Tuesday, September 22, 2009

Facts Don't Speak For Themselves

Suppose, optimistically, that a year from now the current recession is currently over, the economy more or less returned to normal. There are two opposite ways in which recent events can be, and will be, interpreted:

1. The U.S. faced the risk of another Great Depression and was saved from it only by the prompt and courageous action of the Obama admnistration, in the form of stimulus and bailouts.

2. The U.S. was going into a recession, as from time to time it does. The Obama administration used exaggerated rhetoric to misrepresent it as an impending catastrophe in order to justify an extraordinary increase in government spending financed by enormous deficits. The money was mostly spent on the sorts of things politicians like to spend money on. The combined effect of rhetoric and policy made the recession more serious than it would otherwise have been but it still ended, perhaps a little later than it otherwise would have.

Both versions are, I think, consistent with the casual evidence available to most voters. Is there any basis, other than preexisting political preferences, by which voters can choose between them?

32 Comments:

At 12:16 PM, September 22, 2009, Blogger vakeraj said...

We can compare states that did and did not accept stimulus money (if there are any that didn't). Or, because recessions tend to be global, we can compare our recovery to that of other nations.

 
At 12:32 PM, September 22, 2009, Blogger Gary McGath said...

I can think of a third answer: The Obama programs did minor harm or even somewhat mitigated the recession, but at the cost of serious long-term damage through increased deficits and misallocation of money.

 
At 12:47 PM, September 22, 2009, Blogger oeconomist.com said...

vakeraj—

The acceptance of stimulus money was not exogenous; and we would expect recessions to hit different regions and nations differently even if their respective states pursued essentially the same policies. Legitimate "natural experiments" are hard to find.

 
At 1:16 PM, September 22, 2009, Blogger Don Berg said...

For most people there isn't necessarily a definitive choice to be made. One or the other of the framings will be activated in their mind by the context of the conversation and they will think about whatever issue is at hand through that framing without ever making a "choice" about which one is in use.

What would be really great is if voters could become aware that their minds work this way and make a choice rather than simply accept whatever framing of the facts is given.

 
At 1:37 PM, September 22, 2009, Blogger Rick said...

My memory may be faulty, but it seems that lots of non-democratic economists were predicting a horrible disaster. If things are better in a year, that will dispose me to thinking that the administration did some things right.

Your dichotomy seems false to me, though. Boiled down it sounds like your options are
1)"Admin was right, and what they did worked" or else
2) "Admin was lying and what they did worked."

(this one is suspect to me, because it requires the addition of 'and admin's political enemies were in collusion', or 'admin's political enemies were mistaken in exactly the way that the admin was lying - that is, the admin knew there was no disaster coming, while the Republicans mistakenly thought there was.')

There are, it seems, other options though:
3) "Admin and admin's political enemies were all mistaken, and what admin did had no effect."

4) Admin is mistaken, oppenents know it and lie in their agreement, hoping to deadlock any relief so that they can say that the disaster was coming but cleverly doing nothing solved the problem, thank goodness we stopped the stimulus. Of course after failing to stop much of the stimulus, now they have to hope that things get worse, so they can say it didn't work.

 
At 2:15 PM, September 22, 2009, Blogger David Friedman said...

Rick's memory doesn't fit mine, which may mean that we read different non-administration economists. The Administration claimed that all economists agreed on the need for a stimulus program--but the Cato Institute responded with a full page add listing a very large number of economists who didn't.

I agree that "mistaken" is a plausible alternative to "lied." On the other hand, I think the actions taken by the administration--a large stimulus, most of it in forms that wouldn't be spent for some time--makes more sense as exploiting the opportunity to spend money than it does as an attempt to solve the supposed problem.

And my second alternative isn't "what they did worked" but "what they did didn't do enough damage to prevent recovery." Presumably, when physicians used to bleed patients, a good many of them eventually recovered from what was wrong with them. It doesn't follow that the treatment worked.

Recovery, after all, is what normally happens with a recession. The contrary expectation was based on a single case, and a case in which the relevant Administrations, both Hoover and FDR, responded with an extraordinary expansion in government spending, along with (in FDR's case) radical changes in the existing rules of the game, all of which, one might argue, turned a serious recession into the Great Depression.

It isn't always easy to distinguish between the cure and the disease.

