Ben Bernanke, Hippie

Ben BernankeWe’re a few weeks away from a milestone I suspect most of Washington would like to forget: the start of the Iraq war. What I remember from that time is the utter impenetrability of elite prowar consensus. If you tried to point out Bush administration was obviously cooking up a bogus case for war, one that didn’t bear even casual scrutiny; if you pointed out that the risks and likely costs of war were huge; well, you were dismissed as ignorant and irresponsible. (Paul Krugman – NYTimes – 01/03/2013)

It didn’t seem to matter what evidence critics of the rush to war presented: Anyone who opposed the war was, by definition, foolish hippie. Remarkably, that judgment didn’t change even after everything the war’s critics predicted came true. Those who cheered on this disastrous venture continued to be regarded as “credible” on national security (why is John McCain still a fixture of Sunday talk shows?), while those who opposed it remained suspect. And, even more remarkably, a very similar story has played out over the past 3 years, this time about economic policy. Back then, all the important people decided that an unrelated war was an appropriate response to a terrorist attack; 3 years ago, they all decided fiscal austerity was appropriate response to an economic crisis caused by runaway bankers, with supposedly imminent danger from budget deficits playing the role played by Saddam’s alleged weapons of destruction.

Now, as then, this consensus has seemed impenetrable to counter-arguments, no matter how well grounded in evidence. Now, as then, leaders of the consensus continue to be regarded as credible even though they’ve been wrong about everything (why do people keep treating Mr. Alan Simpson as wise man?), while critics of the consensus are regarded as the foolish hippies even though all their predictions, about interest rates, about inflation, about the dire effects of austerity, have come true. So here’s my question: Will it make any difference that Ben Bernanke has now joined the ranks of the hippies? Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice. True, it wasn’t really a break with what he has said in the past or, for that matter, with what other Federal Reserve officials have been saying, but the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before, and what he said, translated from Fedspeak into plain English, was that the Beltway obsession with deficits is a terrible mistake. First of all, he pointed out the budget picture just isn’t very scary, even over medium run: “The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75% of G.D.P. through much of the current decade.” He then argued that given state of the economy, we’re currently spending too little, not too much: “A substantial portion of recent progress in lowering deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for economic recovery.” Finally, he suggested that austerity in a depressed economy may well be self-defeating even in purely fiscal terms: “Besides having adverse effects on jobs+ incomes, slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

So the deficit is not clear and present danger, spending cuts in a depressed economy are a terrible idea and premature austerity doesn’t make sense even in budgetary terms. Regular readers may find these propositions familiar, since they’re pretty much what I and other progressive economists have been saying all along. But We’re irresponsible hippies. Is Ben Bernanke? (Well, he has a beard.) The point is not that Bernanke is an unimpeachable source of wisdom; one hopes the collapse of Alan Greenspan’s reputation has put an end to the practice of deifying Fed chairmen. Mr. Bernanke is a fine economist, but no more so than, say, Columbia’s Joseph Stiglitz, Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored. No, the point is that Bernanke’s apostasy may help undermine the argument from authority, nobody who matters disagrees!, that has made elite obsession with deficits so hard to dislodge. And an end to deficit obsession can’t come a moment too soon. Right now Washington is focused on the idiocy of the sequester, but this is only the latest episode in an unprecedented run of declines in the public employment+government purchases that have crippled our economy’s recovery. Misguided elite consensus has led us into an economic quagmire, and it’s time for us to get out. 

Acerca de ignaciocovelo
Consultor Internacional

12 Responses to Ben Bernanke, Hippie

  1. Professor Uziel Nogueira says: Sequestration is an acid test for Prof PK academic thinking on fiscal deficit. What IF the $ 80 billion plus budget cuts do not affect GDP growth? what IF instead it creates incentive for additional private investment and GDP grows more vigorously? In the next few months we’ll know the answer.

    http://www.nytimes.com/2013/03/01/opinion/krugman-ben-bernanke-hippie.html

  2. mike: with the dow at 14000 or so there is clearly no shortage of capital to invest. this idea of extra money for private investment assumes there is a shortage of cash for such investment. if that were the case the dow wold have remained depressed because people lacked the cash to invest. also any ”new investment” resupposes the existence of demand. with the additional government employees laid off and the multiplier effect for those lost jobs there will be less demand for goods and services not more. companies and entrpreneurs do not invest in plants, labor and new products for fun but on the assumption of demand for the products. the middle class who make up all of the jobs lost that i mention above create the demand. we need to get out of this mindset that there are these magical job creators who are the one percenters sitting on the sidelines waiting to get more cash from the government on the forms of tax cuts to come and create jobs for us. just as there is no easter bunny, there is no such thing as a job creator, demand is the only thing that creates jobs and that is why keynsian economics works despite the tea party insistence that it doesnt.

    http://www.nytimes.com/2013/03/01/opinion/krugman-ben-bernanke-hippie.html

  3. Steve: no it’s not an acid test…because all the economist already agree to the amount of GDP drop they expect from the deal. 95% of all economist expect some .6% of GDP to drop directly from the sequestration. The only unknown is will it be .59 or .61.

