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There is plenty of shouting across the national aisle, false certainties on both sides, with Tea Partiers and their fellow travelers insisting that government spending is destroying the country, and some progressives insisting that public spending on social services and entitlement programs can never be a bad thing. Once again, the nation is embroiled in a false dichotomy of extreme views, with the real business of line-drawing lost in the process.

The real economic debate, the one we’re not having, is the one over what, precisely, are the costs and benefits of particular kinds of spending under particular economic conditions. Under what conditions and in what forms does government stimulus spending help or hurt an ailing economy? Does the apparent political inevitability of directing spending toward lower rather than higher short-term multiplier effects (funding too many languishing programs and too few shovel-ready projects) undermine it’s utility as a stimulus strategy? And, a historical favorite, did government stimulus spending end or prolong The Great Depression?

I’ll offer some thoughts on the last question: As this timeline ( demonstrates, economic growth was very robust from 1934-1937: In 1933, when FDR took office, the freefall in GDP was brought to an almost complete halt, dipping only 2.1% (after falling 31% over the previous 3 years). In 1934, GNP rose 7.7%, and unemployment dropped about 3%. In 1935, GNP rose another 8.1%, and unemployment went down another 1.6%. In 1936, GNP rose another 14.1% (a record growth rate), and unemployment dropped another 3.2%. In 1937, GNP rose another 5%, and unemployment fell another 2.6%.

According to one argument, the one that 2008 Nobel Prize Winning Economist Paul Krugman subscribes to, Roosevelt, seduced by these years of phenomenal success in his program of economic recovery, was persuaded to reduce spending and focus on balancing the budget in 1937, driving the nation back into recession. According to the counterargument, it was the spending itself which resulted in the 1937 economic downturn.

But the one piece of evidence that seems to be most consistently disregarded is the one upon which virtually everyone agrees: WWII definitively ended The Great Depression. And just what was it about WWII that accomplished this feat? The fact that it was the most massive public spending project in world history, with enormous deficit spending in the production of heavy industrial equipment that kept getting conveniently blown up and needing to be replaced, a stimulus package far larger than any that could otherwise have been politically accomplished. And one whose success, along with the foundation laid by New Deal policies, set the nation on a path of decades of enormous economic growth.

Those who argue that it wasn’t New Deal spending, but rather WWII, that ended The Great Depression are not demonstrating with their evidence that government stimulus spending is inefficacious, but just the opposite, and that it needs to be truly massive to be truly effective.

Okay, folks! Have at it. I’ve invited professional economists to join this discussion; I hope I have some takers.

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  • George Lakoff, in “The Political Mind,” argues that the old Enlightment view that we should pursue policies, and argue our positions, based on dispassionate reason, simply ignores how we think, and that, instead, it is necessary to frame discourse in terms of compelling narratives, with a moral and emotional as well as rational component.

    There are several classic competing narratives nested within the Keynes-Hayek debate: One is free-will v. determinism. Are we, collectively, mere subjects of forces over which we have no collective control, or are we nations and peoples that can act with a will to guide our own destiny? Is it that the inescapable logic of market economies, like Max Weber’s “Iron Cage of Rationality”, requires of us that we do no more than create and maintain the context (the bars of the cage, so to speak), and then leave those inexorable forces to exert their supposedly benevolent influence over human welfare? Or is our economy a tool at our disposal, one that must be understood and implemented with skill and deference, but our servant rather than our master?

    I believe in the human endeavor. I believe that our wills, our exertions, both collectively and individually, matter. It is not that we operate without natural constraints: It would not be wise for me to leap from a skyscraper without some sort of artificial aid, in my determination to fly. We operate within some fairly immalleable parameters.

    But within those parameters there is much room for maneuver: I can strap on a hang-glider before I jump. The key to understanding the interaction of the parameters we apparently can’t change, and the room-for-maneuver within them, is to understand what I call the variable malleability of nature: It is easy for me to change my clothes, harder to change my own physical appearance, and harder still to change my species-membership. Similarly, it is easy to change certain of my actions, harder to change my beliefs, and harder still, perhaps, to change yours. It is easier to act individually than collectively, with reference to the more immediate than more distant future, moving that which is more moveable than that which is more fixed, and so on. The debate over what is encompassed by “human nature” and what is encompassed by “nurture,” or what we learn through our cultural and personal context, is a perennial favorite, another version of the more basic “free will v. determinism” debate.

