August 19, 2003

William Saletan Is Unbalanced and Unfair

Why oh why do we have such a lousy press corps?

Here we have William Saletan and Ben Jacobs sneering at Dick Gephardt for being proud of his role in the 1993 deficit-reduction package:

The Best of Dick Gephardt - The bravest thing he ever did. By William Saletan and Ben Jacobs ...Whether that [1993 Clinton] budget caused the expansion, boosted home ownership, lowered inflation, and created millions of jobs is far more dubious. According to figures released by the Office of Management and Budget in 1999, the recovery from the 1990 recession started in April 1991, nearly two years before Clinton took office. Furthermore, the Dow Jones Industrial Average didn't begin skyrocketing until Republicans captured Congress in 1994. The Dow gained just 538 points during the two years in which Clinton enjoyed a Democratic Congress. The Dow then soared nearly 7,000 points in the six years during which Clinton faced a Republican Congress. And the nation's Gross Domestic Product didn't starting recording annual increases of 4 percent until 1996.

Where to start? Let's work backwards, with the claim that the 1993 budget deal did not contribute to rapid growth in the late 1990s because GDP growth did not cross 4% per year heading upward until 1996. When do Saletan and Jacobs think that the reductions in the budget deficit set out in the 1993 deficit-reduction package too effect? The redirection of the funds flowing through America's capital markets from financing government deficits to financing productive investment began in 1994 and gathered strength in 1995, 1996, and 1997. We Clinton economic policy people hoped and expected the deficit-reduction package to transform what was then a low-investment, anemic, slow-productivity growth recovery into a high-investment high-productivity growth recovery. But we didn't expect that to happen overnight. Do Saletan and Jacobs really know so little about the American economy that they expect it to turn on a dime, as if it were a racing yacht, rather than behave like an oil tanker?

Saletan and Jacobs's stock market point is simply weird: good economic policy that accelerate growth raises the level of the stock market; confidence that future taxes on the rich will be low raises the level of the stock market; good news about technological revolutions raises the level of the stock market; new that future interest rates will be low raises the level of the stock market. The stock market is an indicator, but not an especially good indicator, of the overall health of the economy. Do Saletan and Jacobs really know so little about the economy that they think the stock market--rather than real GDP, or real wages--are good measures of how well it is doing?

It's not the Office of Management and Budget that decides when recessions end--it's the National Bureau of Economic Research. And it's not "figures", it's a judgment call. And the fact that the NBER called the end of the recession in April of 1991 (which I would not have done: I would have said June 1992) has nothing at all to do with whether the 1993 deficit-reduction package contributed materially to the strength of the recovery.

Did the deficit-reduction package significantly contribute to the strength of the economic recovery? I defer to Bush CEA Chairs Glenn Hubbard and Greg Mankiw, whose textbooks say that (if the Federal Reserve is doing a good job and keeping the economy near full employment) deficit reduction boosts investment and accelerates economic growth. Home ownership? Less finance needed for the government deficit means more finance available for home loans, and more finance available for home loans on better terms. Inflation? Look at Argentina for an illlustration of the possible impact of sustained large deficits in triggering inflation and financial crisis (the U.S. was still very far from an Argentinean-type situation in 1993, but not far enough that the Federal Reserve was not worrying about what might eventually happen in the absence of something like the Clinton budget). Millions of jobs? This is, I think, the only one of Gephardt's claims that can be described as "dubious," but I would acknowledge that higher investment triggered by the Clinton 1993 budget did play a role in reducing the so-called natural rate of unemployment in the late 1990s.

Now the economic consequences of the 1993 Clinton budget are not hard to learn about. Go ask Robert Solow at MIT about why it is in general a good thing for the federal government to run budget surpluses. Go read Greg Mankiw's Macroeconomics textbook. Go read Alan Blinder and Janet Yellen's The Fabulous Decade.

You have to work very hard to remain as ignorant of macroeconomics as Saletan and Jacobs are. And you have to be unfair and unbalanced to then write about a subject about which you know so very little.

Posted by DeLong at August 19, 2003 08:44 AM | TrackBack

Comments

saletan loves george w. lieberman . he once wrote that he wished his candidate was more effective on stump.it most likely is a hack job . he may be ignorant of economics and business .i do not know but seems being ignorant has not prevented a lots of people from being the member of press. lots of them are at least lazy if not dim bulbs.
badri ( never fair and always unbalanced )

Posted by: badri on August 19, 2003 09:01 AM

Count me an ex-fan of Saletan. That is really dumb.

Here's a question for you experts: what are the formulas for determining when a deficit is OK (or even desirable), and how large it is safe for a deficit to be? Of are the data too scattered for clear formulas to emerge?

