Friday, August 27, 2010

David Brooks is No Size Queen

He happily situates himself among those who insist that it's not the size of your stimulus that counts. The column is an excellent example of bad, counter-factual reasoning. Steve Benen has addressed some of Brooks' factual errors in relation to Germany's response to the economic crisis. It is also fair to respond to Brooks' claim that "" by observing that Germany's primary exports to the United States are performance cars and passenger vehicles, along with some pharmaceutical products, manufactured in unionized factories by workers who receive generous job benefits, and who benefit from a national health insurance plan - and what Brooks and his friends would no doubt see as a "nanny state" solution to keeping workers employed. Brooks' colleague, Paul Krugman, has previously commented on additional differences between Germany and the United States,
Basically, here’s the German story: it’s an economy that didn’t have a housing bubble, so it wasn’t caught up directly in the bust. But it’s very export-oriented, with a focus on durable manufactured goods. Demand for these goods plunged in the early stages of the crisis — so that Germany, remarkably, had a bigger GDP decline than the bubble economies — but has bounced back since summer 2009. This has pulled Germany back up; exports to China have done especially well.
As well as, it would seem, the market for cars to the fortunate few in the United States who can still afford a Porsche or a Bimmer.

But as previously indicated, Brooks' also fails in logic. The best analyses to date suggest that the U.S. stimulus has had a significant, beneficial effect on the economy and unemployment rate. Granted, it has of itself been far from adequate, but many stimulus skeptics have been converted to believers by the data. The leading voices against the stimulus are political advocates, who combine scare tactics about debt and big government with misrepresentations that the stimulus did nothing for the economy. Brooks surely knows better, but he appears to be deliberately throwing chum to those bottom feeders.

Brooks' implication that Germany is somehow being rewarded for austerity, while the U.S. is somehow being punished for borrowing, is absurd. Referring again to Krugman, Brooks' theory presupposes the concerns of bond vigilantes, with surging bond prices due to concerns about domestic borrowing - but as it turns out those bond vigilantes don't exist. There is no reason to believe that a recovery led with private money would have occurred in the absence of a stimulus, but not in its presence. There is every reason to believe that the loss of household wealth associated with the collapse of the housing bubble, stagnant wages and high unemployment have resulted in a loss of demand that leaves a lot of private money sitting on the sidelines.

I will grant, Brooks' economic class is doing "just fine, thank you very much", and can still afford the imported luxury cars that Brooks characterizes as "German machinery". And perhaps Brooks hangs out with enough bankers to make credible his claim that their new imported luxury cars have been purchased with bailout funds, but that still wouldn't support his larger argument. If Brooks is seriously arguing that the German approach is better - setting up a fund during good times in order to subsidize employers such that they refrain from laying off workers in bad times, that may well be a better approach than the U.S. offers to financial downturns and what would otherwise be rising unemployment.

Willfully or otherwise, Brooks is blind to the facts and pretends that the entire story is "austerity". The economic differences between nations render problematic simplistic side-by-side comparisons of nations. But as Brooks appears to believe otherwise, where's his explanation of why other nations that have pursued rigid austerity programs are suffering at the hands of bond vigilantes, even as the U.S. is not?

Update: Paul Krugman makes a good point about the relative impacts of the German stimulus vs. the U.S. stimulus:
Via Mark Thoma, Dean Baker points out that real government consumption of goods and services — that’s government buying things, as opposed to cutting taxes or handing out checks — has risen more in “austerity” Germany than in the United States. Dean starts from 2008III, which is somewhat unorthodox; but his result is not, in fact, sensitive to the start date....

What’s going on here? It’s basically the Fifty Herbert Hoovers problem. Because state and local governments can’t run persistent deficits, and because aid to those government was shortchanged, cutbacks at lower levels of government have undermined expansion at the federal level. Overall government purchases have actually grown more slowly than the economy’s potential output.
That is, much of the U.S. stimulus was used to stabilize state budgets, masking the stimulative effect and also significantly diminishing what we could have expected from stimulus spending above the baseline.

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