The debate with Bradford De Long4615
A few things I learned.
The trip to UC Davis was worth the money, the time and the effort. Organization was impeccable and the people at the Department were great. Plus it was nice to meet a number of friends and colleagues I had not seen for quite a while (my last seminar at UC Davis must have been in the early 1990s ...).
The debate was interesting, even if it were maybe less "lively" than one could have expected.
I learned a few things.
1) I no longer know how to debate in public, if I ever did. I guess I presumed I did, otherwise I would not have accepted the challenge, but looking at my performance I realize that I mumble way too much, make funny (nay: ridiculous) faces, eat my own words and the microphone while screaming into it, and, in particular, never look straight at the camera. Lesson: stop debating or learn how to do it.
2) I said lots of stupid things, or at least confused enough to sound stupid. My worst blunders: arguing over the quality of the CBO's calculations instead of just making clear that their actual estimates are in fact of the order of magnitude I claimed (spending 10% of the total during fiscal year 2009); not making clear that in Germany the depression ended earlier than in the US for reasons we may not like to imitate and that this applies to Italy as well, where the effect of the depression was very small; debating the content of Valerie Ramey's paper without having read it, thereby having to resort to a quick summary in the Hall and Woodward's blog, which did not help much, leading me (not their fault, mine) to confuse matters even more when, in fact, the issue was much simpler (see 4), below); not making clear that the data on public spending and relative performances of the G7 countries I showed were not mine but due to the kindness of David Andolfatto, whom I should thank ... there may be more, but these are enough!
3) I never made my position as clear as I should. I guess De Long had an easier job: he just believes that the stimulus will make a miracle, that we already are in the Great Depression of the XXI century and markets are not functioning (in fact, I wonder if he ever thought they do), that increasing public spending is un-ambiguously good and that, in any case, it always increases employment and reduce unemployment, not matter what. In retrospect I should have kept insisting that: (i) there is absolutely no empirical evidence this is the case, (ii) we are not in the Great Depression of the XXI century (yet) but we may end up in it if we keep believing that the most important thing to do is increasing public spending, (iii) the real source of troubles is elsewhere, not in the lack of demand but in the disruption of the financial system.
4) The statement promoted by the Cato Institute was right on the mark in stating that the fiscal package the Congress of US has just approved "is a triumph of hope over experience to believe that more government spending will help the U.S. today." My opponent did not have a single piece of data or of theory to support his claim that the "stimulus" package will be effective. The only piece of research he quoted, supporting the idea that there is a public spending multiplier larger than one (i.e. that if G goes up by a dollar Y increases by more than a dollar) is a paper (Ramey's, see above) that focuses mostly on military expenditure. The latter, because of its composition and, most important, because of the special circumstances in which it takes place (was mobilization, forced increase in labor force participation, activation of resources otherwise idle, and so on) cannot, just cannot, be used to assess the economic effects of expanding Medicare and Medicaid or financing state's expenditure these days. We, well the supporters of the "stimulus" package, just hope that the two things will turn out to be the same, but there is no reason to expect they will.
5) I now believe I understand what's going on a bit better than I did before. Hence, will the help of hindsight, I may find the time one of these days to write a longer and better piece explaining my current views. For the time being, here's the executive summary:
- The US households (and the US economy) are less rich and less productive than they thought they were. In particular, part of what we thought was "growth" was not, and the readjustment to a new path of sustained growth is not going to be short and painless. Different and better public expenditure may help, but certainly not the one contained in the package. More importantly, a number of structural reforms are needed, they have little to do with "spending more" and a lot to do with increasing competition in some key industries (financial and health care, first and foremost), technological innovation, and the labor productivity of the lower half of the American workforce.
- Partly as a consequence of the above and partly because of disfunctional internal mechanisms generating all kinds of wrong incentives, the core of the US financial sector is in shambles and not working. It needs major fixing, in fact something close to a drastic restructuring. This is long overdue, it should have started in 2000-2001; instead it is not yet starting even now. What's worse, policymakers seem to be trying the impossible to keep the actual system alive without major changes. A dramatic fight is taking place over who controls the American's (and the world's) financial power; while the fight continues, the financial system is paralized and the economy is being chocked off. This is borderline suicidal and may generate a true depression.
- Since September-October 2008 we are probably in a situation of "panic", panic that seems to get worse every day and to which I see no end in sight. This is not good, but that's the way it is: assets' valuations are reaching levels that make absolutely no sense. If the values of productive assets, in the USA and worldwide, keep decreasing at the same rate for a couple of more months we may hit a point of no return, after which all bets are off. Firms cannot possibly function when their market valuation drops, in a year, to 1/3 or 1/4 of its original value! Unfortunately, nobody seems to have any idea of HOW this panic can be stopped. But stop it we must. Which is what I meant to use the debate to argue for, but I clearly failed to.
P.S. While Bradford and the whole "tax and spend" crowd is out there screaming that we absolutely need to do the spending now and worry about the financial sector later, things like this have been happening every day during the last year and a half. Paulson before and Moral-Hazard-is-not-a-problem Summers now (with the continuing support of Mr. Liquidity-is-like-Aspirin Bernanke) are donating hundreds of billions of taxpayers dollars (at the tune of almost 200 by now, only for AIG) to bankers and other assorted losers with good connections. The reason being, I am sure, that the poor unemployed bankers are bleeding and in desperate need of public money to make ends meet. Oh Yes!