Learning the wrong lessons, following the wrong examples

LEARNING THE WRONG LESSONS, FOLLOWING THE WRONG EXAMPLES…. Just this week, in an emailed newsletter, the Weekly Standard‘s Matthew Continetti offered an economic model he’d like to see the United States follow. (thanks to R.P. for the tip)

“[I]t’s worth noting that in recent years German leaders have followed macroeconomic policies vastly different from those prescribed by Paul Krugman and his various Mini-Me’s. And Germany is doing fine — better than fine, in fact. Doesn’t that count for something? And isn’t it worth trying a different approach to fiscal policy, in the name of “bold persistent experimentation,” when two years of economic stimulus have left us with 9 percent unemployment, trillion-dollar-plus deficits, and red ink for as far as the eye can see?”

Now, as stimulus analyses go, this is pretty silly. The evidence is overwhelming that unemployment would be far worse had it not been for the Recovery Act. For that matter, the point wasn’t to reduce the deficit; the point was to increase it temporarily while focusing on economic growth and job creation. The right doesn’t have to like it, but the stimulus did exactly what it set out to do.

But more important is the notion that the U.S. should be following Germany’s lead. The New York TimesDavid Leonhardt explained why American policymakers would be wise to avoid Continetti’s advice.

Remember the German economic boom of 2010?

Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again.

Well, it turns out the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States — where the stimulus program has been bigger and longer lasting — has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.

Republicans in Congress continue to insist Germany not only got it right, but that we should do as the Germans did. Indeed, Continetti summarized the GOP line nicely: Germany implemented the kind of policies Republicans prefer, and it’s “doing fine — better than fine, in fact.”

Except, it’s not. The Republican line is backwards, bogus, and blind.

Leonhardt added:

Let’s start with the logic. The austerity crowd argues that government cuts will lead to more activity by the private sector. How could that be? The main way would be if the government were using so many resources that it was driving up their price and making it harder for companies to use them.

In the early 1990s, for instance, government borrowing was pushing up interest rates. When the deficit began to fall, interest rates did too. Projects that had not previously been profitable for companies suddenly began to make sense. The resulting economic boom brought in more tax revenue and further reduced the deficit.

But this virtuous cycle can’t happen today. Interest rates are already very low. They’re low because the financial crisis and recession caused a huge drop in the private sector’s demand for loans. Even with all the government spending to fight the recession, overall demand for loans has remained historically low, the data shows.

Similarly, there is no evidence that the government is gobbling up too many workers and keeping them from the private sector. When John Boehner, the speaker of the House, said last week that federal payrolls had grown by 200,000 people since Mr. Obama took office, he was simply wrong. The federal government has added only 58,000 workers, largely in national security, since January 2009. State and local governments have cut 405,000 jobs over the same span.

The fundamental problem after a financial crisis is that businesses and households stop spending money, and they remain skittish for years afterward…. Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.

The most frustrating aspect of the discourse surrounding economic policy is its lack of depth. We know what Democrats think, and we know what Republicans think, but the discussion never gets to why they believe in their agendas.

I desperately want to hear John Boehner — or any GOP leader, for that matter — take the time to field detailed questions on this. Why would taking money out of the economy make it better? Why would laying off hundreds of thousands of workers make the unemployment rate go down?

The ideology that drives such bizarre ideas simply goes unchallenged most of the time. It’s not to late to change that.