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Tuesday, July 06, 2010

David Brooks crashes and burns

David Brooks has made a fool of himself claiming more efforts to create jobs and increase demand will destroy the country, and is taken down in spectacular fashion by Dean Baker. Brooks not only is not a professional economist, but he is poorly read in economics and incapable of comprehending the entire notion that the health of an economy depends on aggregate demand for goods and services.

Here is Baker at his best:

Seems to me that we have a very simple theory to explain the past two years. There was a huge bubble in housing that burst beginning in 2006. This led to a plunge in residential construction that cost the economy more than $500 billion in annual demand. In addition, the loss of $6 trillion in housing wealth, coupled with the loss of around $7 trillion in stock wealth, has cost the economy more than $500 billion in annual consumption demand. This is the result of the wealth effect on consumption, a phenomenon that economists have been writing about for close to a century. In addition, there was a bubble in non-residential real estate that collapsed about a year after the collapse of the housing bubble. This cost the economy about another $150 billion in demand. That gives a total loss in annual demand of around $1.2 trillion. All of this was completely predictable and predicted by at least some demand siders.
It was also easy to see that the stimulus approved by Congress was inadequate. Demand siders rely on something called "arithmetic" to reach this assessment. After pulling out the $80 billion fix to the alternative minimum tax, which had nothing to do with stimulus, and the $100 billion or so designated for later years, the stimulus provided for roughly $600 billion in spending and tax cuts over the years 2009 and 2010. This comes to $300 billion a year. Roughly half of the federal stimulus was offset by cutbacks and tax increases at the state and local level, leaving a net stimulus from the government sector of roughly $150 billion a year.

Demand siders did not believe that $150 billion in annual stimulus from the government could offset the contractionary impact of a reduction in annual spending by the private scctor of $1.2 trillion ($1.2 trillion > $150 billion). That is how demand siders explained the failure of the stimulus to have much impact in reducing the unemployment rate. Perhaps this explanation is too complicated for Mr. Brooks (he repeatedly complains about the high IQs of the demand siders), but it actually seems fairly straightforward. If he wants to be honest, he could at least say that he doesn't understand the demand siders' explanation, rather than asserting that demand siders do not have an explanation.

There is the simple arithmetic that puts the lie to the notion that the stimulus “failed.” It simply was not enough. Total demand declined just since 2007 by $1.2 trillion: $500 billion annually in lost residential construction, $150 B in lost commercial real estate construction, $500 B in lost demand due to $13 trillion – yes, $13 trillion – loss of housing bubble and stock market “wealth” as it existed in 2007. The genuine stimulus amount was $300 billion annual in 2009 and 2010, reduced by $150 billion each year in necessary cutbacks at state and local levels. $150 billion in extra demand from government spending and tax reductions was clearly inadequate to attack a $1.2 trillion demand shortfall.

Consider further that the bubbles were encouraged and permitted to promote borrowing against that inflated wealth in order to keep the Bush economy alive – it was hoped, at least into 2009 -- in the face of fundamental loss of demand in the Bush years due to flat incomes for the great majority of Americans. Wealthy Americans, who spend a smaller proportion of additional income than average Americans, took virtually a 100% share of the growth in gross domestic product between 2000 and 2007. GDP grew roughly 20% in that period. The median household, had it shared appropriately in GDP growth, would make approximately $10,000 more per year now. That's a lot of demand lost – with a multiplier to reflect turnover of that money through several sequences of transactions, very likely considerably more than the $1.2 trillion in phony bubble-supported demand identified by Dean Baker.

Of course, it also would have generated a lot more tax revenue, as would a higher marginal rate on the wealthy as there was before the Bush tax cuts. Funny: before the incomes of ordinary Americans stagnated and the the share of national taxation for the wealthy was reduced, both under the auspices of the Bush administration,we had close to full employment and a budget surplus.
Tell the deficit hawks to shut up. Besides the fact that they are phonies who said nothing when Bush was racking up huge deficits, they are now causing incalculable damage to the country.


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3:30 AM  
Anonymous Anonymous said...

Not only does Kissweb via Baker illustrate the woeful incompetence of the Media in dismembering Brooks sophistry, when we fail to call out the Media, another layer of unaccountability is foisted upon the U.S. social system to lay upon the multiple layers laid down during the G. W. Bush Administration (Hellava job, Brownie). Speaking of accountability, Goldman Sachs settled a fraud case that cost investors $250 mil, but not a single player in the fraud went to jail because the gov't let the SEC process the case instead of New York court of law.

12:28 AM  

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