The Spin on Tires

It would be nice to have economic literacy in journalism.  Take this morning’s story in the New York Times about a pair of tire factories in Amiens.  One is managed by Dunlop; its workers agreed to a schedule of constantly shifting workweeks and shift work, and it is still operating.  The other is managed by Goodyear.  There the workers rejected the disruptive schedule, and the factory is shutting down.  The comparison is presented as a morality tale, where the responsible workers, recognizing the new demands of productivity and competitiveness in a globalized economy, did the right thing, while their obstinate counterparts, representative of all that’s wrong with France, preferred heroic self-annihilation.

Reading the article, I couldn’t help but think that this analysis of The Real Reason the French Economy is Sputtering was there all along, looking for a story to attach itself to.

But an economist might ask a few simple questions.  First, what is the elasticity of the total production cost of a tire with respect to the changes in work hours?  I realize the reporter wants to emphasize the symbolism, the importance of workers bending to the employer’s will as a virtue in and of itself, but perhaps there is a factual dimension worth looking into.  Just a suggestion.

Second, what is the market for these tires?  In particular, who if anyone will pick up the market share being abandoned by Goodyear?  Is this about outsourcing of a portion of tire production to lower-cost producers in developing countries?  Or is it about a shrinking domestic market that no longer needs the output of both plants?  Or some combination of the two or something else?

In particular, it is interesting that both factories, despite their different nameplates, are owned by the same company, Goodyear Dunlop.  Thus, this story describes a consolidation.  The very least an enterprising journalist can do is to inquire into the company’s overall capacity.  Is it cutting back elsewhere in Europe?  Are they shifting production geographically?  Is it possible that they might want only one operation in Amiens in any case, and that the only result of the contest over worker concessions is which plant it will be?

All of this is speculative, because I don’t know the tire market in France.  That’s what I would want to learn from a newspaper story, a rather long one at that, on the subject.  This might also help me understand why the US, where few workers are unionized and none have the will or ability to resist whatever schedule is dictated to them, is not blanketed in tire factories.

Incidentally, there has been a ton of research in the past decade documenting the health effects of exactly the sort of work schedule being imposed at Dunlop.  It is associated with significantly elevated levels of a wide range of diseases; arguably it represents the single greatest occupational safety and health threat experienced in developed countries.  An informed journalist might want to weave that into the story too.

Old and New Keynesian Economics and Abenomics, or: Does the Phillips Curve of Japan Look Like Japan?

Flipped around, of course, and with the kink at the zero inflation rate level.  That is what some Abenomics supporters appear to believe in the new drive to push the Japanese economy from its current deflationary state into an inflationary one, and both Old and New Keynesian models seem to support this, although the OK view thinks that the PC is downwardly sloping in the longer run, while the NK view seems to go with the PC going vertical once Japan gets into positive inflation territory, or, more specifically, a clear yes to the full question.

These are my thoughts on discussing the matter with various folks and listening to some papers at the 17th conference of the Japan Association for Evolutionary Economics at Chuo University in Tokyo, from which I am planning to return home tomorrow.  A leading voice for the OK view is Toichiro Asada, incoming prez of the association and an old associate of the Bielefeld School of macroeconomics, which includes such people as Peter Flaschel, Carl Chiarella, Reiner Franke, Willi Semmler, and some others, most of whom only visit Bielefeld from time to time.  They are arguably somewhat Post Keynesian, but they mostly eschew that label, being more mathematical than most PKs, and Asada is calling himself here and now an Old Keynesian.  Curiously, the loudest advocates of the New Keynesian view at this conference that the Phillips Curve of Japan looks like Japan (flipped around) are some former students of Asada's.

