Wednesday, November 02, 2011

More Obama Criticisms Fail Reality Test | FrumForum

The Obama administration’s economic policies have disappointed almost everybody. Yet if we are to get better results in future, it’s important to understand – not only that the administration is wrong, but why it is wrong.

And unfortunately the Republican case against this administration is too often based on claims that do not survive factual scrutiny.

We saw this most recently in Rep. Paul Ryan’s speech at the Heritage Foundation, where he claimed that the United States offers upward mobility that is unavailable in Europe – despite the well-known and well-attested evidence that the US scores worse on upward mobility than most northern European countries.

If Republicans are to offer better solutions, they need to absorb better information. And if Republicans are to absorb better information, conservative journalists will have to do a better job holding Republican politicians to account when–like Ryan at the Heritage Foundation–they say things that just are not right.

To help, we have assembled a short index of often-repeated but demonstrably mistaken Republican talking points.

Regulatory “uncertainty” is preventing companies from hiring.

On October 24th Dr. Jan Eberly, Assistant Secretary for Economic Policy, wrote a blog post explaining why regulatory uncertainty can not be the main impediment to economic growth:

If regulatory uncertainty were[sic] a major impediment to hiring right now, we would expect to see indications of this in one or more of the following: business profits; trends in the workforce, capacity utilization, and business investment; differences between industries undergoing significant regulatory changes and those that are not; differences between the United States and other countries that are not undergoing the same changes; or surveys of business owners and economists.  As discussed in a detailed review of the evidence below, none of these data support the claim that regulatory uncertainty is holding back hiring.

Reihan Salam, National Review’s policy blogger agreed that the “uncertainty” argument “was never very well-crafted.”

Dr. Eberly’s report is not the only empirical data that makes this point. Bloomberg reported that Obama has approved fewer new regulations than previous Republican presidents:

Obama’s White House has approved fewer regulations than his predecessor George W. Bush at this same point in their tenures, and the estimated costs of those rules haven’t reached the annual peak set in fiscal 1992 under Bush’s father, according to government data reviewed by Bloomberg News.

And the total cost of regulation is simply not large enough to be a drag on the economy in the short term:

The average annual cost to businesses under Obama is higher than under his predecessors, the Bloomberg review shows. The increase is estimated to total as little as $100 million or as much as $4.1 billion, or at most three one-hundredths of a percent of the total economy.

So if regulatory uncertainty is not responsible for the weak economy, what is? Here we get to the 2nd Republican economic shibboleth…

Whatever is happening, it can’t be a collapse in aggregate demand!

It has become an article of faith among Republicans that the problem can’t be that there is not enough spending in the American economy. AEI’s American blog currently has a blog post by Nick Shulz entitled “No such thing as aggregate demand” which links to a post by Eric Falkenstein which describes the concept as “gibberish” and comparable to the “ Hegelian Dialectic.”

Whatever academic arguments conservatives might be able to find, there are other uncomfortable truths that need to be addressed. Why do NFIB surveys of business show that concerns about “poor sales” correlate extremely closely to the unemployment rate?

Even if you reject the Keynesian math or terminology, it can’t be denied that a significant level of personal debt overhang is largely responsible for holding back consumer spending. Why else would economist Carman Reinhart (co-author of This Time is Different, one of the most important books about the recent financial crisis) recommend significant debt forgiveness to relieve America’s debt overhang?

Conservatives are rightly skeptical of fiscal stimulus so this leaves monetary policy as the last tool avilable to alleviate the personal debt overhang. Yet this is not a possible policy for conservatives to advocate because…

Conservative are afraid the Federal Reserve is printing too much money and threatening inflation.

There are many Republican misunderstandings about monetary policy, so it can be hard to know where to start.

-For a while, conservatives thought that just because the monetary base had expanded that inflation was inevitable, ignoring the point that simply having a large money base means nothing for inflation if money is not actually being exchanged in transactions.

-Conservatives also had a habit of interpreting high commodity prices during the summer as a sign of oncoming inflation. They haven’t updated their view to account for the current fall in commodity prices.

-In fact, America might benefit from a short period of inflation to make it easier for debts to be repaid, yet the thrust of the recent GOP attacks on the Federal Reserve is that inflation cannot be allowed to rise at all.

There are numerous conservative ways to support an expansionary monetary policy, currently the most fashionable one is to call for a Nominal GDP target. It is likely that any policy would likely be better than current conservative calls for higher interest rates or even in some cases, a gold standard.

