Wednesday, June 22, 2011

Alan Blinder Has Trouble with Basic Economics

No Wonder He Gets to Write in the WSJ

The editorial pages of the Wall Street Journal are dominated by Conservatives and conservative thinking.  There is nothing wrong with this, the editors of the Wall Street Journal are very conservative and it is their right to write position papers supporting their positions.  When those positions or the logic behind them is not correct, it is the job of others to point that out, and then let the free marketplace of ideas sort things out.

However the Journal does want to be somewhat fair, and occasionally allows a divergent view to be put forth on their editorial pages.  Frequently this involves Princeton economist Alan Blinder, who usually writes devastating critiques of conservative positions, backed up by fact and logic.  Not this time.

In his most recent piece, Mr. Blinder largely attacks the idea that government spending is a “job killer”.  This is not a difficult job, sort of like attacking the idea that good nutrition and exercise is dangerous to your health.  However, Mr. Blinder does a very nice job of debunking the easily debunkable, and it was nice of the Journal to give him the opportunity to do so.

Mr. Blinder then goes on to recognize the real problem facing the U. S. Economy.

Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?

Now the correct answer here is no.  We cannot square the circle (bad analogy anyway Mr. Blinder).  Policy to reduce the deficit is in direct opposition to policy to increase employment and growth, as The Dismal Political Economist has pointed out elsewhere.

Policy to reduce unemployment will increase the deficit.  Policy to reduce the deficit will cause unemployment to be higher than it otherwise would be.  The economics profession must confront Americans with that fact and America must choose which goal it wants to achieve.

But Mr. Blinder says

Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too.

NO.  Mr. Blinder the answer is NO.  Combining a stimulus program with a deficit reduction program results in neither stimulus nor deficit reduction.  Mr. Blinder goes on to say

A package like that is not fantasy. I believe that a bipartisan group of economists, if given the authority, free of political interference, would design some version of it.

Yes, Mr. Blinder fantasy is exactly what it is.  And a tax credit for hiring is not the way to go.  The problem with hiring is lack of demand, not the cost of hiring.  As a former Vice Chairman of the Fed you should know that.

The problem here is that professional people do not like to admit they do not have a solution to an insolvable problem.  A physician does not want to say “No, we have no way to help you, you are going to die”, an attorney does not want to say, “No, there is no way to convince a jury you are not guilty, you are going to jail” and an economist does not want to say “No, we cannot have policy that will simultaneously increase employment and reduce the deficit”. 

If we could have, we would have. 


  1. Actually we can pursue a course of fiscal expansion that will lower the long run deficit.

    For a longer explanation, see Bard DeLong

    There are many things that are explicitly optimizing that we could have, but do not have. The fact that we do not have these is not an indication that they do not exist but an indication that politics is not a sieve through which the best ideas are produced.

    To bring it back to your linked post. I suspect that very few economists and advisers don't know those things you claim they do not. But those things do not matter in the face of politics, when the people doing the deciding are not enlightened professionals.

  2. @Dale

    Very insightful, I think it is correct to say that good politics does not make good economic policy. Any long term policy to cut the deficit involves stimulating growth in the short turn, which in turn means very targeted government spending and investment.

    Instead we get payroll tax cuts across the board.

    Not very encouraging.