According to Asada, he is the person who changed the mind of Koichi Hamada on this matter.  Hamada, a former student of Tobin's, is now Emeritus at Yale and was also at the Univerity of Tokyo.  He is now the top economic adviser of new Japan Prime Minister, Shinzo Abe, and reputedly the person who convinced Abe to adopt "Abenomics," although Asada claims it should be named for him or Hamada, with Asada now on Japanese TV pushing it.  He and quite a few others are enthusiastic, with Abenomics supporter and Hamada associate, Haruhiko Kuroda, taking over the Bank of Japan on March 20.  Even the NKs support it, although they are worrried about shutting it off sooner than the OKs such as Asada once the inflation rate goes positive (if it does). 

Asada also says that there is really no difference between Abenomics and "Bernankenomics."  In the end in both Japan and the US, the debate gets down to when to pull back from the policy rather than whether to do it or not.

Shame on Mom

So it will be the policy of New York City to publicly shame teenage mothers, and this is a good thing, writes Richard Reeves of Brookings in today’s New York Times.  I don’t want to argue with a professional moralist, being a mere amateur myself, but wouldn’t this make more sense in a world of parthenogenesis?  I mean, there are guys involved somewhere, right?  And, last time I looked, we still lived in a society in which sex was not exactly a realm of pure equality and equally shared responsibility.

Climate Change: The 90% Solution (Not)

I wish Joe Nocera would stop writing about climate change, so I can get on with my life.  Unfortunately, he keeps spouting nonsense—aggressively malicious nonsense directed at climate activists—and, like the saying has it, silence is acquiescence.  And we certainly don’t want to do that.

So here we go again.  This time Nocera is talking up “A Real Carbon Solution”, which turns out to be a coal gasification program in Texas.  It is the very future of energy, the soul of sustainable development.  You see, they will turn the coal into gas before they burn it, capture 90% of the carbon and use it either for fertilizer or to pump out more oil from hard-to-get deposits.  Everyone who is enlightened is on board.

But there is a serpent in the garden, and his name is Bill McKibben, the same guy Nocera has repeatedly attacked for his opposition to the Keystone pipeline.  We are told that McKibben is so deluded that he is unable to understand what causes greenhouse gas accumulation and what doesn’t.  He just doesn’t get that fossil fuels aren’t the problem; we just have to burn them better, so that energy companies and environmentalists can be reunited in a circle of joy.  McKibben has dustheap of history written all over him, right?

Of course, as you may have already suspected, McKibben, who has been booking up on the topic for over 20 years and consults with leading climate scientists, actually has a pretty good handle on what causes what, and it’s Nocera who glaringly exposes his ignorance.

Take the carbon we extract from the goal gas and spread on our fields.  It will just stay there, right?  After all, how can you pollute the atmosphere if you sprinkle the stuff on topsoil?  And what’s wrong with pumping more oil?  What does that have to do with climate change?

If, on the off chance, Nocera has a glimmer of doubt and wants to see if there’s an aspect of the science he may have overlooked, I would recommend that he search under “carbon cycle” and “carbon exchange”.  It’s part of an obscure field of study called “ecology”.  He might be surprised to find out that chemical substances actually move through soil, water, atmosphere and living organisms, and that clever humans haven’t found a way yet to build a wall around any piece of the system and keep carbon where we put it.  Unless you truly pump the stuff back into the deep earth and keep it isolated for eons, extracting carbon is the problem.  What you do with it after you extract it is strictly second-order, because it, well, cycles.

But don’t take it from me.  Read up on it yourself.  In particular, ground yourself in the study of biogeochemical cycling.  You just might avoid making statements in public that are simply ignorant and mean.

What I Learned About Climate Change this Year

I just finished teaching a two-quarter class on climate change, and here is my most important takeaway.  Going in, I knew the main aspects of the science and how much risk we face.  I also knew the main policy levers and, in general terms, the pluses and minuses of each.  What I didn’t know then, but know now, is the enormous mismatch between the obligatory greenhouse gas mitigation timetable and the energy transition timetable.

