June 22, 2002
Hoping That the Flaws in the American Economy Throw a Lot of People Out of Work

William Greider, writing in the Nation, hopes for a depression in the United States--for this would "deflate" the "smug triumphalism of Bush's unilateralist war policy" and be "a good thing for world affairs, since Washington couldn't run roughshod over others. He believes that such a depression could be triggered by "... financial scandals" which would lead "overseas investors... to take their money home... the declining dollar... [to] fall sharply... credit... [to] become suddenly scarce, since our debtor-nation economy relies heavily on capital borrowed from abroad, and... trigger an ugly downdraft in the U.S. economy." And then "the fashionable boastfulness about America... would implode."

I don't know which is stranger: the anticipatory schadenfreude at the fantasy of U.S. unemployment climbing toward 15 percent, or the strange and ill-thought-out chain of logic by which a decline in the value of the dollar is supposed to produce a domestic depression and a shift in U.S. foreign policy.

The belief that high unemployment would produce a less unilateralist and less forward foreign policy--that catastrophic "economic events" would "deflate" the "smug triumphalism" of George W. Bush's "unilateralist war policy," and produce a "Washington that couldn't run roughshod over others"--is certainly the most bizarre link in Greider's ill-thought-out chain of logic. An economic depression would not reduce the strength of the U.S. military, would not change the U.S. national interest in destroying Al Qaeda and its ilk as rapidly and completely as possible, and would not change the way the Bush administration's foreign policy establishment views the world. And from whence comes this claim that Bush administration foreign policy is based on "smug triumphalism"? It is based on fear--not so much fear of Al Qaeda and its ilk today, but fear of what they could become if left to grow for the next decade or so.

The chain of logic that runs from Enron scandle --> withdrawal of overseas investor funds from the United States --> decline in the value of the dollar --> rise in domestic interest rates --> depression and high unemployment is, on its face, less unreasonable. Foreign investors might well decide that the U.S. is not a good place to invest so much of their wealth. Such a shift in portfolio preferences would bring about a decline in the dollar. If the Federal Reserve responds by raising interest rates, that would be likely to reduce the flow of domestic investment.

But a decline in the value of the dollar also reduces imports and increases exports. The fall in demand for investment goods is offset by a rise in demand for exports and for import-competing goods. There is no reason to believe that the net result will be a rise rather than a fall in unemployment. (When there is a sharp rise in unemployment following a decline in the value of a country's currency, there have always been other important factors--external hard-currency debt whose domestic currency value is greatly amplified by the depreciation, or an unsound monetary policy that is about to result in hyperinflation.) So why doesn't Grieder know that--in standard Keynesian theory, and often in reality as well--a shift in foreign investor sentiment away from a country's currency is expansionary?

I don't know. This guy was, twenty years ago, one of our best and most incisive reporters. Now his chains of logic snap at the first touch, and his overriding hope appears to be that the flaws in the American economy manifest themselves by throwing a lot of people out of work, so that "the fashionable boastfulness about America... [will] implode..."


William Greider (2002), "Bad for Business," The Nation (July 1, 2002):

The scandals of Enron et al., unfortunately, must compete with another story--the war on terrorism--that's more exciting, and threatening, than dirty bookkeeping or the looted billions. The two crises are intertwined in perverse ways. The smug triumphalism of Bush's unilateralist war policy could be abruptly deflated by economic events--which probably would be a good thing for world affairs, since Washington couldn't run roughshod over others, but terrible for U.S. prosperity. The financial scandals have provided yet another chilling reason to be wary of the U.S. stock market, and if overseas investors decide to take their money home in volume, the already declining dollar will fall sharply. Credit would thus become suddenly scarce, since our debtor-nation economy relies heavily on capital borrowed from abroad, and such a convergence would trigger an ugly downdraft in the U.S. economy. In that event, the fashionable boastfulness about America, the only superpower, would implode as swiftly as Enron's stock price.

Posted by DeLong at June 22, 2002 07:27 AM

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Doe this mean Greider has joined the Chomsky crowd? BTW isn't The Nation just the American sister publication of the Guradian?

Posted by: Michael Reifsnyder on June 22, 2002 04:21 PM

Grieder nowhere hopes for a recession; he merely notes that it would have the consequence of undermining American boastfulness. He says it would be bad for American prosperity; obviously a bad thing.