 
At 3:31 PM, September 22, 2009, Blogger Mike Huben said...

Your hatred of what Obama represents blinds you to the fact that the recession, crisis, stimulus and bailouts started with the BUSH administration.

Both Democratic and Republican politicians were not going to be labelled as Hoovers this time.

And of course, if you want to be ignorant enough, you can present anything as a conspiracy. It's just a matter of how much evidence you want to sweep under the rug. Ignorance and bigotry (against "statists") is so much easier than thinking about all those messy facts! Or even getting the basics straight, like when things started so you can assign blame.

 
At 3:36 PM, September 22, 2009, Anonymous Anonymous said...

It's easier if the question is changed slightly to whether the proposed theory of the economy holds up. In particular, it should be possible to evaluate whether the stimulus has worked in a Keynsian sense.

To do so requires breaking down the precise mechanism that, in theory, such a stimulus should work. Then, measure the data more carefully and see whether the way it played out matches the way the stimulus would represent.

I'm weak on economics, but to the extent I understand a Keynsian stimulus, the idea is to put to productive work resources that are currently unused. Investment dollars are currently too few to make it happen, but the governmet cant step in anyway. Once the pump has been primed, the government steps out, and these resources continue to be employed.

Both steps of that could be evaluated by looking at employment by industry sector. First of all, the sectors with low employment before the stimulus are surely the ones with slack in them; after the stimulus, we should see those areas springing back to life. Additionally, a few years after the stimulus is over, we should see those guys still working. If they just took the stimulus and run, that would be the epitome of a pump failing to be primed.

On the flip side, Keynes would have that the place the stimulus is placed makes a difference, no? It should, then, be possible to look at where money was spent vs. where the economy has picked up. If we spent 500 billion on social workers but the place we see growth is in computers, then it looks like the stimulus failed.

 
At 3:49 PM, September 22, 2009, Anonymous Anonymous said...

Was your title for your generally fact free post supposed to be ironic?

 
At 4:04 PM, September 22, 2009, Blogger oeconomist.com said...

Dr Friedman—

Is it the norm for commenters here to attack you based upon what they guess that you think about matters upon which you have not remarked?

 
At 7:06 PM, September 22, 2009, Blogger grammar commenter said...

I vote for:

3) The government, under both Bush and Obama, employed short-sighted expedient measures to alleviate a very real and very severe crisis of rare intensity. We'll probably regret these short-sighted "expediencies" later on.

 
At 8:16 PM, September 22, 2009, Blogger David Friedman said...

Mike Huben seems to think I'm unaware of the previous administration's role in what happened. He is mistaken--a mistake that may be related to his ideological blindness. I am sure that Bush was just as willing to spend money in ways he found politically useful as Obama.

I don't think it is relevant, however. If there is a recovery, Obama will naturally enough claim credit for it, and whether or not he deserves that credit isn't obvious to the ordinary voter--which was my point.

I am curious about Mike's "labeled as Hoovers" comment. Bush did what Hoover did--greatly expanded government spending in response to economic difficulties. If it didn't keep people from believing that Hoover did the opposite, I'm not sure it will keep them from believing the same about Bush.

 
At 6:48 AM, September 23, 2009, Blogger Rick said...

David,

Sorry I was a little unclear on two points.

1) I didn't remember everyone saying there should be a stimulus - just that most economists I heard interviewed on both sides seemed to think there was a pretty severe crisis. They disagreed on what to do about it, for certain. And, of course, if your reading was that a lot of economists thought things were going to fine after a short period of moderately bad, then I believe you - I am listening to the radio and you are an actual scholar reading full analyses.

2) The 'what they did worked' part was me trying to be clever - my understanding is that you proposed the possibility that the Admin was trying to spend a ton of money under cover of an imaginary crisis. If that is true, then what they were doing worked - that is to say, they _did_ spend a ton of money.

Additional, in response to Hoover: My lay understanding of the history was that Hoover took a long time to respond, and that by the time he did, it was too late, the depression was in full swing. Again, lay understanding based on undergrad history (not economics) classes, and some recent analysis again heard on NPR (liberal radio).

 
At 8:20 AM, September 23, 2009, Blogger Rick said...