The first is about the targets we need to reach in order to keep climate change unpleasant but manageable.  For a very stringent version, see this analysis by Kevin Anderson.  Here is one of his mitigation scenarios:

This is a set of global pathways.  Reductions begin in 2020 (riotous optimism in my opinion, but why not?) and reach their goal by 2040 or so at the latest.  The different colored lines represent different assumptions about climate sensitivity.  If we're lucky and the least sensitive relationships apply, we get the purple line.  If the news on the science front turns out to be worse, we could end up with the red or blue, which basically fall off a cliff in 2020.  That is not a representation of policy but catastrophe.  It is unimaginable, in fact.  So stick to your optimism and color the science purple or green.

The second timetable is about the replacement of carbon-based energy and the infrastructure it rests on with carbon-free energy, along with its infrastructure, and expanded to meet the needs of the hundreds of millions of people who lack adequate energy supplies today but will acquire them tomorrow.  I haven’t seen a particular visualization that jumps out at me, but everyone who studies energy systems agrees that it will take many decades to innovate, deploy and scale up new energy sources, along with the investments we need to make to achieve greater efficiencies in using energy to meet human needs.

If our reduction in fossil fuel use is limited to the progress we make in substituting non-carbon energy, we’re cooked.  Literally.

Before teaching this course I didn’t realize how bad this mismatch truly is.

So, if we want to avoid carbonapocalypse, we will have to do without some stuff for a while.  This was one motivation for my Green Keynesianism post: one of the goals of economic policy around climate and the macroeconomy is to make it possible for people to do the kind of expenditure-switching that can maintain incomes and employment—and quality of life—even as the energy-dependent part of our economy is pinched.

It is also behind the posts I’ve written to more carefully distinguish mitigation from adaptation in carbon policy.  Unless we turn to geoengineering or sequestration, there is only one form of mitigation: leaving fossil fuels in the ground.  Supplying clean energy and improving the efficiency of energy use are not mitigation.  They can lead to mitigation if they result in more carbon staying put in the lithosphere, but only then, and only to that extent.  This is important not because I like to split hairs, but because energy transition alone will not be enough to do the job.  To understand this, and to feel it deeply enough to get you to do something about it, you need to have an absolutely clear sense of what the job actually is.

To repeat what I’ve said before, none of the above should be taken as criticism of all the activism and policy intelligence around energy transition.  We absolutely need to replace carbon-based fuels with clean ones and revolutionize our heating, transportation and other systems as quickly and massively as possible.  This is for two tightly connected reasons, to preserve and enhance our quality of life in the face of the climate challenge and to promote the political will we must somehow summon to enact the restrictions that will force most of the carbon now buried to stay buried.  Adaptation, which is what energy transition comes down to, is not a dirty word.  The problem is, mitigation demands more.

Jeffrey Sachs Accuses Paul Krugman of Being a Closest Republican

Jeffrey Sachs has a long argument that can be basically summed as suggesting that had we relied more on increases in public investment than on tax cuts four years ago, this smarter fiscal stimulus would have had more bang for the buck in the short-run and been better for long-term growth as well. A lot of us were saying the same thing four years ago. The sad thing about this post was that it was designed as an attack on Paul Krugman for being a crude Keynesian. I know Paul is a big boy who can ably defend himself but has to remember that Paul was saying the exact same thing four years ago. It was the Republicans who were advocating tax cuts and yet Jeffrey teamed up with Republican Joe Scarborough recently to attack Paul for advocating any form of demand stimulus. It’s funny because Scarborough has vacillated between arguing for austerity versus arguing for smart fiscal stimulus. We saw the exact same thing from the Team Romney economists who claimed they were for policies that both promoted short-term stimulus and long-term growth. Yet when push came to shove, their policy recommendations continued to be tax cuts for the rich, which of course is what Jeffrey is not calling for.

Does the UK Prime Minister Know the Difference Between Shift Along an IS Curve Versus Shift of the IS Curve?

