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Finance Prof Finds Six Conservative Economic Arguments Mostly Wrong

If you're feeling economical this fine summer morning, read finance professor Noah Smith's evaluation of six major conservative arguments about the 2007–2009 recession and the recovery. Smith finds all six mostly wrong:

  1. Fannie, Freddie, and the Community Reinvestment Act caused the crisis: 5% right. If government programs to promote home ownership were a bad idea, banks had to be brainless wonders to charge along toward the cliff. But, says Smith, "a lot of other countries had simultaneous and even larger housing bubbles, and those countries did not have Fannie, Freddie, or a CRA. Also, it would be odd if Fannie, Freddie, and the CRA were benign for decades and then suddenly caused a giant bubble."
  2. Stimulus can't work: 0% right. Smith only contends that some stimulus policies may work, others may not. He refutes the contention that some conservatives made that stimulus is a shell game from which positive results are logically impossible. I'll append the future-classic 2011 review by Dylan Matthews that concludes "the preponderance of evidence indicates the stimulus worked."
  3. Welfare is prolonging the recession: 10% right. Smith sees some workforce impact in higher Social Security disability claims. But Smith doesn't see the vast majority of the unemployed choosing the poverty, dissatisfaction, and stigma of joblessness for the sake of a government check. But when demand and GDP collapse, and there are more job seekers than jobs, handing out unemployment checks is not your biggest problem; it's a moral imperative so families can eat until things get better.
  4. Fear of liberal policies holds back the recovery: 15% right. Smith actually overstates the connection between uncertainty and economic sluggishness. He gives the fear-of-liberals myth credence on the basis of a study that counts mentions of policy uncertainty in newspaper articles. But that count plays into the hands of Republicans who believe that shouting "Uncertainty kills jobs!" over and over will make it true. Uncertainty is not sandbagging the recovery.
  5. Quantitative easing will cause inflation: 10% right. Whatever quantitative easing is, we've been doing it, and it hasn't triggered inflation yet. It could be lurking, but so far, creating new money and buying bonds hasn't done what the doomsayers say it will.
  6. "Deficits are dangerous and must be cut, but only by cutting spending rather than raising taxes": 15% right. Nations (and individuals!) should pay down debt and save in good times so they have more room to borrow and spend in bad times. But deficit spending is sometimes good and necessary policy (see above stimulus, and World War 2), and easing out of deficit spending is safer for the economy than a crash course of cutting. And absolutism on spending cuts instead of tax increases is ideology, not good economics.

The conservative arguments Smith analyzes aren't fringe issues; all six have been central to the economic arguments and policies Republicans have offered since President Obama took office. All six are mostly wrong.

6 Comments

  1. Michael Black 2013.08.11

    My responses to the points above. How can we trust economists any more than politicians. They all have an agenda.
    1. Congress is responsible for the housing bubble by promoting home sales to anyone with a pulse.
    2. The stimulus should have done a great deal of good by fixing our countries infrastructure. The massive spending got everyone hooked on what should have been one time money.
    3. Everyone seems to have a sense of entitlement right now. It should not be what the government can do for you but what can you do for our country.
    4. Uncertainty does kill jobs. If we do things like simplify our tax structure and allow gov't to do the things it does best, our country can be greater than ever before.
    5. You can't create wealth from nothing and not expect it to come back and haunt you.
    6. When interest rates go up to historical norms, those deficits will come back to haunt us.

  2. Douglas Wiken 2013.08.11

    No sense paying attention to regular economists when the Laffer curve is still taken seriously by conservatives.

  3. Rorschach 2013.08.11

    Michael Black,

    "5. You can't create wealth from nothing and not expect it to come back and haunt you."

    If I do this, will "wealth" come back to haunt me? Or will "nothing" come back to haunt me? Either way I'm fine with "it".

  4. Rorschach 2013.08.11

    All those slogans from Michael Black got me thinking, and I've come up with a nice slogan that ought to appeal to both Democrats and conservative Republicans in Kentucky:

    "Bring old sourpuss home." "Bring" sounds so much more positive than "send." And of course, this slogan neither advocates for the election nor defeat of any political candidate, as no candidate is named nor is an election even mentioned. But this would make a great slogan for bumper stickers, t-shirts, plackards, yard signs and billboards in Kentucky in particular. It would bring people together.

  5. caheidelberger Post author | 2013.08.11

    Michael, provide a valid reason to dismiss this Professor Smith's ideas. Prove he has an agenda that would render invalid his reasoning and evidence. Choosing to trust no one pretty much ends any opportunity for rational discourse and shared truth-seeking.

    1. Congress had nothing to do with my decision to buy a house.

    2. What stimulus money are we hooked on?

    3. But not every unemployed person is on welfare or unemployment insurance. Unemployment insurance is necessary when job seekers outnumber job openings.

    4. Michael , you're just asserting back what Thune, Noem, et al. assert and what Smith just refuted, with evidence. Saying we need to simplify taxes does not refute the irrelevance of uncertainty; if you believe that uncertainty kills jobs, then you should never advocate any policy change ever again; let everyone know that our tax and regulatory structure will stay the same forever.

    5. Actually, the evidence on QE says that on a macroeconomic level, you pretty much can. And don't workers create new wealth every day from raw materials, time and energy that are worth less than the sum of their parts?

    6. When will interest rates return to historic norms? Is that return inevitable? What economic model says so? Isn't your assertion the same as saying that my personal income is bound to return to historical norms? Besides being vague magic, your assertion does not refute what Smith says: long-term, uncontrolled deficits are problematic, but deficit spending is not only not uniformly dangerous but sometimes the best economic course of action.

  6. Deb Geelsdottir 2013.08.12

    My brother owns and operates a big concrete construction company in Denver. He is a Republican (unfortunately). He admitted that, regardless of tax structure or instability, he only hires more employees when there is work to do. His company generally keeps very busy, though it did see a decline in bid opportunities during the heights of the Great Recession. He complained about regulations and other common Republican bs, but when I pushed him he admitted that his #1 impetus for hiring is having work to do. Tax and/or regulatory instability are secondary. Incidentally, he is very successful financially.

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