    http://www.nytimes.com/2013/03/01/opinion/krugman-ben-bernanke-hippie.html

  4. Professor Uziel Nogueira says: Why so much heated debate about budget cuts of 0.5 of 1%? nothing will happen to an economy of $ 15 trillion. The only danger is of political nature. Public opinion may sway in favor of additional cuts instead of more taxes. GOP wins and White House loses.

    http://www.nytimes.com/2013/03/01/opinion/krugman-ben-bernanke-hippie.html

  5. Speaker John A. Boehner, the man who spent significant portions of the last Congress shuttling to and from the White House for fiscal talks with President Obama that ultimately failed twice to produce a grand bargain, has come around to the idea that the best negotiations are no negotiations. As the president and Congressional Democrats have tried to force Mr. Boehner back to the table for talks to head off the automatic budget cuts set to take effect on Friday, Mr. Boehner has instead dug in deeper, refusing to even discuss an increase in revenue and insisting in his typical colorful language that it was time for the Senate to produce a measure aimed at the cuts. “The revenue issue is now closed,” Mr. Boehner said Thursday, before the House left town for the weekend without acting on the cuts and a Senate attempt to avert them died. Mr. Boehner said the dispute with Democrats amounted to a question of “how much more money do we want to steal from the American people to fund more government.” “I’m for no more,” he said. While the frustrations of Congressional Democrats and Mr. Obama with Mr. Boehner are reaching a fever pitch, House Republicans could not be more pleased with their leader. “We asked him to commit to us that when the cuts actually came on March 1, that he would stand firm and not give in, and he’s holding to that,” said Representative Steve Scalise, Republican of Louisiana and chairman of the conservative Republican Study Committee. “I think Friday will be an important day that shows we’re finally willing to stand and fight for conservative principles and force Washington to start living within its means. And that will be a big victory.” Representative Mick Mulvaney, a South Carolina Republican who was elected on the 2010 Tea Party wave and has had his differences with the speaker, was similarly complimentary toward Mr. Boehner. “He’s doing exactly what he said he was going to do, and I think it’s working to our favor and to his,” Mr. Mulvaney said. “I get the feeling that our party is probably more unified right now than it has been at any time in the last several months.” Mr. Boehner, in some ways, finds himself the leader of the House Republicans with nowhere to actually lead. Among those who placed him in his post and could conceivably remove him, the test of his leadership seems to be how little action he takes. In a closed-door meeting and subsequent news conference this week, Mr. Boehner said the House was done negotiating over spending cuts until the Senate “begins to do something” (…..)

    http://www.nytimes.com/2013/03/01/us/politics/house-republicans-cheer-boehners-refusal-to-negotiate-on-cuts.html

  6. Professor Uziel Nogueira says: The budget gambit may backfire on the White House and the GOP could end up with the upper hand. The automatic budget cuts caused by sequestration are too small to affect (negatively) GDP growth in 2013. On the contrary, it might encourage additional private investments since the fiscal side of the economy is strengthened. After so many dire predictions by the White House, budget cuts will not result in the end of the world. The political budget game is just beginning.

    http://www.nytimes.com/2013/03/01/us/politics/house-republicans-cheer-boehners-refusal-to-negotiate-on-cuts.html

  7. House Republicans were elated this week when their leader, John Boehner, made it clear that deep, automatic spending cuts would begin as scheduled on Friday. Incredibly, some consider the decision a victory. As the cuts take effect, they will inflict widespread hardship. But some Americans will be hurt more than others, and the people who will be hurt the most are those who are already struggling. In the months ahead, an estimated 3.8 million Americans who have been unemployed for more than six months face a cut in federal jobless benefits of nearly 11 percent — or about $32 a week — all from the recent average weekly benefit of $292. And an estimated 600,000 low-income women and toddlers will be turned away from the federal nutrition program for women, infants and children, known as WIC. It should not be this way. Deficit reduction should not occur on the backs of the poor and vulnerable. At the insistence of Democrats, most major programs that help the needy have been exempted from the cuts, including food stamps and Medicaid. Democrats also won exemptions for beneficiaries of programs that are not explicitly aimed at low-income Americans but that are crucial to keeping many retirees out of poverty or near-poverty, notably veterans’ pensions, Social Security and Medicare. Still, smaller, vital programs will fall under the knife, in part because they are in spending categories deemed dispensable under the unthinking rules for across-the-board cuts (…..)

    http://www.nytimes.com/2013/03/02/opinion/as-the-budget-cuts-hit-home.html

  8. Professor Uziel Nogueira says: The budget cuts represent 0.5 of 1% of GDP. Not enough to “inflict widespread hardship” as the NYT editorial says. Of course, stories of Pentagon contractors laying off people in the Washington DC area will soon appear in this newspaper. For the 99% middle class and the poor, life won’t get any worse as already is.