I hear that David Cameron has made another pathetic defense of his fiscal austerity. Lots of good rebuttal including a nice summing up from Paul Krugman:

I was particularly struck by the way Cameron is still claiming that Britain’s low interest rates show that his policy is successful and necessary. This is a bit like the high priest sacrificing a virgin once a month to ensure that the sun keeps rising, then claiming that the fact that the sun has risen proves that the sacrifice was indeed necessary. The obvious test is to compare Britain with other countries; if Britain’s 2.07 percent bond yield validates his policies, does America’s 2.05 percent yield validate Obama’s? Or better yet, does France’s 2.10 percent yield validate Hollande’s? Or is the point, perhaps, that every country that borrows in its own currency (or, in the case of France, finally has a central bank willing to do its job by providing liquidity) can now borrow cheaply?

OK, the ECB, Federal Reserve, and the Bank of England are all doing all they can to reverse their weak economies as the fiscal policy decision makers are doing all they can to screw things up. Cameron’s defense of austerity may be pathetic but we hear similar silliness from Republicans in Congress. While I admire Krugman’s tenacity in pointing out how the evidence vindicates the good old fashion Keynesian IS-LM model, let’s do something we do even in our classrooms with college freshmen. Interest rates can be low for a couple of different reasons. The Cameron version is consistent with a full employment view where very modest fiscal austerity is offset with a very effective monetary expansion – aka something akin to a shift along an IS curve. Krugman’s view is consistent with a massive inward shift along a flat LM curve. Either way – interest rates fall. So what’s the difference? Well considering how weak the UK economy is – no intelligent person could describe this situation using Cameron’s view of the world – at least with a straight face. Since I’m told Cameron is an intelligent person, I really have to wonder how he can make this most recent statement.

Sinnlos, Part II

Just when you thought it might be possible to have a rational discussion about the Eurozone situation that included mainstream German opinion, along comes Hans-Werner Sinn, this time in the company of Akos Valentinyi, to prove that you can’t.  Let’s take a look at their latest, and truly clueless, post on VoxEU.

They begin by announcing, “There is a large body of literature on global imbalances. To date, however, little attention has been paid to the imbalances within the EU or the Eurozone...”  Yes, why stoop to read Paul Krugman, George Soros, Martin Wolf or any of the thousands of less prominent writers on this topic, who have been fixated on these imbalances from the moment peripheral bond spreads exploded?  This keeps our thinking pure.

But let’s not get distracted.  Their real point is that they have discovered something new and significant: there are large trade imbalances within Europe, augmented by capital flight!  Who could have imagined?  And the solution is for the deficit countries to devalue, which they can do either externally (leave the euro) or internally (deflation).  Both are difficult-to-impossible.  Such a pity.

Perhaps if these worthies (and Sinn is by far the most influential economic voice in Germany) had deigned to read Krugman, Soros, Wolf or one of the others, they might have learned that one country’s deficit is another’s surplus, and that adjustment is necessarily relative.  This is a matter of macroeconomic identities, but it appears that Sinn wouldn’t recognize an identity if it were staring at him from a mirror.  The point: for the purpose of rebalancing, it doesn’t matter whether peripheral prices go down or German prices go up.  If the first is virtually impossibly, then, just maybe, it might make sense to take a look at the second.

In fact, German wage repression, as many have noted, was an important part of the story over the course of the 00's.  Because of the Hartz reforms, and cautious wage bargaining in general, German wages remained essentially flat for nearly a decade.  This is great for generating a massive trade surplus, but, and here’s that pesky identity, Germany’s surplus within Europe was also the peripheral deficit.  Germans could save like crazy from the earnings inflow, which is simultaneously the outflow that forced their trading partners to borrow.

So, if you know a bit about economics and are able to follow an argument like this, you can imagine a third possibility, unmentioned by Sinn and Valentinyi: German could reflate.  They could run a looser fiscal policy and pump up domestic demand, drawing in imports from the deficit lands.  They could give themselves a big pay raise, and allow their price advantage over the peripherals to erode.