Perhaps the most important reason conservative should support monetary expansion is that it can offset the contractionary effects of fiscal austerity. Yet this benefit gets ignored by many Republicans because…

Republicans have reversed past convictions and now claim fiscal austerity always works.

Part of the blame for this talking point does legitimately rest with the Obama administration. At the start of 2009, the White House produced a now infamous graph showing how the stimulus bill was supposed to reduce unemployment. That graph has been thoroughly discredited by the real world unemployment rate.

It should not be surprising that there is a lot of deserved skepticism over fiscal stimulus, but Republicans have gone further in their criticism. They now not only oppose fiscal stimulus, they argue that fiscal austerity will lead to higher economic growth.

The entire intellectual basis for this belief is the work of economists Alberto Alesina and Silvia Ardagna. Yet a closer look at the data reveals that fiscal contraction only lead to growth in cases where monetary easing took place.

Studies by other organizations, from the IMF to the Congressional Research Service strongly suggests that fiscal austerity won’t have the immediate expansionary effects advertised by conservatives.

What is particularly troubling is that even if conservatives are willing to acknowledge that fiscal contraction might happen, that they would still rather go ahead with it instead of waiting for the economy to return to a higher rate of employment.

In a testimony that he gave to the Senate budget committee, AEI economist Kevin Hassett argued that the IMF literature suggested that “the negative effects of a spending‐based consolidation would be small and statistically insignificant” so it was worth engaging in austerity now.

Yet surely any risk of contraction is something to take heed of?

Conservatives are right that America’s long-term is unsustainable. It will be easier to pay off that debt with a combination of both long term cuts as well as having a larger population of employed and working Americans. It will be harder to pay off that debt if America creates a “lost generation” of American workers.

Conservatives think we are living in an era of high taxes.

This is an easy one to debunk. Bruce Bartlett has gone through the data and it is clear that average taxes are lower for both the poor and for most families.

However, as Bartlett notes, the conservative complaint about high taxes might not be a complaint about how high taxes are in relation to their historical average, but about how high (or low) they think they taxes should be:

Of course, these data do not prove that taxes are not too high. That is a subjective judgment related to issues of fairness and the value that people assign to the government benefits they receive in return. Many in the Tea Party talk as if the value of government is zero; consequently, they would probably complain about any tax level above zero.

As long as America agrees to fund a healthcare for senior citizens and maintain a large military presence, then at some point, hard decisions will need to be made about how to reduce spending. Some conservatives believe that the solution is to “starve the beast”: to deprive the government of revenue and force a decrease in spending. How effective has this strategy been?

‘Starve the Beast’ doesn’t work.

The most successful effort at bringing down the deficit with increased revenue and reduced government spending (as a percentage of GDP) was the 1990 tax deal agreed to by President George H.W. Bush and the Congressional Democrats. This CBO chart shows the result of that deal:

cbo revenue outlays More Obama Criticisms Fail Reality Test

This successful government compromise has since entered conservative history as an example of the sort of compromise that ‘betrays’ the movement. As this blog post from Americans for Tax Reform frames it:

The lesson is simple–tax hikes are real in these deals, but the spending cut promises are a fraud, plain and simple. Raising taxes for fake spending cuts is no deal at all.

Do you think that Republicans today should accept tax hikes in exchange for spending cut promises given what happened in 1990?

Conservatives inevitably run up against the historical problem that taxes decreased during the Bush administration without a decrease in spending. They likely argue that this was due to a lack of ‘true conservatives’ in Congress and that President Rick Perry will not allow that to happen.

This if course returns us to the earlier point: that extreme fiscal austerity would likely hurt the economy and unemployment rate at this current time.

Many points remain.

So far, this index has focused on immediate issues related to the crisis, yet there are still many other talking points and ideas which are more pernicious, but which need the attention of an additional blog post.

After making a list like this, the natural response would be to assume there are no good conservative ideas for how to deal with the economy. This is incorrect. The current discussion about making the Federal Reserve adopt a nominal GDP target is the result of work from conservative and libertarian economists.

The GOP also gets other points right. Free Trade is still a good thing so it still makes sense to support Free Trade Agreements. It is also true that the President’s healthcare law targets the highest income earners in order to fund itself. The NLRB also really shouldn’t be telling Boeing it can’t build a factory in South Carolina. Even Paul Ryan’s budget is right that reform is needed to bring the long term costs of Medicare under control.

Let’s raise the quality of the rest of the critique to equal those valid points, and retire the ones that are simply wrong.


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