Jacob Segal

Posted by: Jacob Segal on June 22, 2002 06:53 PM

Others will cease to invest in the U.S. only when there are better options elsewhere. If the U.S. economy sank into a real depression, the rest of the world would be sucked under as well. Greider is just bitter that socialism failed, and now wants capitalism to fail just as badly--no matter who suffers.

Posted by: Joel on June 22, 2002 06:54 PM

Foreign investors will only pull their money out of the USA if there are better investments elsewhere. As wretched as the US markets look for the near future, I can't see anywhere else in the world that is going to do that much better.

I seem to recall a bunch of early-90s ROLLING STONE articles by Bill Greider predicting that we were on the brink of a massive wave of bank failures that would make the S&L mess look like small potatoes. I haven't paid much attention to him since.

Posted by: FMguru on June 22, 2002 07:32 PM

Foreign investors will only pull their money out of the USA if there are better investments elsewhere. As wretched as the US markets look for the near future, I can't see anywhere else in the world that is going to do that much better.

I seem to recall a bunch of early-90s ROLLING STONE articles by Bill Greider predicting that we were on the brink of a massive wave of bank failures that would make the S&L mess look like small potatoes. I haven't paid much attention to him since.

Posted by: FMguru on June 22, 2002 07:32 PM

>>Grieder nowhere hopes for a recession; he merely notes that it would have the consequence of undermining American boastfulness. He says it would be bad for American prosperity; obviously a bad thing.

Jacob Segal<<

Go read it again...


Brad DeLong

Posted by: Brad DeLong on June 22, 2002 11:58 PM

Liberal Media Look Out! There's Bias in Blogland!
And a good bit of confirmation bias to boot. First, DeLong misreads Greider horribly and then fashions his own sensationalism. To make the whole thing particularly egregious, he gets a plug from celebrity blogger/merchandiser Glenn Reynolds who cites the fabrications thereby propagating the inaccuracy as only blogland can (and tosses in a third-party, appeal-to-authority recommendation to complete the advertisement). Bloggers love to decry their mainstream detractors who have suggested that blogging lacks editorial oversight. Well, here is the evidence. Soon the rapid-fire, shoot-from-the-hip, scratch-my-back culture of blogging will become so smug and triumphant it will lose its self-critical, self-correcting nature and become that which it despises, that to which it aspires. It started today.

Posted by: db on June 23, 2002 01:02 AM

Oh, please! I haven't read the article in question, but DeLong's take on it sounds about right based on the poor quality of Greider's work over the last few years. Read "The Accidental Theorist", Krugman's take on Greider's "One World, Ready or Not", to see another good critique of Greider's muddy thinking.

Posted by: Ross N. on June 23, 2002 07:22 AM

I read it again as Delong suggests and I don't see how Grieder says he wants a recession. A recession would be a bad thing that might have good consequences. Bad for America, good in that American unilateralism might decrease. If Grieder says the good outweighs the bad, then Delong might have a case. Instead, Delong is just speculating about Grieder's motives; whereas Greider could just say he is stating a possible chain of events, without wanting them to happen.

Jacob

Posted by: Jacob Segal on June 23, 2002 07:38 AM

FMGuru writes: "Foreign investors will only pull their money out of the USA if there are better investments elsewhere. As wretched as the US markets look for the near future, I can't see anywhere else in the world that is going to do that much better."

Well, if you see the UK Sunday papers today, you'll read that loads of people are pulling out of dollar investments, UK stocks. Their brokers & bankers are advising them to. What are the other investments? Hedge funds, property (aka real estate), euros, whatever. The dollar has fallen this year substantially, is falling, looks like it will fall further. Last week I changed a big sum out of dollars into sterling. It's a bandwagon already.

Posted by: A. E. Perkins on June 23, 2002 08:35 AM

Correction, I meant US stocks, not UK stocks.

Posted by: A. E.Perkins on June 23, 2002 08:36 AM

"The Accidental Theorist"
It looks like Krugman is due for some comeuppance. Krugman states: "An overall excess of production capacity (compared to what?) has nothing at all to do with it." (Referring to an inadequacy of demand stimulated by a lack of money in circulation.) His own "seriousness" under the guise of playfulness exposes his own "implicit assumptions" which make him look as "foolish" and "naive" as he characterizes Greider to be. Ask Cisco how well its just-in-time inventory system prevented unwanted production from being discarded. Tight money you say? On the contrary, loose money fueled the overinvestment and overproduction. Now I understand that there is demand for housing and nurses and biometrics. So maybe Krugman will appear correct again, at least temporarily, after the economy has had time to make its adjustments. He says: "If production were to double, and all that production were to be sold..." Big IF.

