due to a subpar recovery but to something that has gone on ever since 1973. His Wall Street Journal article complains of “the decades-long trend of slower income growth for the middle class.”
Furman says, “Congressional Budget Office data (with a minor extrapolation) show, median U.S. incomes are up 17 percent since 1973.” Actually, CBO data start with 1979 and end with 2011, so it takes more than minor extrapolation to extend that back to 1973 or forward to 2013. CBO estimates show real after-tax median income rising from $45,400 in 1983 to $68,000 in 2008 (in 2011 dollars), but not yet back to the 2008 level by 2011. Making up a number for 1973 can't undo stagnation after 2008.
He continues: “But from 1948-73, median incomes rose 110 percent, according to broadly comparable Census estimates.” Yet the two series aren’t remotely comparable. Unlike pre-tax “money income” from the Census Bureau, the CBO subtracts federal taxes (middle-income tax rates were nearly cut in half since 1981) and includes rapidly increased health and other in-kind benefits from employers and government (Medicaid, SNAP, CHIP and housing allowances).
Furman repeatedly sets up 1973 as the ideal, with productivity, incomes, and fairness all supposedly downhill after that. The reason this old trick is still so popular is that 1973 was the last year Nixon’s price controls appeared to keep the consumer price index artificially low – creating a brief artificial spurt in measured real wages and productivity. When price controls exploded in a wave of shortages, average weekly earnings (in 1982-84 dollars) dropped from $341.36 in 1973 to $314.77 in 1975, $308.74 in 1979, and $290.80 in 1980. A falling dollar and rising tax rates stimulated demand and discouraged supply, giving us two nasty episodes of “stagflation.” Amazingly, those trying to blame current discontents on the distant past continue to hold up 1973 or 1979 as ideals -- idolizing the economics of Richard Nixon and Jimmy Carter.
Furman writes, “In 1973 the bottom 90 percent of households received 68 percent of the nation’s income, a figure that has fallen to 53 percent today.” But because this is no measure of the nation’s income, Furman has no idea what the bottom 90 percent share has been. Instead of using any official measure of personal or household income, Furman is citing an untenable private estimate of income reported on tax returns --with income frequently redefined by changing tax laws. “From 1944 on,” Piketty and Saez explain (Table A0), “total income is defined as total Adjusted Gross Income less realized capital gains in AGI, taxable Social Security and Unemployment Insurance benefits, and adding back all adjustments to gross income. Income of non-filers is imputed as 20 percent of average income (50 percent in 1944-1945).”
As I pointed out in a recent article and blog post, the data Furman cites report that the average real income of the bottom 90 percent was higher in 1968 than it was in 2013. Claiming to actually believe such preposterous data is a mark of unlimited gullibility or deception.
This graph illustrates a few points made in my recent Wall Street Journal article. First of all, the Piketty & Saez mean average of bottom 90% incomes per tax unit is not a credible proxy for median household income, particularly since the big reductions in middle-class taxes from 1981 to 2003.
Second, the red bars claiming bottom 90% incomes in the past six years have been no higher than they were in 1980 (Sen. Warren) or even 1968 (see the graph) is literally unbelievable. If that were true then all other income statistics -- including GDP -- would have to be completely false.
The Piketty & Saez estimates before 1944 describe total income as Personal Income less 20% (because not all income is reported). Postwar data use a modified version of Adjusted Gross Income as a proxy for personal income, with no transfer payments or health benefits, and that measure has become less and less credible over time. This makes the estimates of bottom 90% incomes simply worthless, as well as related claims that the top 1% "captured" all the cyclical gains (and losses!). If total income were calculated the same way it was in 1928, the the top 1% share would drop from 17.5% to 13.3%. Grossly underestimating total income by greater and greater amounts created an artificial increase in top 1-10% shares of such increasingly understated income.
As the blue line in the graph shows, many measures of income in 2012 or 2013 were not yet back to the peak levels of 2007 or 2000. But that definitely includes real incomes of the top 1%, which were 20.6% lower in 2012-2013 than they were in 2007.
Unemployment benefits could continue up to 73 weeks until this year, thanks to “emergency” federal grants, but only in states with unemployment rates above 9 percent. That gave the long-term unemployed a perverse incentive to stay in high-unemployment states rather than move to places with more opportunities.