    Even those apparently immalleable parameters are sometimes gradually accessible through the more malleable elements of our reality: It was, for millenia, an immalleable fact of life that human beings could not fly, could not outrace a Cheetah, and could not set foot on the moon. Bit by bit, by incrementally addressing that which was within our power, many things which were not gradually were surmounted.

    There are two aspects to that overarching free will v. determinism debate relevant to the Keynesian v. Chicago School economic debate: 1) To what extent are we the masters of our economy, and to what extent is our economy the masters of us? And 2) Are we our brothers’ keeper? Is the socio-economic fate that each finds themself in, as so many on the brutal right seem to believe, more an expression of what they’ve earned or failed to earn through their own efforts, or, as socially responsible and empathetic progressives tend to believe, more an expression of the opportunity structure into which they were born?

    And that leads us to the two essential questions nested within the Kenesian-Chicago School debate: 1) Where does the moral imperative lie? Is it more morally imperative to defend the right of each to wage their own war of all against all, in pursuit of a life that is destined to be “nasty, brutish, and short;” or is it more morally imperative to govern ourselves wisely and with empathy, with a recognition that part of our social responsibility is to mitigate the injustices both of nature and of our own historically produced social institutional context? And 2) What are the most efficacious means to whichever moral imperative we identify as being most salient, or to achieve the balance of the two we identify as the best balance? Is individual liberty really better served by the disablement of government, or is it better served by the refinement of government as an agent of collective will? What liberty is found in destitution, in curtailed opportunities, in increasing social immobility and concentration of wealth in fewer and fewer hands? And how do we best use our economy, understanding its nature, recognizing that it is not as malleable as our wardrobe but not as immalleable as the species to which we belong, to achieve the most functional and fair economic ends? What means most effectively serve the chosen ends, and what ends are worth choosing?

    And, most importantly of all, how do we get our entire polity to engage in this kind of discourse, that eschews blind ideological platitudes and tackles the complexities and subtleties of our shared existence? Even getting the far right to recognize that we do have a shared existence, that we are not just a collection of unconnected individuals, seems a daunting enough challenge! Never before in my half-century of life has the basic foundation of our society seemed more threatened by the coalescence of an ideology of mutual indifference, neo-social-Darwinism, and, in general, Organized Ignorance! It’s time to strive to be reasonable people of goodwill again.

  • CU Economics Professor Philip Graves just sent me the following draft of a paper on this very subject, completed just over a week ago and submitted to American Political Science Review: (click the “download” button at the top of the page this links to to open the whole paper).

    Here’s the abstract:

    Fiscal policy has become quite controversial in the post-Keynesian era, the debate over the
    Obama stimulus package being a contentious recent example. Some pundits go so far as to
    take the position that macroeconomic theory has failed to meaningfully progress in terms of
    providing useful recommendations for policy-makers, particularly in times of recession.
    Others take the laissez-faire view that policy reactions to the business cycle do not help in a
    rational expectations world and indeed do harm by increasing uncertainty. Still others, while
    not necessarily viewing themselves as in any sense “Keynesian,” have a nagging feeling that
    sometimes doing nothing must be worse than doing something…but what to do? Sensible
    guidance is provided here on how governments should spend taxpayer dollars and on how that
    spending should change under varying economic conditions. The nature of public goods,
    namely whether they are complements, substitutes, or neutral to private goods, is seen to be
    critical to such decisions.

    For those who are interested in the ideal of continuing to strive to be reasonable people of goodwill, working together to confront the challenges of a complex and subtle world, I urge you to tackle this paper! We all need to learn a little more economics, if we want to govern ourselves wisely.

  • aoprodney:

    Really what is the solution to our current economic downturn in the face of global climate change and reduced consumption? We see the European countries rebounding quickly with staggering growth in Sweden, Norway, Denmark, Germany and even England is reporting a robust 8.7% increase in GDP. These countries all have strong social networks and workers rights we don’t is this another factor in the depth of this downturn for this country? I am a solutions person is to move our economy to more of a social democracy? Or is it simply to revisit our trade policies with our trading partners? I am not for closing our borders as we saw in the great depression this is a recipe for disaster but something has to be done and done correctly not half way like Obama and his team have tried and failed at. My last question is what happens to our economy and banking system when and if the Republicans get the house and senate and pass $800 billion over ten years tax cuts for the top 1%, cut federal spending on the social networks we have in place $1.3 trillion as report by John Boehner and spend the next 2 years trying to impeach the president? Isn’t this a recipe for disaster?