Posted by: db on June 23, 2002 11:17 AM

Krugman may be in for some comeuppance, but not because of "The Accidental Theorist". Whatever the problems of an individual company are, that is not the same as the problems that an entire economy may face. That was the point of the article.

Posted by: Ross N. on June 23, 2002 05:21 PM

luv ya, Brad, but I also read it and didn't see any evidence that WG was hoping for a collapse, at all. (as far as the economic chain of logic, I bow to your expertise but with the note that economists aren't real famous for their ability to predict the future)

WARNING: Stupid Analogy Upcoming!!

If I try to read between the lines maybe I *could* extract this much, but it's pretty inductive: WG feels that a rich, spoiled, loutish brat (and his cohorts) has been handed the keys to a machine with capabilities far beyond his skill and maturity level. And his joyriding mortally threatens everybody. So although it's very wrong, wrong, wrong to think this way, it's also very human to wonder if a little sugar in the gas tank might in the long term be better for everybody. Just until Little Lord Snotty has been safely shipped off to wherever it is rich kids go when the rest of us enter the real world.

I'm sure not in a position to weather an economic collapse or even a sharp downturn, but even I occasionally have to fight off a thought or two like this.

Posted by: on June 24, 2002 08:58 AM

This is the only paragraph where he mentions it:

'The scandals of Enron et al., unfortunately, must compete with another story--the war on terrorism--that's more exciting, and threatening, than dirty bookkeeping or the looted billions. The two crises are intertwined in perverse ways. The smug triumphalism of Bush's unilateralist war policy could be abruptly deflated by economic events--which probably would be a good thing for world affairs, since Washington couldn't run roughshod over others, but terrible for US prosperity. The financial scandals have provided yet another chilling reason to be wary of the US stock market, and if overseas investors decide to take their money home in volume, the already declining dollar will fall sharply. Credit would thus become suddenly scarce, since our debtor-nation economy relies heavily on capital borrowed from abroad, and such a convergence would trigger an ugly downdraft in the US economy. In that event, the fashionable boastfulness about America, the only superpower, would implode as swiftly as Enron's stock price.'

As always, he doesn't have the slightest idea what he's talking about, but he's not wishing for a depression.

Posted by: Jason McCullough on June 24, 2002 09:42 AM

It seems to me that DeLong is confusing Greider's analysis, in the last paragraph, with the hopes he articulates in the first couple of paragraphs. Those hopes are pretty clearly stated: Greider wants a populist democrat to reconfigure the system. There is no indication whatsoever that Greider is linking this hope with some vague hope for the collapse of the US economy -- instead, he thinks the US economy will collapse if a populist Democrat doesn't offer a pursuasive alternative to the current administration's policy. Now, in Delong's opinion, Greider's hope might be wrongheaded, but it is completely foolish to accuse him of wishing for a depression. I can't accuse a conservative of wishing for a depression because he supports Bush, although I think Bush is leading us in a bad direction, economically. Rather, I would accuse the conservative of being wrong about what is good for the economy. This is pretty elementary stuff. Surely the real issue here is Delong's own ability to analyze a piece of writing. If he can't read a simple editorial, how can we trust him to 'read' the macro-economic features of the capitalist system? In particular, I wonder how much trust we can put in his assurance that the dollar's fall in value will be expansionary (in fact, he seems to ignore that, at least for the people on the ground, i.e. the investors in the Stock Market, the thinking is all Greider's way -- which is why news that the dollar is sliding is producing dysphoria in the market).

Posted by: Roger on June 25, 2002 11:50 AM

I don't think Brad getting a linked article from InstaPundit wrong somehow invalidates his economics training. Sheesh.

Posted by: Jason McCullough on June 28, 2002 10:51 AM

>>I don't think Brad getting a linked article from InstaPundit wrong somehow invalidates his economics training.<<

No. But perhaps it is a sign that I need to take my neoconservative impulses outside to the woodshed and beat them senseless with a rubber hose...

:-)


Brad DeLong

Posted by: Brad DeLong on June 28, 2002 03:06 PM
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