Before leaving the White House recently, former Presidential adviser Gene Sperling had been pushing Congress to reenact “emergency” benefits for the long-term unemployed. That was risky political advice for congressional Democrats, ironically, because it would significantly increase the unemployment rate before the November elections. That may explain why congressional bills only restore extended benefits through May or June.
Sperling argued in January that, "Most of the people are desperately looking for jobs. You know, our economy still has three people looking for every job (opening)." PolitiFact declared that statement true. But it is not true.
The “Job Openings and Labor Turnover Survey” (JOLTS) from the Bureau of Labor Statistics does not begin to measure “every job (opening).” JOLTS asks 16,000 businesses how many new jobs they are actively advertising outside the firm. That is comparable to the Conference Board’s index of help wanted advertising, which found almost 5.2 million jobs advertised online in February.
With nearly 10.5 million unemployed, and 5.2 million jobs ads, one might conclude that our economy has two people looking for every job (opening)” rather than three. But that would also be false, because no estimate of advertised jobs can possibly gauge all available jobs.
Consider this: The latest JOLTS survey says “there were 4.0 million job openings in January,” but “there were 4.5 million hires in January.” If there were only 4.0 million job openings, how were 4.5 million hired? Because the estimated measure of “job openings” was ridiculously low. It always is.
The Table shows that from 2004 to 2013 a million more people were hired every month (4.6 million a month) than the alleged number of “job openings” (3.6 million).
In years of high unemployment, such as 2004 and 2009, the gap between hires and ads reached 1.4 million – mainly because of reduced advertising rather than reduced hiring. The well-known cyclicality of help-wanted ads makes such ads a terrible measure of job opportunities. The number of advertised job openings always falls sharply when unemployment is high – because employers can fill most jobs without advertising. As Stanford economist Robert Hall explains, employers “see there are all kinds of highly qualified people out there they can hire easily, so they don’t need to do a lot of recruiting—people are pounding on the door.” This is one reason the number of help-wanted ads tells us little about the number of available jobs.
“Many jobs are never advertised,” explained a recent BLS Occupational Outlook Handbook; “People get them by talking to friends, family, neighbors, acquaintances, teachers, former coworkers, and others who know of an opening.” Note that because many jobs are never advertised they are also never counted as “job openings” by JOLTS.
The BLS Handbook adds that, “Directly contacting employers is one of the most successful means of job hunting.” Executive employment counselor Paul Bernard likewise warns against the “reactive approach” of looking for job ads; “Instead, take a proactive approach. Spend at least 75 percent of your time networking — online and in person — with people in fields you want to work in. These days, most good jobs come through personal networking.”
Yet jobs are acquired through the initiative of job seekers are not counted as job openings by JOLTS. New job openings within firms are excluded from this constricted concept of job opportunities. Even the common practice of rehiring previously laid-off employees when business picks up does not count as “job openings” in JOLTS because it requires only a letter or phone call, not advertising.
The JOLTS data on hiring proves that the JOLTS data on the number of help-wanted ads is useless as a measure of “job openings.” Paul Krugman, Gene Sperling, PolitiFact and others who repeatedly claim these ill-defined JOLTS estimates demonstrate that there are three job seekers for every available job are completely wrong.
In End This Depression Now! (pages 77-78) Paul Krugman offers the strangest arguments I have seen. The story opens with familiar fulminations about the “top 1 percent” (those earning more than $366,623 in 2011). As he put it in a 2011 column, “income inequality in America really is about oligarchs versus everyone else.”
“Incomes of the rich,” his book claims, “are at the heart of what has been happening to America’s economy and society.” Yet it apparently requires great bravery to even dare to mention “the rising incomes” of the top 1 percent or top 0.1 percent:
Merely to raise the issue was to enter a political war zone: income distribution at the top is one of those areas where anyone who raises his head above the parapet will encounter fierce attacks from what amount to hired guns protecting the interests of the wealthy. For example, a few years ago Thomas Piketty and Emmanuel Saez . . . found themselves under fire from Alan Reynolds of the Cato Institute, who has spent decades arguing that inequality hasn’t really increased; every time one of his arguments is thoroughly debunked, he pops up with another.
