Sunday, November 28, 2010

The red badge of bad economics

Though Brad DeLong is, far and away, my favorite econ blogger out there today, there are times when I disagree with him. In
an article in Foreign Policy, Brad reminds us of the origins of many of the bad economics ideas making the rounds among the political right today:
There was silence in the seminar room. Richard Kahn broke it. "Do you mean to say," he asked, "that if I were to go out tomorrow and buy a new overcoat, that it would increase unemployment?"

"Yes," said the man in the front of the room, Friedrich von Hayek, "but it would take a long and complicated mathematical argument to explain why."...

In [Hayek's] thinking, [depressions] were righteous karmic payback for past sins against the gods of monetary orthodoxy. Any attempts to cut them short or make them shallower would produce only temporary palliation, at the cost of a fiercer, deeper, and nastier further depression in the future.

Hayek's fellow countryman, Joseph Schumpeter, went further: "Gentlemen!" he announced to his students at Harvard University (there were no ladies). "A depression is healthy! Like a good ice-cold douche!" If depressions did not exist, Schumpeter thought, we would have to invent them. They were "the respiration of the economic mechanism."

Agreeing with Schumpeter was Herbert Hoover's Treasury secretary, Andrew Mellon...Hoover quotes Mellon: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."
Anyone who has been following the economics press over the past two years will find these ideas very familiar - they are the ideas advanced by conservative-leaning economists and other conservative intellectuals. From Glenn Beck (who hawks Hayek's books on his show) to well-respected economists like Robert Lucas, Robert Barro, and Greg Mankiw, the Right has embraced the idea that depressions like our current one cannot be mitigated by government policy.

But why? Why, in particular, have so many eminent macroeconomists rushed to embrace the notion that their discipline has produced no new useful policy recommendations in the last 75 years? Here is where DeLong and I differ. He believes that the culprit is resentment - the Nietszchean idea that people in a bad situation will come to believe that their suffering is noble, and will try to force their plight on others. DeLong writes:

Nothing has changed in the past few years to make Hayek's, Schumpeter's, and Mellon's arguments stronger intellectually against the critiques of Keynes and Friedman than they were 60 years ago. On substance, their current victory is inexplicable. But their triumph, epitomized by the Tea Party movement and its hostility to government action, can be explained by our fourth horseman: Friedrich Nietzsche...

Nietzsche talked about the losers -- or rather, about those who thought they were the losers. He looked at those who saw themselves as weak and poor -- rather than strong and rich -- and saw trouble. "[N]othing on earth consumes a man more quickly than the passion of resentment," he wrote. It drives us to madness.

Think of that when you consider this: The U.S. unemployment rate is stubbornly high, yet aid from a federal government that can borrow at unbelievably good terms could allow states to maintain their levels of public employment, and those public workers would then spend their incomes and so boost the number of private-sector jobs as well. But the voters are against that. No, they say. We have lost our jobs. It is only fair that those who work for the government lose their jobs as well -- never mind that each public-sector job lost triggers the destruction of yet another private-sector job. It's the underlying logic that has led to a wave of austerity across Europe that is now headed for America's shores. And it's the same logic that says, "It is only fair that homeowners lose their money" -- never mind that everyone's home prices will suffer...

Because some are unemployed, unemployment is good -- we need more of it. Because some have lost their wealth, wealth destruction is good -- we need more of it.
Although I am, in general, a big fan of Nietzsche's psychological insight, I just don't think it applies here. After all, none of the eminent economists who have railed first against stimulus spending and then against quantitative easing have lost their jobs - or even seen their wages cut! - as a result of the depression. They cannot possibly envy the good fortune of the construction workers who were employed by the stimulus. Additionally, studies have shown that Tea Parties, on the whole, are better off than most Americans; they are less, not more likely to be experiencing resentment over losing their jobs.

My guess is that the culprit behind Zombie Economics (as John Quiggin calls it) is simply the same devil that is currently plaguing every other aspect of American public life: identity politics.

American politics right now is all about identity. At the grassroots level, it's about race, with the Tea Party trying to convince poor whites that their interests lie with people of the same skin color - that the tribal threats of immigration and welfare are more dire than macroeconomic mismanagement. At the elite level, it's about the clash between the Business Class on one hand, and academics and lawyers on the other.

As both grassroots and elite America have separated themselves more and more (the so-called "Big Sort"), they have become ever more eager for markers to distinguish their two tribes - cultural flags around which to rally. In other countries, and in times past, identity markers included what church you went to and what accent you spoke with. Nowadays, there are the obvious material symbols, like whether you drive an SUV or a Prius. But in addition, people declare their allegiance by the ideas they accept and promulgate.

If you are a conservative, how do you communicate to fellow conservatives that you are on their side? Being white is not enough, since plenty of whites (about 45%) vote Democratic. Having an SUV and talking with a Southern accent might do it, but that's expensive and difficult. But denying global warming is easy, costless, and instantly and effectively communicates that you are part of the conservative movement/identity/army.

It's the same thing with Zombie Economics. If you are an economist or public intellectual, saying "stimulus doesn't work" or "we're in danger of inflation" or "the economy is being held back by uncertainty over Obama's policies" is just an easy way of saying "I stand with the Business Class against the forces of academics and lawyers." Never mind that the Business Class doesn't really believe we're in danger of inflation - otherwise, the TIPS spread, which is a market measure of inflation expectations among the investor class, would be much higher than it is. Never mind that policy uncertainty is not cited by businesses as a major concern. The purpose of these theories is not to guide policy, but to assert allegiance.

For Nobel laureates and other distinguished economists, it is important job-wise and prestige-wise to stand with the Business Class, who provide demand for the services of the econ profession. For grassroots Tea Partiers, mouthing support for Hayek is either a way of saying "don't give my money to nonwhite people", or simply a way to make conservatism seem like more of a coherent ideology than it is. Resentment need not have anything to do with it.

And if policy is paralyzed by the bad ideas that are used as ideological markers? Well, that's just collateral damage, but if you think about it, it's mild compared to the absolute political paralysis that America's identity rift has already brought about. Americans are more focused right now on dividing the pie than preventing the pie from shrinking. So shrink it shall continue to do.


  1. I agree with you - the dominant group among the Tea Parties is old, white and high income and the key theme of their identity politics is much more "What I have I hold" than ressentiment.

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  3. Anonymous5:22 PM

    I really like the last line: "Americans are more focused right now on dividing the pie than preventing the pie from shrinking. "

    Good post. =)