  • The important thing, I think, is to start with the recognition that it’s not simple, and some of the answers are counterintuitive. But, knowing that, we then have to tackle the beast to the best of our ability: All we can do is the best we can do, and that means governing with intelligence rather than with platitudes.

    First, there’s an ever-present levels-of-analysis issue: We have to be careful when we discuss how “we” are going to confront a problem we collectively face, because “we” (certainly the world, and even, in many ways, sovereign polities within it) don’t act with corporate coherence. “We” are competing, squabbling, ideologically divided and entrenched, and in so many ways disunited actors, that no policy answer that starts and ends with what would be the sanest thing for us collectively to do is ever sufficient, nor even generally very useful.

    So the real question isn’t what “we”, meaning the nation or world, should do, but rather what “we”, meaning those who recognize that we face complex and subtle challenges and are committed to doing so with intelligence and goodwill, should do.

    I really believe that the ultimate political battlefield is the human mind. Elections affect both what happens on that battlefield, and what happens more superficially, but unless we keep our eye on the ball, we’re just going to keep stumbling around like fools with two left feet. We need to make concerted, intelligent, focused, and effective advances in how those of us with the will and the wit to do so actually affect the cognitive landscapes of those who share this world with us.

    George Lakoff emphasizes the importance of narratives, and particularly emotional and moral narratives that bind seemingly disparate issues into a coherent vision. That dovetails with my “systemic” approach; I’ve never really been a big fan of the issue-balkanization that we have grown accustomed to. The trick is to integrate systems in ways which make advances on multiple dimensions (e.g., improved public transportation, which reduces carbon footprint and congestion, can also be used to strengthen and form local communities around, for instance, light-rail stations, which both further reduces carbon footprint by reducing the need to commute, and provides a stronger foundation for higher quality public education by creating more community inolvement…, and so on, and so forth.).

    The overarching narrative that progressives need to promote, that has the potential to resonate with those of other ideologies, is “social responsibility in service to extending and maintaining individual opportunity to succeed by all those who exercise the personal responsibility to make the effort to do so”. Or, more simply and accessably: “Securing the foundations upon which liberty depends”.

    We need to take the narratives within which people currently live, and parlay them into narratives that advance the degree of enacted reason, far-sightedness, and empathy in how we govern ourselves. The far-right has been very successful at rallying people around slogans, frames, and narratives that enshrine ignorance and bigotry. We need to become even more successful at rallying many of the same people around slogans, frames, and narratives that enshrine wisdom and goodwill.

  • (Pete posted this on my Facebook page, in response to a comment there by another poster):

    Post war Europe has as its basic economic structure and for many of the post war written constitutions, New Deal economics. Ever wonder why the Republican Party hates western Europe so much? This is it. Republicans did not prosecute the two… World Wars. After World War One, it was Republican resistance in Congress that kept us out of the League of Nations–our own idea. They were no more fond of the idea at the end of World War Two but they were too weak and time had past them by. The United Nations was a reality–an American reality.

    The Republican mind today cannot bear the unfettered historic success of democratic ideals and how, in the postwar world, we spread those ideas around the world. To this day, strong elements of New Deal economics survive despite the relentless attacks and corporate consolidation of America’s wealth and resources. Now they attempt to poison those ideals with spiteful, predatory economics, really a dead economics that we keep pumping life into.

    Time to pull the plug and revive all relevant and workable New Deal ideas and infuse green economics and yes, even some supply-side where beneficial to all. Remember, today’s large, for profit corporations are mostly autocratic, anti-democratic entities circling the wagons thru mergers, rabid with fear and plunging toward monopoly, toward anti-competitive markets, toward economic tyranny and the assimilation of nations. It is not economics that determines the structure of government and its institutions–it is the will of citizens, instead. Let’s work the intemperance out of the global economy and put the thugs and the thieves in their proper place; under the rule of law for the people and by the people, as it should be.