Posted by: Joe Willingham on August 19, 2003 09:14 AM

That's an excellent point. Two follow up questions:

1) Have you written a "Fray" entry for it? If you drop an e-mail to their Fray editor, I'm sure he would flag it.

2) Granting your point that the effects of a 93 budget deal wouldn't start to show until the next few years, can you point me to any work on:

a) what percentage of the surplus was actually attributable to the 93 budget deal, and

b) what percentage of the 96-00 economic growth was due to interest rate drops caused by the surplus? (I guess that's a two-part question).

I agree that the economy is an oil tanker, but I've always understood that the problem with "Rubinomics" is that deficits or surpluses are so small in relationship to the economy that it's not a big enough rudder to move the ship. Am I wrong?

Posted by: J Mann on August 19, 2003 09:25 AM

Quite right. You can't expect the United States to turn around in the space of a few months; that sort of thing only happens in Iraq. If I'm following the argument correctly, we'll have to wait until sometime in 2004 to start gauging the effects of Bush's economic policies. We can keep ourselves entertained in the meantime trying to figure out where Clinton went wrong in 1998 or thereabouts.

Posted by: Paul Zrimsek on August 19, 2003 10:00 AM

saletan used to be a reasonable guy - he wrote some of the best, most accurate stuff about the clinton impeachment - but he (like so many) has turned into a game-playing hack.

and i agree with j mann, professor delong, you should submit this to "the fray."

Posted by: howard on August 19, 2003 10:08 AM

"we'll have to wait until sometime in 2004 to start gauging the effects of Bush's economic policies."

... until right after the elections? How convenient!

Just let us know how long you want the lag to be, and we'll tell you that's how the economy works. Similarly, if numbers don't look good (or, say, plain catastophic) over a certain horizon, we'll just say that beyond X (say 10) years, there is too much uncertainty, or whatever pleases you, and stop publish projections beyond that horizon. That sounds fair and balanced. Amen.

Posted by: Jean-Philippe Stijns on August 19, 2003 10:28 AM

I never said anything about wanting a lag at all, fella. Do you read Prof. DeLong's messages, or only the comments?

Posted by: Paul Zrimsek on August 19, 2003 11:27 AM

Oh, I see, you believe we live in Comparative Statics, the country where all adjustments take place instanteously, by assumption. Sure sounds like a very realistic framework to think about (macro)economic policy... Excus'me, I just happen to live in a world where agents take a little time to react to incentives, where complex macro-dynamics do exist, whether we understand them or not, and where we rarely know for sure when the full effect of a shock is in place (unless, of course, there is an election...) But I do aggree, my world is much harder to think about than yours. [The end]

Posted by: Jean-Philippe Stijns on August 19, 2003 12:30 PM

Oh, I see, you believe we live in Comparative Statics, the country where all adjustments take place instanteously, by assumption. Sure sounds like a very realistic framework to think about (macro)economic policy... Excus'me, I just happen to live in a world where agents take a little time to react to incentives, where complex macro-dynamics do exist, whether we understand them or not, and where we rarely know for sure when the full effect of a shock is in place (unless, of course, there is an election...) But I do aggree, my world is much harder to think about than yours.

Posted by: Jean-Philippe Stijns on August 19, 2003 12:46 PM

Perhaps Saletan thinks that the reductions in the budget deficit took place at the same time the stock market bubble began inflating. That is, perhaps Saletan correctly believes that deficit reduction/surpluses of the late 1990s were more a matter of luck than of good policy.

Perhaps DeLong could explain to us why, just when the US began running surpluses, the bottom fell out of economic growth. If it was the end of deficits that created that growth--and not the other way around--then DeLong should explain exactly what happened.

Posted by: Thomas on August 19, 2003 03:05 PM

I never said anything at all about *not* wanting a lag either. I just wanted to point out one or two overlooked implications of the way in which our host was making use of lags. That is all.

Posted by: Paul Zrimsek on August 19, 2003 03:47 PM

My theory (and I'm not an economist, but I am acutely aware of dishonesty) is that as bad as the deficits are when they occur at the wrong point in the business cycle, the really bad thing is fraud from the top. Year after year of saying this is a balanced budget, or this year's budget puts us on a trend toward balance when the opposite was/is so obviously true exacts a toll. After twelve years (1980 - 1992) the only thing left for investors was to hunker down and pray for relief. No wonder the '91 "recovery" was so anemic and the post '93 integrity-based recovery so strong.

Posted by: dennisS on August 19, 2003 06:09 PM

Rarely have two writers been so firmly, quickly and devastatingly dissed. The little man is standing on his seat and applauding.

Posted by: Dave Roberts on August 20, 2003 10:26 PM
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