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Snappy Comebacks to Stupid Policy Arguments

November 29, 2009

UC Berkeley economist Brad DeLong has a good post up on why good macroeconomic policy is so often a political loser. The post is a readable takedown of the now-standard meme that “Obama hasn’t done anything yet.” (How and why did Saturday Night Live establish itself as the arbiter of conventional political wisdom?)

But back to DeLong. After arguing how effective the stimulus has been, he posits that as for unpopularity

…With respect to the ARRA–the stimulus package, the Obama fiscal boost–it seems to me that what is going on in the American right is simply (a) an outbreak of extraordinary intellectual and political dishonesty that (b) the press refuses to see.

This isn’t exactly a novel analysis, but this is one case where ubiquity is due to truthfulness rather than lazy thinking. In fact, DeLong can point to a time when Republicans were arguing the exact opposite of what they are arguing today:

Republican politicians’ arguments that fiscal stimulus isn’t working are simply ripped out of the Newt Gingrich playbook: lie all the time. Remember that back in 1993 when the Democrats’ analyses led them to seek to reduce the deficit and spend less–well, back then the Republicans said that would destroy the economy too. And they were very wrong. But how many media stories about Republican claims make even a small attempt to evaluate them?

We hear so much about the “Liberal Media,” maybe it’s time to start referring to the “Media-GOP detente.” But that’s all as may be. What can we, my handful of readers, do in the face of this detente? Because I believe in always being prepared, I’d like to recount for you the following:

When my girlfriend was making her graduate school visit-weekend rounds, she was assigned a former air force pilot as a roomie. Somehow or other, they began debating whether we should have invaded Iraq. I guess my girlfriend had the upper hand (is that a tribute to her debating skills or the pesky fact that we never did find WMDs?), because her roomie shifted the terms of the argument by trotting out that tired, old claim: “Well, historically wars are good for the economy anyway.”

To which the perfect response is: Oh, so you’re a Keynesian!

Devastating! Let’s see them get out of that one. (Note: To oversimplify, Keynesian economics is generally interpreted to support liberal policies, while monetarist economics a la Milton Friedman is generally interpreted to support conservative policies.)

There is only one war that economists cite as having been “good for the economy”: World War II. In the late 30s, FDR experimented with the kind of fiscally austere programs that Hoover had used in the early 30s – the kind of fiscally austere programs that only deepened the Depression, and the kind of fiscally austere programs that the GOP and Tea Partiers are currently clamoring for. Anyway, FDR’s ill-advised austerity plunged the country back into depression. How did we get out?

Many economists believe it was thanks to the massive government demand for war materiel generated by World War II. WWII in effect provided political cover for a massive government stimulus program. Stimulus-via-war spending wasn’t creeping socialism, it was patriotism!

In Keynesian terms, American consumers had responded to a decade of bad economic news by becoming irrationally thrifty. Even those who hadn’t suffered reductions in income nonetheless spent less because of recession-induced jitters. The result of this aggregated “irrational” behavior is what Keynesians call a crisis of effective demand. If consumers are too nervous to spend, then Keynesians believe that the government must step in and spend exactly the amount consumers would spend if they were rational – i.e., if the bad economic environment hadn’t made consumers so thrifty. This government spending will stimulate the economy, production will ramp up, unemployment will fall, and eventually people will open their wallets again, thanks to a new sense of general optimism.

Such a story seems to partially explain why WWII lifted the economy from depression, and thus the myth that war is good for the economy was born. In propagating this myth, however, conservatives have been careful to mask the leftist origins of its internal logic. Hawks have made this argument about Vietnam, and they are making it about Iraq and Afghanistan. Yet these hawks somehow don’t notice that the argument only makes sense when the economy is in dire need of stimulus. Otherwise, war spending is just redirecting taxpayer money (and people) from productive investments in infrastructure, education, and social spending toward destructive¬†investments abroad. Thus outside of a depression, war spending only helps the defense industry and hurts everyone else.

The argument can also be made that war spending during times of prosperity reduces the government’s ability to respond to future financial shocks. The war in Iraq has been costing us upwards of $800 million a day since March, 2003. The debt incurred by war spending made it politically impossible for Obama to pass a stimulus package as large as nearly every economist agreed would be maximally effective.

But most importantly, “war is good for the economy” proponents miss the fact that, in the strictest sense, it is irrelevant whether the government spends on war supplies or on infrastructure and social programs. Both strategies shore up the crisis in aggregate demand. The only difference is that 1) waging war results in death, destruction, and big profits for the defense industry while 2) infrastructure and social spending reduce the suffering of the poor and working-class while making productive investments in our country that continue to generate returns years down the road.

One further point: “stimulus by war spending” was probably more effective in the 1940s than it could be today. This is because manufacturing was more evenly distributed in the 1940s, so that war-stimulus would have had a nationwide effect. Today, I gather that war-stimulus is more likely to have a localized effect, excluding many regions. However, pouring billions of dollars into high-speed rail would spread stimulus money evenly across the country, and redound in the form of future boosts to productivity and reduction in carbon emissions. Unlike war, it’s win-win-win!

(There are many more technical arguments to be made about the velocity and multiplier effects of a dollar spent on rail construction versus the velocity of a dollar spent on a jet fighter, but I don’t know enough about velocity to discuss those. I also suspect that $1,000 spend on rail ends up employing more people than $1,000 spent on a jet fighter.)

Anyway, I’ve now been waiting over a year for someone to tell me that war is good for the economy so that I can call them a Keynesian. When someone finally does, I’m ready.


Update 1/30/2010: To hear more about Keynes theories in rap format, watch Fear the Boom and the Bust


From → Snappy Comebacks

One Comment
  1. Katie permalink

    I doubt you’ll ever get to use your line. You don’t hang out with the right people.

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