Tuesday, July 20, 2010

Is "Obamanomics" Working?

Say that an intruder breaks into your house and shoots you in the stomach. He then robs you, but at the last minute, as he scurries away, he forgets to cut your phone line. This misstep enables you to crawl to the phone and call an ambulance, which rushes you to the hospital where your life is saved. Would it be fair to conclude that the robber saved your life?

If you think that argument would be ridiculous, because it ignores the fact that the robber shot you in the first place and that you only survived because he didn't fully implement his original plan, consider that this is exactly the form of argument made by those who claim the Federal Reserve and "Obamanomics" deserve credit for "saving the economy." Businessweek's April cover story,
Obama's Hot Hand: Why the Obama Plan is Working by Mike Dorning, is just one example. And just what is Obamanomics? Quoting Dorning:

For most of the past two decades, the reigning economic approach in Democratic circles has been Rubinomics, a set of priorities fashioned in the 1990s by Bill Clinton's Treasury Secretary, Robert E. Rubin, the former co-chairman of Goldman Sachs (GS). Broadly, Rubinomics was a three-legged stool consisting of restrained government spending, lower budget deficits, and open trade, which were meant in combination to reassure financial markets, keep capital flowing, and thus put the country on a path to prosperity.

On the surface, Obamanomics couldn't be more different. The Administration racked up record deficits as it pursued a $787 billion fiscal stimulus on top of the $700 billion bailout fund for banks and carmakers. Obama has done close to nothing to expand free trade. And while Clinton pleased the markets with a moderate, probusiness image, Obama has riled Wall Street with occasional bursts of populist rhetoric, such as his slamming of "fat cat bankers" on 60 Minutes last December.
In other words, Obamanomics consists of spending more than you have, subsidizing inefficient or bankrupt businesses that sell products no one wants, quashing free trade, and denigrating or threatening the most productive members of society. One might ask, if Rubinomics once led to economic prosperity, how can Obamanomics, which is the exact opposite approach, lead to economic prosperity? Isn't that a contradiction? It doesn't matter. The robber saved your life. According to Dorning:

Little more than a year ago, financial markets were in turmoil, major auto companies were on the verge of collapse and economists such as Paul Krugman were worried about the U.S. slumbering through a Japan-like Lost Decade. While no one would claim that all the pain is past or the danger gone, the economy is growing again, jumping to a 5.6% annualized growth rate in the fourth quarter of 2009 as businesses finally restocked their inventories. The consensus view now calls for 3% growth this year, significantly higher than the 2.1 % estimate for 2010 that economists surveyed by Bloomberg News saw coming when Obama first moved into the Oval Office. The U.S. manufacturing sector has expanded for eight straight months, the Business Roundtable's measure of CEO optimism reached its highest level since early 2006, and in March the economy added 162,000 jobs—more than it had during any month in the past three years. "There is more business confidence out there," says Boeing(BA) CEO Jim McNerney. "This Administration deserves significant credit."
Evidently, if any economic activity occurs, following and in spite of destructive policies, the Administration "deserves significant credit." And what if Obama had followed a different course, a course that encouraged deleveraging, failing businesses to declare bankruptcy, cuts in government spending, lower taxes, and decreased barriers to capital investment, i.e., economic freedom and the rule of law? What could have happened? The author does not ask this question. And what about the policies that caused the crisis to begin with, such as the Fed's easy money policy, government underwriting of mortgage loans, laws that encouraged loans to low income persons who could not afford them, government guarantees of checking accounts, and the like? Aren't these same institutions and policies still in place? Again, these questions are never asked by the modern economist. He simply observes positive GDP and busts out the champagne!

Arguments of the type made by Dorning commit the Fallacy of the Broken Window, conceived by Bastiat and popularized by Henry Hazlitt in his famous book, Economics in One Lesson. The lesson is that economists must not only focus on what actually happens but also account for the unseen or unintended consequences of an action throughout the entire economy. Economists who do not understand this principle, are the kind of economists who tell us that war, destruction, and broken windows are good for the economy, that "stimulus" creates prosperity, that unemployment insurance creates jobs, and that Obamanomics is "working."

9 comments:

mtnrunner2 said...

I am so sick of hearing about what the "stimulus" is or isn't doing. It's all wrong. Just last week Obama was crowing about jobs at a broken window -- er, battery -- factory in Michigan.

And this from *Business* Week no less!

Like you said, the economy may show signs of growth, but it will be in spite of the "stimulus", not because of it. What of the losses due to coercion, and due to funds being funneled away from more productive uses?

Our world has become so incredibly detached from reality when it comes to economics and politics.

Doug Reich said...

"What of the losses due to coercion, and due to funds being funneled away from more productive uses?"

Exactly. They consider the money that was spent on "something" but they never consider where the money came from and what uses it would have gone toward.

If they spend $100 on a "stimulus project", that is $100 that will not be spent somewhere else in the economy. Stimulus is simply a wealth transfer from one group to another. And, actually, it's worse than that, since the stimulus money is usually spent on something unneccessary or downright counterproductive as opposed to having been spent on some productive purpose.

HaynesBE said...