  • aoprodney:

    The issue is in the human mind Steve you are absolutely correct on that point. The debate today seems to be the collective against the individual. Currently both parties represent the good of the induvidual over the good of the collective. Ultimately that is the debate and nothing can be resolutely decided upon until a vast majority settles the debate one way or another. Today we see those supporting the induvidual winning the day. Americans vowing not to take Obama care or Social Security as they will do it on their own and wanting lower taxes to pay for it. We see celebrates like Glen Beck usurping religion and changing its central message to reconfirm the induvidual over the collective. His inaccurate diatribe over “Liberation Theology” case in point.
    So how does this relate to Economics? Economics has been debated for over a century now in these same terms. Look at the economic system of socialist compared to those of capitalist, collect v the induvidual. We have in my life time had a cold war over this debate. For the last 30 years since the Regan administration our policies as a country have enabled the few to economically succeed unlike we have ever seen before. Today the top 3% own 90% of the wealth in the USA. Yet we still see a majority of the 90% still supporting the rights of the top 3% to take it all. And they are at a ever increasing rate moving jobs and factories to locations in the world where they can pay employees a fraction of what they would have to pay them in the USA. We see these individuals and corporations becoming increasingly powerful politically and religiously by being able to buy what they want from governments as now they can hide behind their corporate veil as corporations now have equal rights as humans.
    My question is have we reached the logical conclusion of the induvidual as an economic system, is true capitalism aged to the point where as a pure form it will die? Once 99% of the wealth is owned by the induvidual is it any longer capitalism or has it morphed into despotism at that point? We see the coming election polls with Republicans winning both the house and the senate. They stand for nothing except getting rid of social systems and tax cuts for the rich. Yet the American populous still supports them in mass as they kling to the idea that the induvidual should stand for themselves over the collective. What happens when this occurs again in a time of deep recession? What happens when government stops spending and decreases revenue again with deeper tax cuts to the richest in society? Is this the melt down the end of the economy of the individual? Logically yes it has to be. But how can we as a society begin to communicate as Steve has pointed out in real terms to discuss real issues and consequences? It is difficult as we have a well entrenched corporate news that really give us little or slim fact. I actually get the bulk of my information from news agencies in Europe as I find them more academic, well written and honest. Steve what do you think on this point?
    We see today hybrid societies like Germany, Sweden, Denmark and others are once again thriving. They have embraced the ideas of the collective but in conjunction with capitalism. They collectively pull together and proved health care, unemployment, education and many other benefits for each induvidual person in their society. We have seen that in bad times this gives those in need the ability to continue to live meaningful productive lives and then when things get better they simply go back to work to resupply the coffers for the collective good. This is of course a over simplification but I am running out of time so I want to make my final point. How do we move this possible solution into the mind frame of the average American? Especially when they have such a deep collective need to prove the induvidual is more strong than the collective? These are the issue we face economically and they in my opinion won’t be resolved until we see a complete breakdown in society, which we are not many years from, or a miracle of sorts and a collective move towards each other. Thank you.

  • Rodney, you raise lots of good points. Rather than try to address them one-by-one, let me take a different approach:

    First, I shy away from the overarching labels, like “capitalism” and “socialism” and “individualism” and “collectivism”. I think we need to ween ourselves from this big, encompassing concepts, and move toward a complex dynamical systems view of society, one which sees different societies less in terms of belonging to typologies and more in terms of occupying locations in a multi-dimensional space.

    The axes of this space are often hard to define: What is the opposite of a completely centralized command economy, for instance? Is it anarchy, or a state of maximum sustainable economic decentralization (completely anarchy isn’t sustainable; groups coalesce and assume power within that vacuum)? Where does oligopoly capitalism fit into that continuum? Does it require a seperate axis from monopolistic corporatism to corporationless individual human market actors? But how is the extreme of centralization along that economic axis different from the extreme of centralization along the government axis?

    Despite these challenges, we need to think more in terms of multiple continua of social institutional variation, and less in terms of discrete categories of distinguishable social systems. Categories are useful when there are bright boundaries, and the categories are exhaustive and exclusive (no instances exist of something that does not clearly fit into any category, and everything clearly fits into one and only one category). That’s not the case with social systems: They are all hybrids along multiple dimensions. It is more useful to locate them along those dimensions.

    Then we need to ask ourselves questions such as, if we consider any particular dimension in isolation, can we make judgments about the consequences of given locations along it? And, more difficultly, can we consider the dimensions simultaneously, and make judgments about the intersections of various locations along them?

    Personally, I think we are a far too individualistic society, and, along the same or similar continuum, far too locally biased. American ideology, particularly right-wing ideology, is permeated with a strong in-group bias, and a strong out-group dismissal. There is decreasing interest in the welfare of humanity, and increasing commitment to advancing American interests at anyone else’s and everyone else’s expense.