By the way, none of this is about “reducing performance”.  In Germany one hears the argument, if others are losing the race, that’s not a reason for you to slow down.  By all means, Germany should continue to improve its institutions for investment, innovation and building worker skills.  No reasonable person wants their productivity to go down.  But the point of all this improvement should be the possibility of living better, not amassing an unsustainable surplus that requires their customers to borrow their way to destitution.

Riding a Bike Causes Climate Change

Thus saith state representative Ed Orcutt, who represents the Kalama area of Washington State and is the ranking Republican on the House Transportation Committee.  To quote:

...the act of riding a bike results in greater emissions of carbon dioxide from the rider.  Since CO2 is deemed to be a greenhouse gas and a pollutant, bicyclists are actually polluting when they ride.

Before you lose yourself in mirth, stop to think for a moment about where this idea comes from and how other versions of it might be more widespread than you think.  Behind Orcutt’s statement lies the notion that pollution is when a substance goes from one place, where it is relatively harmless, to another, where it causes damage.  So a farmer, for instance, applies nitrogen fertilizer which increases crop yields, but a lot of it gets washed into lakes and rivers and then into the ocean, where it helps create a dead zone.  Pollution is what we call this process of moving chemicals to places where they cause harm, and the farmer is guilty of it.  The same, says Orcutt, with bike riders and CO2.  The carbon doesn’t do any harm when it’s in your body, but it creates environmental havoc when you breathe it out.

The reason why Orcutt is wrong is that bike riders, and the rest of us, are essentially way stations in the carbon cycle that courses through all living things.  We eat plant and animal matter (carbon), incorporate it into our own tissue, and release it when we exhale, secrete or decay after our death.  The carbon goes round and round.

Now think of a logical corollary to the Orcutt bicycle hypothesis: the couch potato solution.  Maybe we could reduce the buildup of greenhouse gases by encouraging everyone to eat junk food, watch TV and put on as much weight as possible.  Think of all the carbon we could store that way!  It would be fixed in our fat rolls and no longer floating in the atmosphere where it alters the earth’s radiative heat balance.  The problem, alas, is the same as with the bike rider story: all that carbon is going to be released.  It is in our bodies only temporarily.  We can alter the global distribution of carbon only by the difference between the total body mass before and after fattening up—a one-time effect—and only to the extent that this increase in aggregate human tissue is permanent.

Note that this is analogous to the role of forestry.  Bulking up our forests removes carbon from the atmosphere in exactly the same way as fattening up ourselves.  Of course, more carbon can be stored in trees than in people: there are more of them than us, and they are way bigger.  Still, the logic is no different, and the problem is the same.  Addressing climate change through forestry is measured by the one-off increase in stored carbon, and it works only if this difference is permanent, for which we have no guarantees.  Future people may cut down the trees we grow today, or the trees may not survive in the future climate.  (Couch potatoes may not last too long either.)

The moral of this whole tale is that the carbon problem is not a pollution problem in the familiar sense, because there is massive ongoing carbon exchange throughout the biosphere.  Atmospheric carbon is incorporated into plant and animal tissue; plants and animals release the carbon into water, soils and air.  Released carbon finds its way back into the atmosphere.  You can’t build walls between the different elements of the system to keep carbon from moving around.

But there is a point of pollution all the same, which is when carbon that has been stored deep in the earth—where it doesn’t move around very much—is extracted and burned, so that it enlarges the carbon cycle in toto.  We are talking here about fossil fuels, of course.  Humans can tweak the carbon cycle at the margin, through activities like forestry, but the future of our climate depends almost entirely on how much fossil fuel we manage to leave in the ground.

So go ride your bike, and don’t feel guilty about it, even if it means you’ll lose some weight.

So Whose Wealth Is At a Record High?

This news story must be good news for some folks:

According to the Federal Reserve, household wealth amounted to $66.1 trillion at the end of 2012 and further gains in stock and house prices have allowed Americans to make up for the losses incurred during the recession.

If you want to protest that not everyone has recovered their lost wealth, the story sort of concedes this further down:

The recovered wealth — most of it from higher stock prices — has been flowing mainly to richer Americans. By contrast, middle class wealth is mostly in the form of home equity, which has risen much less.

