This seems to be a meta period, with reactions to how people think -- or, all too often, don't think -- about economics taking center stage.
Justin Fox, editorial director of the Harvard Business Review Group, posted an interesting article on HBR.com recently documenting something I more or less knew, but am glad to see confirmed: People aren't very receptive to evidence if it doesn't come from a member of their cultural community.
This has been blindingly obvious these past few years.
In the post "Don't Like the Message? Maybe It's the Messenger," Mr. Fox writes: "Think about that next time you hear an argument that you think is just the dumbest thing ever. Is it the argument that bothers you, or the group you think the arguer belongs to?"
Consider what the different sides in this economic debate have been predicting these past six or seven years. If you got your views from, say, The Wall Street Journal's editorial page, you knew -- knew -- that there was no housing bubble, that the United States in 2008 wasn't in recession, that budget deficits would send interest rates sky-high, that the Federal Reserve's expansion of its balance sheet would produce huge inflation, that austerity policies would lead to economic expansion.
That's quite a record. And yet I'm well aware that many people -- including those with real money at stake -- consider The Journal a reliable source and people like, well, me flaky and unbelievable. Much of this is politics, of course, but that's intertwined with culture: the kind of people who turn to The Journal or right-wing investment sites can clearly see that I'm a latte-sipping liberal who probably favors gay rights and doesn't worship the financially successful (I actually prefer good filter coffee, black, but that's otherwise accurate), and who just isn't part of their tribe.
I suppose that in my quest to improve policy and understanding I should be trying to fit in better -- lose the beard, learn to play golf, start using "impact" as a verb. But I probably couldn't pull it off even if I tried. And as a result there will always be a large group of people who will never be moved by any evidence I present.
Actually, I had a wonderful, in a way, piece of correspondence today; the correspondent had read my new book, "End this Depression Now!," and was having trouble finding any instances where I presented facts deceptively to support my ideological agenda. Could I please help him locate the places in the book where I do that?
Oh well. We just do what we can.
'Battle of the Beards'
Kudos to Robert Samuelson for a serious effort to grapple with the monetary policy dispute.
"Besides Krugman, some other economists advocate higher inflation. But not Bernanke," Mr. Samuelson wrote in a recent column for The Washington Post. "Krugman's theory could be right. It responds to an understandable urge to do something about the feeble recovery and the millions left without work and hope. But in this debate, I side with Bernanke. Flirting with more inflation is treacherous."
I believe that I'm right (but then I would, wouldn't I?); and you should know that a lot of credentialed economists, including -- I think -- a majority of those who were worrying about the zero lower bound before it actually happened, are on my side. I also believe that in assessing risks, you have to bear in mind the enormous risk of letting high unemployment fester. But I wish more economic discussion was like this, as opposed to the fraudulence that permeates most of the "debate."
Or to put it another way, I don't think everyone who disagrees with me is stupid and/or evil; just the ones who actually are stupid and/or evil.
Data Refutes 'Structural' Theory in U.S.
How do you assess stories about what's going on in the economy? You can go with your prejudices, of course. You can turn to detailed econometric evidence -- although in my experience, essentially nobody, including the econometricians, is convinced by that sort of thing. But the way I usually try to do it is to ask whether the available facts fit the "signature" that the story seems to imply -- that is, do we see the general pattern that the argument would suggest we'd see?
Now consider the argument that our problems are mainly structural. The way this story is usually told is that we had too many workers in the wrong industries in the United States -- that we have to expect a depressed level of overall employment as workers are moved out of these "bloated" sectors.
O.K., so what should be the signature of that story? Surely it is that job losses should be concentrated in the bloated sectors, that employment should if anything be rising elsewhere -- and wages should be rising in the unbloated sectors more rapidly than in the bloated ones.
So, let's take a quick look at data from the Bureau of Labor Statistics on employment and wages. The chart on the right at the top is what we get on a first pass.
Kind of looks like job losses everywhere, doesn't it?
And on wages, see the chart at bottom. Who's bidding for workers?
You can try to refine this stuff by disaggregating, but on first pass the signature of a structural problem just isn't there. (And trust me, a closer look doesn't do much better).
Or maybe people have some other structural story in mind -- except that's the one they like to tell in popular articles.
So why are these people so sure that it's structural? I know that it sounds wise and Serious to say that it is, but there is this matter of actual evidence; that evidence is strongly inconsistent with a structural story, and quite consistent with a demand story. That doesn't settle the case entirely, but in a better world it
would go a long way toward resolving the argument.
Too bad we don't live in that better world.
Structural Flashbacks
A few notes regarding the renewed push by conservatives to declare our problems "structural," or not solvable just by increasing demand.
1. That's what Very Serious People said in the 1930s, too. Then the approach of war finally delivered the stimulus we needed, and all those structural difficulties turned out to be imaginary.
2. Ireland was praised for its wonderful flexibility; it was a shining example of the art of the possible, declared George Osborne, then Britain's shadow chancellor of the Exchequer. Then, when things went wrong, Ireland was told that it must fix its deep structural rigidities.
3. Anyone who says something like, "If deficit spending were the route to prosperity, Greece would be in great shape," should be immediately considered not worth listening to. People in my camp have repeated until we're blue in the face that the case for fiscal expansion is very specific to circumstance -- it's desirable when you're in a liquidity trap, and only when you're in a liquidity trap. I know that some people like to project their own crudity onto others, but what they're actually demonstrating is their own ignorance.
4. Anything along the lines of "we need long-run solutions, not short-run fixes" may sound sophisticated, but it's actually just the opposite. Take it away, John Maynard Keynes: "But this long run is a misleading guide to current affairs. In the long run we are all dead," he wrote in 1923. "Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
ENDURING JOBLESSNESS
The New York Times columnist David Brooks argued recently that the stubborn unemployment rate in the United States is structural in nature, meaning that it is not the product of a temporary economic downturn but, rather, of fundamental long-term flaws.
"The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last," Mr. Brooks wrote on May 8. He and a number of other conservative commentators who share his views believe that the system itself is distorted, and that stimulus spending is not the way to get the economy back on track.
They contend that the 8.1 percent unemployment rate reflects issues stemming from rapidly changing technology and a labor force that is unprepared for globalized competition, and should be remedied by solutions like education and job training.
Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, explained in a speech he gave on May 7 that additional stimulus will not remedy the fact that many workers in the United States are inadequately trained. "The effects of unemployment insurance benefits," he said, "together with ... labor market inefficiencies, could plausibly account for a quite substantial portion of our elevated unemployment rate."
But economists and commentators who argue that the government should be doing more to tackle the nation's unemployment rate say they feel that the structural theory has little basis in fact. The real danger of the current downturn, they argue, is that people who have lost their jobs will stay unemployed for a long time.
"The evidence is that cyclical problems harden into structural problems because people who have been out of work for a year lose their ability to work," Larry Summers, the former secretary of the Treasury, told the Washington Post columnist Ezra Klein in May.