To be called a “hired gun” of the wealthy might be insulting if it was not so ridiculous. First of all, no employer has ever tried to influence what I write. Second, I have been a very successful investor and live quite comfortably from realized capital gains plus mandatory distributions from IRA, Keogh and 403(b) accounts that President Obama would regard as much too large. I negotiated a token salary from Cato (smaller than my Social Security check) but return at least 40 percent of it as a charitable donation. I am usually in the top 1 percent, at least when stocks are up, and thus not easily bribed. I would be flabbergasted if Krugman is not also a member of that demonized bunch of oligarchs.
Krugman complains that some of my arguments changed (new ones popped up) over decades, but arguments should change after decades of new data. I must have made a couple of mistakes since 1992, but mistakes (including Krugman’s) are not evidence of deliberate deception or corruption.
An illustration of the way my work has supposedly been “thoroughly debunked,” was provided by Brad DeLong. He found it scientifically definitive to rerun Tim Noah’s complaint that, "Reynolds's technique is to bury you under a mountain of hard-to-follow, often irrelevant, and sometimes entirely erroneous statistical quibbles to the point where you cry 'Uncle!'" How this journalist who was admittedly unable to follow my simple charts and graphs was nevertheless able to identify all of them as irrelevant or erroneous quibbles remains a puzzle.
Back to Krugman's book. Two graphs compare a mean average of real incomes of the top 1 percent of tax units with median income for households from 1947 to 2007. Did I ever suggest that inequality of pretax, pre-transfer income has not increased since 1947? Of course not. I wrote that broad measures of the inequality of disposable income, consumption and wealth have not increased since 1988.
Krugman cites an instantly obsolete 2011 Congressional Budget Office (CBO) report about top 1 percent income shares from 1979 to 2007. Aside from cyclical ups and down, most swings in top 1 percent shares were due to taxpayer response to (1) deep cuts in individual income tax rates in 1983-88 causing a surge in business income reported by pass-through entities, and to (2) increases in realization of capital gains after the capital gains tax rate was cut in 1997 and 2003.
The disgraceful thing about the October 15, 2011 CBO report was stopping the data with the cyclical peak of 2007 even though the CBO knew perfectly well that many “top 1 percent” businesses and investors were devastated by crashing real estate and stocks. CBO estimates that the top 1 percent’s share of after tax income fell to 11.5 percent in 2009 – down from 17.4 percent in 2000 and unchanged from the 11.4 percent average of 1986-89.
Incomes of the top 1 percent did not bounce back after 2009, according to Piketty and Saez, merely rising from 18.1 percent of “market income” in 2009 (which arbitrarily excludes rising transfer payments from total incomes) to 19.8 percent in 2011. Piketty and Saez estimate that average real income of the top 1 percent was $1,322,635 in 2000 (measured in 2011 dollars) but real income dropped 20.7 percent by 2011 to $1,048, 234. Does a 20.7 percent drop over eleven years justify Krugman’s anguish about “rising income” among the top 1 percent?
In the summer of 2006 I presented a paper at the Western Economic Association International about statistical difficulties with using income reported (rather than unreported) on individual (rather than corporate) tax returns to gauge inequality of living standards. A condensed 24-page version appeared as a Cato Institute paper, and received some academic attention. I also wrote a 248-page book, Income and Wealth, with a chapter devoted to this issue, including a reprise of 1992 disagreements with Krugman.
Piketty and Saez responded only to the first of two short Wall Street Journal articles on the topic, never to my 2007 or 2012 Cato papers or my book. Among other things, they asserted that “the emerging consensus is that there can be substantial responses [to tax changes] in the short-run due to retiming of income... but that the long-term response is small.” On the contrary, all studies by Saez and others, including studies from other countries, find a very large and sustained response (elasticity) of reported income among the top 1 percent to changes in marginal tax rates on income, dividends and capital gains.
My100-page 2012 working paper offers detailed factual answers to the Piketty and Saez comments on my 2006 op ed, plus a critical examination of CBO and other measures of distribution. Here are some truncated highlights:
“It has become commonplace to use top 1 percent shares of market income as a shorthand measure of inequality, and as an argument for greater taxes on higher incomes and/or larger transfer payments to the bottom 90 percent. This paper finds the data inappropriate for such purposes for several reasons:
- Excluding rapidly increased transfer payments and employer-financed benefits from total income results in exaggerating the rise in the top 1 percent’s share between 1979 and 2010 by 23 percent because a growing share of other income is missing.
