Thursday, June 06, 2013

Alberto Alesina wasn't right

By Frank Moraes

I guess Wonk Blog is trying to brandish it conservative credentials. This morning, Jim Tankersley wrong one the lamest economic articles I've read in weeks, The Era of 'Uncertainty' May Be Over. Will a Growth Boom Begin? It seems designed to give the austerity folks cover. It argues that all the signs indicate that "confidence" is increasing, and if the economy improves it must be that the conservatives were right all along! Most likely, as usual, the causation works the other way around: the improving economy has increased confidence. But that hardly matters, there are so many things wrong with what is effectively an austerity apologia.

The basis of the article is the daily news-based Economic Policy Uncertainty. It looks at what people are writing in newspapers and determines if times are more or less uncertain. Do people really believe that "uncertainty" is keeping the economy down? "It's a persistent [thought] among Republican lawmakers and business leaders of all stripes." While I know this is an ideological belief among Republicans, this just isn't true of business leaders. Survey after survey has found that a small percentage of businessmen think regulatory uncertainty is holding their businesses back. Consumer demand is a much bigger deal. And understandably so: no one is ever certain what the future will bring; business owners are used to this; the silly idea that businesses need "certainty" is just made up by conservative politicians. (Note: "economic certainty" is just another phrase for "demand.") By "business leaders" Tankersley means, "People who write for conservative business magazines." In other words: who cares?

Similarly, the article uses the Stanford-University of Chicago monthly economic policy index to show that "uncertainty" is down to the—Wait for it!—2011 level right before the Republicans caused the Debt Ceiling crisis. The stark downward fall in "uncertainty seems to be nothing more than a seasonal effect: it goes down at the beginning of every year. But it isn't even clear what the index means. It was markedly lower at the end of 2009. What exactly has happened to make things less uncertain now? I would argue that things aremore uncertain now than then: the Republicans are continuing to push another Debt Ceiling showdown. But in 2010, no one thought a major American political party was

crazy to do that. Now we know better.

Tankersley also puts up a graph of "consumer confidence." It is up. But this is a measure of how people feel about the economy; it doesn't work the other way around. And that is the heart of what's wrong with the whole article. Everyone knew that as the economy improves, people will feel more confident. But the whole argument that "confidence" would lead to growth was about businesses not individuals. First, individuals don't have a lot of money to spend; that's why we're in a liquidity trap. Second, the austerity philosophy is part of supply side economics, the idea that if you build it the customers will come. So consumer confidence is irrelevant to the argument.

The article ends by quoting Alberto Alesina of all people. He was the lead author of the hugely influential paper, "Large changes in fiscal policy: taxes versus spending." Mike Konczal wrote an article explaining some of the history of this paper that was both shoddy and wrong, It's Alberto Alesina's World and We're All Just Unemployed in It. Just like with Reinhart-Rogoff, Alesina's work depended upon a (hopefully unintentional) deceptive use of data. When the appropriate data were used, the argument fell apart.

But Tankersley quotes Alesina as saying that he is very optimistic about all of this "confidence." The implication is that if the economy does improve, then he was right. But he wasn't. As we all know, eventually the economy will recovery, even if policy makers do all the wrong things. The question is whether the economy would recover better under one policy rather than another. Alesina's theory has been tried throughout Europe and to a lesser degree in the United States. And we know the answer: the theory made the economy worse than it would have been and people are still suffering as a result. It is journalistic malpractice to turn reality on its head and give Alesina cover for being so disastrously wrong.

What is wrong with Wonk Blog these days?!

(Cross-posted at Frankly Curious.)

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