Sunny on Liberal Conspiracy used recent growth levels during various administrations to prove that the Right is all at sea, economics-wise. As someone who has lambasted selective data on Climate change, I must point out how arbitrary this is: taking just a few data points to prove such a large general point.
But as I explained yesterday, on some of the recent matters of huge import, the Right has been almost stubbornly wrong. Take, for example, John Redwood’s claim that the financial crisis was 100% home grown. This is nonsense. He has surely noticed that capital is international, or learned that much of the debt losses of British banks came from exposure to overseas assets (though not, as Rick suggests, enough to destroy NRK on its own). And the claim that the banks were in trouble because the government insisted they needed more cash is utterly barmy. If the UK crash was caused by bad state decisions, then the simultaneous nosedive in every global economy points to an awful lot of coordinated bad state action at once. They must all be Facebook friends.
He ought to read the foremost monetary thinker of the age who has exhaustively examined the proposition that the US housing boom was a staightforward consequence of too low interest rates. Or at least look at this slide. Housing conditions varied wildly between countries with similar monetary conditions. It wasn’t all rates.
The Economist’s blogger has picked up on similar ‘Chicago school’ distress amongst thinkers even better known than Redwood.
Others in the department appear to be lost. Casey Mulligan has advocated a “Great Vacation” view of the recession, in which the unwillingness of workers to take jobs has played a significant role in driving up the unemployment rate. John Cochrane is quoted in the New Yorker piece attributing the financial crisis to a speech by President Bush acknowledging that financial markets were in trouble, and not the problems generated by insolvency at the nation’s largest banks. It’s not very pretty.
A dreadful article on Bloomberg is perhaps a new nadir. This is pretty shameful stuff, and recalls to mind some of DeLong’s more hysterical anti-Chicago posts. It also reminds me of Tim Congdon, I’m afraid to say. In February, he was convinced that just £100bn of QE could end the recession “with speed“.
Roughly speaking, operations of the necessary size – say, £100bn ($143bn) to £200bn of asset purchases – can add 5 to 10 per cent to the quantity of money in a few months. Company money holdings are more volatile than money as a whole. So company bank deposits might jump 10 to 20 per cent by the summer, ending the recession with surprising speed.
Here we are, #200bn later, and corporate liquidity ratios are up by just 2% or so, which Keynesians could have predicted easily. If economic expectations are weak, then loans are not created, no matter how much banking reserves go up or asset prices rise. As I am writing in my QE piece,
In the jargon, during a recession money may be “endogenous” – its quantity being determined by economic activity rather than the other way round. To use a crude analogy: a shortage of chairs may limit the popularity of a restaurant when customers are queuing up, but endlessly adding more chairs does nothing to bring business to an unpopular restaurant.
So, in January do we see humility? No – instead, a lecture at Smith’s Shadow MPC about everyone else’s mistakes, and continuing obsession with the monetary aggregates. In the Congdon view, because issuing bonds removes cash, and loans create deposits, Cambridge University’s decision to issue a bond instead of using a bank loan must be terribly bad for the economy. I have heard otherwise brilliant economists from Lombard argue that the equity raising in October 2008 was what sucked money out of the economy and drove us into recession. What a bizarre world the monetarists inhabit: read Patrick Minford for a much saner approach in the same piece.
I think some right wing economists can be good (see Minford. And David Smith). I like what Tim Worstall has written here about booms and busts – good Schumpeterian stuff. Ed Conway takes a consistently sensible approach:
In essence, the question of the year is: can the private sector begin to stand on its own feet? How long will it take until banks start lending and sufficient confidence returns to the economy so that businesses can start planning? The key metrics to watch on this front are statistics for lending (primarily to businesses) and the rate at which they are investing.
Like Stephanie Flanders, he thinks a plan B for QE is gestating. I agree.
And Bernanke is a Republican!
I could wonder aloud about why the Right takes particular approaches to economics. It can’t all be selfish class interest can it?(see Dillow’s post on this for which I have been fishing for an excuse to link to). Does the answer explain something about why terrorists are often engineers – a simple-minded belief that economics can be mechanical (like mechanical monetarism – pump in more money, out comes output)? I think the answer is probably pride. Old, clever people hate to admit they have been wrong. On the LEFT, see how long it took Samuelson and Others to admit that Soviet growth was not as high as they thought. And despite the Right being wrong in places, what has the Left really added to economic knowledge in recent years – a point made on the IEA blog? All that has happened is that Keynesianism – discovered in 1936 – has found conditions on the ground suiting it once more.
(Update: this is almost exactly what Mark Thoma/John Quiggin seem to agree with, here). Paul, Paul, Dave etc: this is a challenge. How has the Left done better, apart from resurrecting Keynes?