- Using estimates of the top 1 percent’s share of pretax, pretransfer income (Piketty and Saez 2003) as an argument for higher tax rates on top incomes or larger transfer payments to others is illogical and contradictory because the data exclude taxes and transfers.
- Using highly cyclical top 1 percent shares as a measure of overall inequality leads, paradoxically, to describing most recessions as a welcome reduction in inequality, because poverty and unemployment rates typically rise when the top 1 percent’s share falls, and fall when the top 1 percent’s share rises.
- Top 1 percent incomes are shown to be extremely sensitive (“elastic”) to changes in the highest tax rates on ordinary income, capital gains and dividends. Although estimates of the elasticity of ordinary income for the top 1 percent range from 0.62 (Saez 2004) to 1.99 (Moffitt and Wilhelm), those estimates fail to account for demonstrably dramatic responses to changes in the highest tax rate on capital gains and dividends.
- I estimate that more than half of the increase in the top 1 percent’s share of pretax, pretransfer income since 1983, and all of the increase since 2000, is attributable to behavioral reactions to lower marginal tax rates on salaries unincorporated businesses, dividends and capital gains.”
Krugman and DeLong are not obligated to acknowledge my recent research in any way, but they ought to at least avoid the pretense that anyone has “thoroughly debunked” any of it, much less all of it.
Responding to a student question after a recent Kansas State debate with Brad DeLong I posed a conceptual puzzle. I asked students to ponder why textbooks treat Treasury sales of government bonds as a “stimulus” to demand (nominal GDP) in the same sense as Federal Reserve purchases of such bonds. “Those are very different polices,” I noted; “Why should they have the same effect?”
The remark was intended to encourage students to probe more deeply into what such metaphors as “stimulating” or “jump starting” really mean, not to accept as dogma that fiscal and monetary policy are equally effective or that economists are certain just how they work.
DeLong’s misinterpretation of my question led him to lecture me that, “if you really do think that monetary expansion undoes fiscal expansion because monetary expansion buys bonds and fiscal expansion sells bonds, you need to educate yourself.” Citing that wholly imaginary rewriting of my question, Paul Krugman wrote, “My heart goes out to Brad DeLong, who debated Alan Reynolds and discovered that his opponent really doesn’t understand at all how either fiscal or monetary policy work.”
Did I really say that “monetary expansion undoes fiscal expansion”? Of course not. If that had been my question, I would have answered myself by saying that piling more debt on the backs of taxpayers is unlikely to stimulate private spending (much less encourage more or better labor and capital) unless the added debt is “monetized” by the Fed and regulators allow banks to lend more to private borrowers. DeLong made much the same point by saying, “Expansionary monetary policy makes it a sure thing that expansionary fiscal policy is effective by removing the channels for interest-rate and tax crowding out.”
The Fed’s current bond-buying spree is bound to have some effect, if only to facilitate cheap corporate buybacks of shares and speculative day trading of such stocks on margin. But selling more government bonds per se (if the Fed won’t buy more) would be just as much an added burden for taxpayers as it would be a benefit to whoever receives the resulting government transfers, contracts or subsidies.
This make-believe squabble about monetary expansion undoing fiscal expansion exists only in DeLong’s imagination, like my non-prediction of mammoth inflation or Krugman’s non-facts about Ireland’s fiscal frugality.
I do have a few minor issues, however, with DeLong’s remark that, “It's not possible to get confused if you have the IS-LM diagram in front of you.” To lean too heavily on John Hicks’ 1937 ad hoc diagram, which reduced the whole economy to two curves manipulated separately, is not an answer but rather part of my question. As theory goes, I much prefer Hicks’ 1975 book, The Crisis in Keynesian Economics (57) including his assessment (57) that “one of the worst things about Keynes’s doctrine . . . is the impression he gives that Liquidity Preference is wholly, and always, bad. . . .The trouble lies deep in his version of short-run macroeconomics, in which one form of investment appears as good as another.”