But to sum up as I understand your point (so you can tell me if I misunderstand):

Imagine that a year from now, these are the facts:

1) Markets looked on the verge of collapse, housing values plummet, banks go under, others look like they are about to.
2) Govt spends a huge pile of money, financed by deficits.
3) Things get better.

Question: Is 3 because of 2 or in spite of it?

As you put it there, it will certainly _look_ to most voters like it was because of it, but you are right, few voters will have the tools to determine which it was, and many will presumably use their political preconceptions to decide.

My original note was that guessing whether it was stupid or evil on the govt's part depends, I expect, on the same preconceptions.

 
At 11:46 AM, September 23, 2009, Anonymous Anonymous said...

I know this is not a totally appropriate place for this, but the best I could find and I wanted to get it in on your blog. What's up with Posner drinking the Keynesian Kool-Aid here?

http://www.tnr.com/article/how-i-became-keynesian?page=0,0

 
At 12:23 PM, September 23, 2009, Anonymous Anonymous said...

"Your hatred of what Obama represents blinds you to the fact that the recession, crisis, stimulus and bailouts started with the BUSH administration."

So what you are saying is that if the recession ends within the next year, you will credit Bush for taking action in the form of stimulus and bailouts?

 
At 12:25 PM, September 23, 2009, Blogger David Friedman said...

I'm afraid I missed Rick's cleverness, which was indeed a legitimate point.

I think most economists thought it was a serious situation, but that involved two different things happening at once. It looked like the beginning of a fairly severe recession--but even fairly severe recessions are normally over in a few years. It also looked like a crisis in parts of the financial industry, likely to cause a bunch of firms to go broke.

So far as Hoover is concerned, you might want to look at an old post on this blog, which has the numbers:

http://daviddfriedman.blogspot.com/2009/05/two-great-depressions.html

By his last year, Hoover had increased government spending by 50% in nominal terms, about 100% in real terms, about 200% measured as a fraction of national income--i.e. tripled it.

That was 1932. It wasn't until 1931 that unemployment reached a really extraordinary level (15.9%), so his response wasn't all that slow.

I suggest, however, in the post, that it was the wrong response, offering as evidence the events a decade earlier, when the President responded in the opposite way and the problem was over in a couple of years.

 
At 1:06 PM, September 23, 2009, Anonymous 123 said...

As ZIRP and QE was needed it is clear that it is no ordinary recession, but a potential Great Depression or at least a Lost Decade like in Japan.

 
At 1:09 PM, September 23, 2009, Blogger Rick said...

I understand that you were looking at percentage of GDP and purchasing power, but isn't the government's purchasing power also decreased? That is, if 3.44mil doesn't buy as much as 3.29mil did last year, didn't the government's effective spending go _down_ that year?

Just looking at the numbers you put down - that is, how much money is the government spending - it looks like yearly increases of around 4%, 10%, 28% - with the 28% increase being after things were already pretty bad. That isn't fast, definitive action of the sort that proponents of New Deal or Stimulus mean. And of course, there is no information about what the increased expenditure was on. Certainly a big part of the stimulus concept is to put that money into the right things.

 
At 2:53 PM, September 23, 2009, Blogger David Friedman said...

Rick writes:

"but isn't the government's purchasing power also decreased? "

Increased, not decreased--prices were falling.

"That isn't fast, definitive action of the sort that proponents of New Deal or Stimulus mean."

Are you assuming the reaction should have been to the 1929 stockmarket crash? A stockmarket drop doesn't guarantee a depression.

If you look at unemployment figures, the rate in 1930 was high, but lower than it had been back in 1921. The administration reacted to the 1921 recession by cutting expenditure sharply, not raising it--and by 1923 unemployment was down to 2.4%.

It wasn't until 1931 that unemployment reached an extraordinary level--and the 1932 budget was, as I said, much higher than the 1929 level. Absent a crystal ball, Hoover's spending increase was a fast reaction to the situation as it developed--in the wrong direction, as I interpret the evidence, but fast.

 
At 3:32 PM, September 23, 2009, Blogger Jonathan said...

I suppose virtually all voters will choose whichever of your alternatives fits their political outlook best. That's the way most people interpret most political events.

 
At 12:58 PM, September 24, 2009, Blogger David Friedman said...