    http://www.nytimes.com/2013/03/02/opinion/as-the-budget-cuts-hit-home.html

  9. The deadline has passed. The sequester is in effect. And Congress is not in session. We now know that our political system is broken beyond anything even remotely resembling a functional government. The ridiculous bill was designed as a poison pill, but Republicans popped it like a Pez. Now the body politic — weak with battle fatigue, jerked from crisis to crisis and struggling to recover from a recession — has to wait to see how severe the damage will be (…..) When Gallup this week asked Americans to use one word to describe the sequester, negative words outnumbered good words four to one. The top three negative words or phrases were “bad”, “disaster” and “God help us.” At a news conference after Friday’s meeting with Congressional leaders, the president tried to tamp down some of the most dire predictions about the sequester’s impact. He said: “What’s important to understand is that not everyone will feel the pain of these cuts right away. The pain, though, will be real.” The president knows well that if the sequester’s effects are so diffused that the public — whose attention span is as narrow as a cat’s hair — doesn’t connect them to their source, people might think the administration cried wolf. That’s why he said, and will most likely continue to say for months, “So every time that we get a piece of economic news over the next month, next two months, next six months, as long as the sequester’s in place we’ll know that that economic news could have been better if Congress had not failed to act.” He must yoke this pain to the people who invited it. It’s not as though most Americans don’t already think poorly of Republicans anyway. A Pew Research Center report released this week found that most Americans think the Republican Party, unlike the Democratic Party, is out of touch with the American people and too extreme. And most Americans did not see Republicans as open to change or looking out for the country’s future as much as Democrats. The president said Friday that “there is a caucus of common sense up on Capitol Hill” that includes Congressional Republicans who “privately at least” were willing to close loopholes to prevent the sequester. Those privately reasonable Republicans might want to be more public before their party goes over another cliff and takes the country with them.

    http://www.nytimes.com/2013/03/02/opinion/blow-the-sequester-poison-pill-politics.html

  10. Professor Uziel Nogueira says:


    Sequestration is bi-partisan politics by other means. The system is no longer working. This is the perfect mechanism to deal with the (political) downside of budget cuts. No one is guilty, blame the other guy. The great sequester game 2013 is just beginning. Meanwhile, the American people are having an European experience of fiscal deficits and public debt.

    http://www.nytimes.com/2013/03/02/opinion/blow-the-sequester-poison-pill-politics.html

  11. To listen to the human side of sequestration, wait in line here for the 595 bus to Reston, Va., a journey across a suburbia grown fat and happy on a federal spending boom in the past decade, primarily military. While the rest of the country experienced a corrosive recession, unemployment in Arlington County, home of the Pentagon, never rose above 5 percent. Nearby Fairfax County, with a cyberintelligence industry that took off after the Sept. 11 terrorist attacks, gorged on government contracts to private companies. “It was easy, and people got comfortable,” said Stephen S. Fuller of George Mason University, an expert on the regional economy. “They haven’t come to terms with the fact it isn’t going to be as easy.” The Washington metropolitan area, especially Northern Virginia, is in line to experience the largest economic hit of any region from the $85 billion in spending cuts that President Obama made official late Friday. Because the automatic cuts, known as sequestration, fall unevenly across the country, many Americans are greeting them with a shrug. Their nonchalance is heightened because the 2.4 percent lopped from a federal budget of $3.55 trillion is relatively small and will not happen all at once. Moreover, Congressional Republicans have accused the White House of exaggerating the impact for political gain. But in Northern Virginia the cuts will be deeply felt, economists said, assuming there is no political deal to undo them, a dimming prospect. The White House said the Defense Department would furlough 90,000 civilian employees based in Virginia, the most of any state, reducing their salaries by 20 percent this year. The ripple effect, as those employees pare expenses, put off car purchases and delay buying a home, is expected to be large. Some economists predict that Virginia will slip into recession. “No more movies, no more out-to-dinners, no more fun,” Robin Roberts, a civilian budget employee in the Defense Department, said as she waited for the 595 outside the Pentagon for the ride home. She and her husband, who is retired, have canceled their summer vacation. They switched to a cheaper phone plan. “It’s just pay the mortgage, pay the utilities, no more frills.” Americans far from Washington who say government spending is reckless and unsustainable may not shed a tear for its suburban counties, 6 of which are among the 10 richest in the country, according to the census. But that prosperity has largely rained down on government contractors; federal employees, especially younger ones, depend on their middle-class wages (…..)

    http://www.nytimes.com/2013/03/03/us/politics/virginias-feast-on-us-funds-nears-an-end.html

  12. Professor Uziel Nogueira says: In 1996 I moved from DC to Buenos Aires. Since then, I”ve been visiting the city once or twice a year. Since 9/11/01, and the wars in Iraq-Afghanistan, I’m always amazed about the signs of prosperity to be seen in the metropolitan area, particularly construction. I hardly recognize my old neighborhood of Chevy Chase. This is not the first time DC experiences military spending cuts. It happened before in the early 80s when I arrived in the city. Nonetheless, Washington area economy is better equipped to resist any economic downturn than any other regional economy in the country. The reason is simple: That’s where the money is. That is where Congress and the White House are located. My advice to people in danger of (temporary) losing Pentagon related jobs: Don’t worry. There is always another war to be fought by the US.

    http://www.nytimes.com/2013/03/03/us/politics/virginias-feast-on-us-funds-nears-an-end.html

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