Households owners' equity in real estate peaked at $12.5 billion in 2005 and then plummeted. While it has partially recovered, it was only $8.2 billion at the end of 2012 according to the Flow of Funds Accounts. Given that consumer prices have risen by almost 20 percent over this period, our equity in real estate is still far below its 2005 peak value.

Public Support for Education in Real Terms

Travis Waldron is rightfully worried about the cost of a college education and the diminishing support from the government:

Only 12 states now spend more on higher education than they did before the recession. The decrease in funding has contributed to the six-fold increase in college tuition over the last 30 years.

A six-fold increase? Let’s be fair – consumer prices today are about 2.5 times what they were 30 years ago – so in real terms, college tuition is up by a factor of 2.5 or so. But OK – this is a staggering increase. Mark Thoma highlighted this as well and is getting some comments doubting that government support for education has declined. This table labeled “Table 3.15.6. Real Government Consumption Expenditures and Gross Investment by Function, Chained Dollars” shows that in real terms (2005$), total government spending on education was $690 billion in 2009 but was only $648 billion in 2011. I know that the austerity freaks in the Republican Party want to claim reducing government spending is good for growth but they are wrong on two fronts. Any fiscal restraint now prolongs this Great Recession. And this kind of austerity impairs the creation of human capital needed for long-term growth. It is not just the cutbacks in higher education that concern me but the general tendency for state and local governments to layoff teachers in order to balance their budgets.

Tabarrok on MOOC: Interesting but....

Over at Marginal Revolution, Alex Tabarrok has an extremely interesting post comparing education and music performance.  At its core is an analogy: the student’s experience of learning is like the listener’s experience of hearing music.  Best of all possible worlds is having direct, personal exposure to the best: being in the best classroom with the best professor or in the club or concert hall with the best musicians.  But recorded music has become the vast majority of all music because live music by great performers is too expensive to provide more than the occasional listening experience for most people.  Moreover, the flexibility and repeatability of recordings gives the listener many more choices in when, where and how to listen.  No reasonable person would want to ban or even discourage recorded music.  So why not embrace digital dissemination of education?

Again, this is a great post and an aid to thinking clearly.  My concern is that the analogy is wrong, however.  Educating students is not like entertaining or inspiring a musical audience; it is like educating musicians.  Education is about creating something—an ability to accomplish certain feats of understanding, technique and problem-solving.  This is also true about educating musicians in particular.  Could music instruction be carried out separate from direct contact with music teachers?  For centuries it has, in part.  That’s what all the books of etudes were about.  (I learned a lot about music and the piano from working through the first half or so of Bartok’s Mikrocosmos.)  But only in part.

What this tells me is that there is a big future for online education.  I think the methods are still rather primitive, in fact, and its value will become clearer when people learn how to employ the technology more creatively—and as the technology itself advances.  But to learn is to create something, and there is no reason to believe just yet that this process can be entirely solitary, separated from the give and take between teacher and student or student and peers.  Digitize this and we can revisit this question.

Wealth: It's Not for Everyone

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The Anti-growth Crowd Really Doesn’t Get It!

Fuck me. Here I've wasted years of my life reading analyses by the likes of Peter Victor, Bill Rees, Tim Jackson, Joan Martinez-Alier, Roefie Hueting, Stefano Bartolini, Herman Daly, Robert Costanza, Robert Ayres, Alf Hornborg and even myself only to discover that we're a "crowd" who "really doesn't get it." Now I even waste undergraduates' time teaching this stuff under the pretext that one has to actually read what the "crowd" says and critically evaluate their arguments before categorically dismissing them for really not getting it.

Of course we in the "anti-growth crowd" could be wrong. But how are we to know that if nobody actually engages our arguments critically but instead demolishes facile straw-man images?

