Monday, April 11, 2011

Bad Policy

Are deep recessions predictions of bad policy?
“The sickening plunge in asset prices and economic activity from August 2008 to March 2009 was an implied prediction that (take your pick) fiscal stimulus doesn’t work very well, or would not be done in large enough amounts (probably some of both.) … I doubt that a quasi-monetarist policy regime (say targeting NGDP expectations) would be effective in future severe recessions.  Why not?  Because if the regime was expected to be quasi-monetarist then the deep slump should never have happened.  Alternatively, if it did happen then markets would presumably be forecasting that there would be no NGDP targeting.  Only in the case where policy was quasi-monetarist, but not understood by markets to be quasi-monetarist, would this policy actually be adopted and work. … In the real world policymakers are rarely able to surprise markets.  Investors understand the policy regime, and draw the relevant conclusions.  When they become pessimistic about policy, their fears are generally confirmed. 
“We need to stop thinking about deep slumps as a sort of random “problem” that needs to be “fixed.”  They need to be prevented; if they aren’t, they probably won’t be fixed.”
Understanding political asymmetry: Why is this a draconian cut?  Spending cuts are necessary, our current spending levels aren’t. Tax increases on just the rich only generate so much because there are still only so many rich people. Going back to Clinton-era top marginal tax rates would net $59 billion compared to the $1,413 billion deficit currently. We need broad-based reform.

I’d like to call foul on Yglesias for blatant statistical chicanery. He cites a pre-9-11 report (February to be specific) done by Heritage Foundation predicting major job growth from the Bush tax cuts as evidence that we can never rely on any other Heritage Foundation report ever that claims tax cuts produce job growth. Or at least that Republicans can’t. The first bit of chicanery is ignoring that the estimates change after the realization of the 9-11/ recession. The second bit is that his comparison date is late 2009, at the depth of the recession coming after. That is, he complains that in the depth of the Great Recession we aren’t seeing the robust job growth predicted nine years previous, and because Heritage didn’t predict this recession nine years before it happened, we can’t listen to their forecasts ever again. I would be much more sympathetic to his point if he had cited, say, 2007 job numbers as being wildly out of line, even though they also wouldn’t take account of the earlier recession. It’s not that Ryan’s plan is particularly sound, but we don’t have to resort to rigging the numbers to make the point.

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