Of course I agree with your post. The frustration is---how to get others to understand these arguments sufficiently enough to even address them. How to move the discussion forward instead of simply talking past each other. It seems like people on different sides merely continue to state their beliefs and points without any real engagement or dialog.
All I can say is: frustrating.

Doug Reich said...

Beth,

I think the first step is to get people who are sympathetic merely to understand this. I find many people on the "right" are not well versed in these types of arguments and often fall for the claims of the left. I saw Karl Rove on Fox the other night saying that he "wasn't against extending unemployment benefits", he just wanted Obama to "find a way to pay for it" out of existing funds, or something like that.

Until we convince these people, no chance of convincing the left!

HaynesBE said...

Yes, that has to be the tactic. I guess living in northern California, there just aren't enough people to talk with who even come close--which is why locally I find myself talking past people so often.
Sorry to dump my discouragement on you.

Doug Reich said...

Well, first, your fault for living in a socialist country.

One other tactical point: I find the further you are from someone, the more important it is to be abstract. Focusing on narrower questions is impossible because it requires so much context and people don't generally think in principle about politics or economics.

Therefore, I like to bring the debate down to fundamentals such as: "where does the government get the money and how do YOU justify expropriating someone's income for another's benefit?" Rather than trying to offer a free market lecture, I just force them to justify socialism. It's much easier and accomplishes the same task.

Steve D said...

I would like to emphasize your point about proper epistemology.
“What could have happened?”
This is of course exactly the correct scientific question to ask. The correct comparison is between the world today and the world as it would be today if a different choice had been made. I am talking about the proper use of controls in a scientific experiment. Of course, in this case we only have one country and one world so we can’t actually do the experiment. This is one reason why the conclusions of historical sciences (economics is partly a historical science) are less certain than those of experimental sciences. In economics normally the timeline model of argument is used; one makes a decision and then looks at what follows. Because there is no proper control one cannot isolate variables and conclusions are therefore uncertain. It is unclear whether the decision caused the change to occur or whether the change was due to some other factor. This is particularly the case for the unseen and unintended consequences
However, economics is also partly an inductive science so you can form principles and apply them even if the exact experiments are impossible. This is the way Henry Hazlitt dealt with the unseen consequences - logically using a combination of induction to form the principles and deduction (mostly) to apply them.
“The frustration is---how to get others to understand these arguments sufficiently enough to even address them.”
Starting with sympathetic people such as Doug suggests is one tactic. Part of the key is to understand that however obvious the answer is to you, unless a person is used to thinking in principle it will seem to them like you are talking nonsense. And in order to use principles it is essential that you are able to derive them in the first place. (Otherwise how could you understand their importance). More important than what you know is how you know it.
“I find many people on the "right" are not well versed in these types of arguments and often fall for the claims of the left.”
Even though induction is a pretty natural process for humans, apply the inductive processes to fundamental questions of philosophy or even applied field like economics on a consistent basis is very difficult. This is what made Ayn Rand so unique – she did it naturally all the time and most of the time communicated the steps in the process. It is very easy to fall into a deductive argument; if this is done before the premises are proven and agreed upon no progress will be made. I’ve caught myself making this mistake on several occasions.
The idea I like to adapt Doug’s suggestion of bringing the conversation to fundamentals but mostly in conversations with sympathetic people. Turn the question (asked to socialists) “how do YOU justify expropriating someone's income for another's benefit?” to the question (asked to a capitalist/conservative) “Why can’t YOU justify expropriating someone's income for another's benefit?” Make them dig deep to justify their free market beliefs.
Here is one more idea. I am a scientist and I have noticed that in general scientist seem to be more sympathetic to these ideas then the average person. (I am speaking mainly of active field scientists here, not the political type). I’ve been relatively successful with conversations with other scientists particularly when I have carefully chosen my target. I believe this is because scientists are used to thinking inductively to generate principles (we call them hypotheses or theories). Look at the theory of natural selection for example and how Darwin derived it. Scientists as a group may be good fodder to spread proper epistemology.

Mo said...

well at the core of supporting unemployment benefits is altruism. we need to challenge that. then follow up with economic arguments.

Doug Reich said...

Steve D,

Excellent comment! - thanks so much for adding that.

I agree with your description of the proper method, which applies generally to all social sciences. So much of the difficultly is in understanding the right method in economics and why so many economists come to so many bizarre conclusions. Unlike the proper method you describe, modern economists are lost trying to emulate the method of physical sciences which treats human action as equivalent to atoms and molecules which can be modelled mathematically. This points to why economics is not a quantitative science.

In addition to method, there is the concept of "value" which even the Austrians get wrong. There are concepts in ethics and politics which form the basis of proper economics.

Since this topic is huge, I just want to try and tie it to the question Beth raised regarding how we should proceed.

You can't possibly establish all of this context, method, etc. when making an economics argument in a casual setting, and it's not necessary. It's only necessary if you are writing a book or academic paper in a professional intellectual context.

I think it's important for sympathetic people to be aware of these issues and we should strive towards clarifying and arguing how these issues are really the foundation of the problem and why simply arguing economics is not getting us anywhere. If not possible, that's why I advocate an approach where instead of "convincing", you frame the debate, you at least get the other side to think about the foundation of their ideas and move the debate towards fundamentals and leave them questioning their own approach.