Robert (No Relation to Paul) Samuelson on the 1964 Tax Cut

Robert Samuelson has written some incredibly stupid op-eds but I think this one has to be the all time dumbest. It tries to claim our current fiscal mess started with the 1964 tax cut:

We are now suffering from — and have for decades — the second defect of JFK’s decision: the loss of budgetary discipline. Since Kennedy’s tax cut passed in 1964 — after his assassination — there have been 43 budget deficits and only five surpluses (1969, 1998, 1999, 2000 and 2001). Even the surpluses reflected luck more than policy. The last four resulted mostly from the 1990s economic boom, boosting tax revenue, and the end of the Cold War, lowering military spending.

Dean Baker has already corrected Samuelson on the long-run debt to GDP issue noting that it continued to fall until we had those Reagan tax cuts:

Samuelson complains that in the 50 years following the tax cuts we almost always ran budget deficits. While this is true, the ratio of debt to GDP continued to fall until 1980, dropping from about 43 percent in 1963 to around 25 percent in 1980. The interest burden remained low and the real interest burden of the debt was actually negative through most of this period. (The inflation rate exceeded the average interest rate.) The soaring deficits and rising debt burden began when Ronald Reagan took over in the White House.

Let me also add that while the nominal value of Federal debt was rising during the late 1970’s, the real value of this debt was declining. This is a fact noted by even conservative economists such as Milton Friedman and Robert Barro. Did Robert Samuelson forget about their writings on the topic? It seems that Samuelson also forgot that it took a lot of discipline during the Clinton years to have this boost in tax revenues and less defense spending. But hey – the Clinton Administration was about luck and not policy? But let’s turn back to the macroeconomic issues facing us back in 1963. Here is Samuelson’s take:

What Kennedy did was this: In early 1963, he proposed a $13.6 billion tax cut (today: about $320 billion) even though the economy was not in recession and the tax cut would enlarge the budget deficit. Kennedy adopted the theory that government could, by manipulating its budgets, increase economic growth, reach “full employment” (then a 4 percent unemployment rate) and reduce — or eliminate — recessions. It was a disaster.

Dean also corrected Samuelson’s claim that the economy turned into a disaster after the 1964 tax cut. But let’s add to Dean’s account that the unemployment rate as of May 1963 was 5.9%, which was seen as far below full employment. And by the end of 1965, the unemployment rate had dropped to 4% without a run up in inflation. And most macroeconomic textbooks will note that this fiscal stimulus led to an increase in real GDP, which in turned actually increased tax revenues. Somehow I suspect Robert Samuelson hasn’t read any of these textbooks. But let me recount something often not noted in these textbooks about what happened in December 1965. The President’s Council of Economic Advisors seeing that we were also getting fiscal stimulus from the Vietnam War as well as the Great Society appropriately warned the President that we needed to scale back this triple whammy of fiscal stimulus lest the Federal Reserve raise interest rate (which they did temporarily) or we see a rise in inflation (which was the great disaster Robert Samuelson notes). In other words, it wasn’t the 1964 tax cut as much as later events that led to the accelerating inflation. Anyone who has bothered to learn even the least about the macroeconomic history of our nation would know this – but apparently Robert Samuelson does not. He also does not know anything about how macroeconomics has evolved since the early 1960’s when he writes:

Kennedy and his advisers, overconfident of their ability to control the economy, damaged long-standing national norms and customs. They didn’t know what they were doing.

Actually, the Council of Economic Advisors did know that too much fiscal stimulus could lead to inflation but alas the politicians were not listening in 1966. But we should also note that the economic profession has not been so enamored with the notion that we always need fiscal stimulus to promote growth. We should note two points here. The profession has become more concerned about the possibility that we could repeat the mistakes of the late 1960’s. It has also long recognized that monetary policy is a powerful aggregate demand tool except in exceptional times such as the zero interest rate bound that we’ve been facing for the past few years. In other words, economists may indeed know what we are doing even if Robert Samuelson clearly has no idea what economists discuss on these matters. My only question is why would the Washington Post allow someone so ignorant to write such an incredibly stupid op-ed?