For another response to Rick ... . I just came across an interview with Anna Schwartz, who knows a great deal more than I do about depressions and related matters--she coauthored with my father the Monetary History of the United States. As you can see, she doesn't think very highly of what Obama has been doing:

http://www.time.com/time/business/article/0,8599,1909115,00.html

 
At 8:52 AM, September 27, 2009, Blogger neil craig said...

Whether his policy is considered to work or not should be judged by how other countries, in recession at the time, have performed worse or better. France & Germany are out of recession.

My opinion is that had Sarah Palin been able to fulfil the promise that under a McCain/Palin government they would have started building nuclear reacotrs & shipping oil in January the US would now be out of recession. We will see if that opinion comes to be shared.

 
At 10:27 AM, September 27, 2009, Blogger Mike Huben said...

"Is there any basis, other than preexisting political preferences, by which voters can choose between them?"

Recessions are not characterized by immanent bank failures worldwide sufficient to damage the financial system, are they? Depressions are.

Conspiracy theory attempts to blame "exaggerated rhetoric" from the Obama administration fail when you're talking about a worldwide crisis.

"Libertarianism has also been defined with some plausibility as the form taken by liberalism as common sense asymptotically approaches zero."
Richard Carnes

 
At 3:07 PM, September 29, 2009, Anonymous Anonymous said...

Neil, Iceland was the most libertarian of countries at it still continues to be dead broke.

Ideology is about 10% of effectiveness, execution is about 90%.

 
At 9:04 PM, September 29, 2009, Blogger Beastin said...

Since Bush and Obama took similar approaches, it seems to me that they do both deserve some portion of the credit/blame for the outcome. (Assuming you think they had an effect.)

I agree with Rick that, from what I could tell, a lot of people in both parties and out of them panicked. And, whether exaggerated or not, rhetoric about an impending catastrophe hit the scene well before Obama became president. Likewise, the increased government spending started during Bush's term.

Again as Rick pointed out, I don't think that there's any reason to assume that the Obama administration was lying even if they were dead wrong. If there was anything like a consensus among economists about what was happening and what to do about it, that wasn't obvious to me. (Admittedly, I am not an economist.)

I guess that most people will believe what they want to believe. I try hard to figure out what is actually true, but I recognize that I frequently fail.

 
At 9:13 AM, September 30, 2009, Anonymous b-psycho said...

Mike, where exactly did David say that the 2nd viewpoint example was his own?

 
At 9:31 AM, September 30, 2009, Blogger neil craig said...

Mous - not sure of the relevance of Iceland which has no nukes, nor oil. It does have hydro & geysers but that isn't relevant to its banking crisis either. Nor is it particularly libertarian having a very generous, scandanavian style, welfare system.

 
At 4:50 PM, October 05, 2009, Anonymous Brian N. said...

"Conspiracy theory attempts to blame "exaggerated rhetoric" from the Obama administration fail when you're talking about a worldwide crisis."

Huben...this thing you are doing here has a name. Introductory logic texts and widely available catalogs of fallacies on the internet discuss it in great detail. High School kids learn to be embarrassed caught out doing it at the age of 15. How old are you? Have you no shame? Following that with a vacuous insult gives me cause to think that no, you do not, and even when everyone knows what an obvious putz you are you'll still run around like the class clown, not realizing that even the goof-off kids in the back row long ago grew tired of your crap. I am not going to point out the technical foul in your position. If you are half as smart as you pretend to be you should know by now what you are doing wrong.

 
At 6:54 AM, October 06, 2009, Anonymous none of the above said...

Perhaps an interesting parallel is with the Bush administration's antiterrorism policies. We've had no major terrorist attacks in the US since pretty soon after 9/11 (the anthrax mailings). Some people proclaim that this is evidence that the Patriot Act, massive illegal wiretapping, abduction and torture of people suspected of involvement in terrorism, federalization of airport security workers, searching of shoes and seizure of pocket knives and water bottles, etc., protected us. Others suggest that this was all or mostly theater, with little security benefit, done for political motives.

 
At 8:59 PM, October 06, 2009, Blogger oeconomist.com said...

none of the above—

That is a well chosen illustration of the general point.

 
At 7:16 AM, October 07, 2009, Anonymous Brian N. said...

NotA,

I have more confidence in the latter position, considering the work of Bruce Schneier.

 

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