The question I posed to the Kansas students was more clearly explained in my 2009 Cato Journal essay, “The Misuse of Economic History.” I wrote that “it is a non sequitur to claim a ‘liquidity trap’ demonstrates that aggressive fiscal policy will ‘raise aggregate spending.’ Fiscal stimulus means selling more government securities; monetary stimulus mainly means central banks buying such securities with new money. Those are distinctly different policies, and their effectiveness raises distinctly different questions. Do big budget deficits stimulate demand? In postwar U.S. data there is no discernible connection, over short periods or long, between cyclically adjusted budget deficits and the growth of final sales to domestic purchasers. It is easier to find connections between aggregate spending and exogenous monetary policy changes.”
These are questions of fact, not theory. I was using historical data to show that monetary policy appeared relatively potent at times when Krugman claims it was not, while fiscal policy in the demand-side sense (budget deficits rather than tax rates) had no clear links to nominal or real GDP even during the Great Depression or post-1991 Japan.
Although Keynesian theory postulates a solid link between cyclically-adjusted budget deficits and changes in aggregate demand (nominal GDP), I find no such correlation in any data at home or abroad. Counterfactual simulations from Keynesian black box models are not evidence.
The burden of proof is entirely on those who assert that some measure of fiscal stimulus is linked with some measure of aggregate demand. Where did that happen and when? I am almost begging for some shred of evidence. In End This Depression Now! (234) Krugman could only uncover a study of military spending which suggests, he says, that “every year in which there was big [military] spending increase was also a year of strong growth.” Even if that causality was not ambiguous (i.e., we could afford a fatter defense budget when the economy and revenues were strong) any effect of military contracts on (defense industry) output says nothing about deficits per se, nor about the bulk of federal spending which is on payrolls, subsidies and transfers.
DeLong believes “anything that boosts the government's deficit over the next two years passes the benefit-cost test--anything at all.” Just as there is no obvious reason to expect identical economic effects from marketing or monetizing federal debt, however, there is likewise no reason to expect all types of government spending (purchases, payrolls, interest expense and transfers) to have the same effect. The evidence that different sorts of taxing and spending have quite different effects (to get back to my initial microeconomic question) is entirely on the side of Casey Mulligan, who found increased transfer payments positively harmful to employment and output.
Unless government debt was literally a free lunch, how could it possibly be true that “anything that boosts the government's deficit over the next two years passes the benefit-cost test”? Suppose interest rates doubled or tripled, as consequence of faster growth of nominal GDP, that would greatly increases the government’s deficit through larger interest payments. Would the “benefit” of that larger deficit really exceed the added interest cost to taxpayers? Would it qualify as a stimulus?
In the Brookings Papers on Economic Activity Brad DeLong and Larry Summers remind us of the changing fashions defining the mainstream economic consensus: “The late 1960s and 1970s,” they write, “provided powerful demonstrations that monetary policy had major effects on economic performance. The 1970s provided convincing evidence . . . that in the medium and long runs demand-management policy [whether fiscal or monetary] could affect levels of nominal but not real income. The late 1970s and the 1980s brought increased emphasis on the supply-side aspects of tax and expenditure policies. These three factors had led most economists by the 1990s to reject discretionary fiscal policy directed at aggregate demand as a tool of stabilization policy. Indeed, a central element of the economic strategy of the Clinton administration was the idea that deficit-reduction policy was likely to accelerate economic growth.”
For the DeLong and Summers to switch from advocating deficit-reduction in the Clinton-Bush years to advocating deficit-expansion in 2012 demonstrates impressive intellectual agility. Yet actual results of larger spending and debt have been far less impressive than the results of U.S. and Canadian spending reduction from 1992 to 2000.
For me to continue to “reject discretionary fiscal policy as a tool of stabilization policy,” just as “most economists” (including DeLong and Summers) did a decade ago, is now being redefined as ignorant heresy by DeLong and Krugman, who both wrote of being terrified by modest budget deficits in 2003-2004. The new reality, as opposed to old theory, is that national, historical and international evidence that increased government spending, borrowing and taxing is commonly unproductive or counterproductive has only grown stronger in recent years. Compare, for example, Ireland and Iceland.