    The ideological battle we are in is more a battle of values than of analyses. Conservatives favor a social system in which some can prosper extraordinarily well, and others are left to languish, justifying this with a mythology of a meritocracy in the distribution of wealth in America. This is not just bad for those who suffer from it, but it is bad for us all in the long run, because it disintegrates us a society, and breeds the excessive violence and hostility that is increasingly becoming the national trademark of America.

    Some sort of reaction to these problems that tries to create an excess of collectivism would not fare well, both on its own merits, and due to the reaction it would cause. There is, in this as in most things, a balance to be struck, in which the vitality of individualism is combined with the utility of social institutional coherence, along multiple dimensions, using multiple social institutional modalities (e.g., hierarchies, markets, norms, and ideologies).

    On the topic of the discourse itself, here’s something I posted on a link on Michael Bennet’s Facebook page, in which a small cadre of right-wing ideologues were very belligerently trying to insist that they had possession of the one irrefutable truth, and that anyone who didn’t agree with them had to be an idiot:

    Let’s go back to some basic principles, and some inevitable conclusions of logic. 1) There are some sincere and brilliant people on both sides of all of these debates; 2) there are some competing values involved; 3) and …there is passionate and opposing commitment.

    Some things are harder to resolve: my values lead me to focus more on what serves humanity than on what serves that portion of humanity that happened to be born into the same club as me. If others’ values, instead, are more indifferent to the out-group, than, unless the values are brought closer together, it is not possible to debate what’s “right” or “wrong” or what works or doesn’t work. Similarly, if striving to increase the equitability of the distribution of opportunity is valued by some but not by others, than the discussion of how best to do so, and what balance to strike with competing values with which it is in tension, cannot be arrived at and engaged in.

    Some things boil down to what we don’t know: We don’t know, precisely, whether, when, and in what ways public spending stimulates the economy. There are legitimately competing theories, and legitimitely competing analyses of empirical data. There is no final arbiter. All rational people should be willing to start with the acknowledgement that none of us have the final answer on that one. So the real task, for reasonable people of goodwill, is not to insist that our respective interpretations are the infallable truth, but rather to engage in a process which leads us closer to the best available understanding, which most clearly defines the range of possibilities carved out by reason applied to evidence in service to the public interest.

    Without first knowing that we don’t know, and building wisdom on that foundation, all we are left with is a war of noisy hubris and childish rage. That serves no one, and impresses no one other than those who engage in it.

  • aoprodney:

    So economical what would be your recommendation to the President right now in the face of this deep recession and growing push back to government spending? Personally I would recommend he came out tonight and talked about the need for more stimulus and where exactly the money spent should go. He should also talk about the consequences of not acting and also what the cost would be to the current and future generation of acting v not acting. It is time for cold reality he has the pulpit damn it use it. We need another big stimulus bill and to let these tax cuts go back to where they were under Clinton. He then needs to hammer the right for their attack on the middle class and belittle them into action. He is intelligent I believe he gets this stuff, I hope, we need him to act.

  • aoprodney:

    The other equation that we have not talked about but will put significant economic strain on our economic systems is climate change. Really we face a cross roads not ever seen before in human history. We see the incredible material gains we have made over the last several centuries have come at a great cost, our possible extinction. How do we now change our future to a positive one in the face of these large issues? My point is we need action now, not tomorrow but now.
    Economically we can’t continue on this path any longer without massive cost to society and human life. Our leaders today don’t even talk about these issues at the cost of all of us. We must in my opinion come together as a species to resolve and survive the quickly coming, some might say already here global issues.

  • Clearly, I agree with you on both counts concerning the optimal policy. We need a massive stimulus bill, and one that targets only investments with large multiplier effects (despite my commitment to social programs, better to prime the economy first, and then invest more in those once the engine is cranking away again). In my original post above I point out the powerful example of WWII. There really is no doubt about the ability of massive public spending to crank up the economy.

    And, yes, we need to address global climate change. In economic lingo, it’s called “internalizing the externalities”. There are consequences to market exchanges that affect those who are not parties to them. Those effects are not included in the price, and so, when negative (e.g., buying and burning gasoline), leave the public to bear some portion of the real costs of the good or service purchased. In an optimally functioning economy, all of these myriad, cross-cutting externalities are incorporated into the prices of goods and services through either taxes and subsidies, or through tradable permits and credits (what I call “Political Market Instruments”).

    The question remains how to actually get such policies implemented. I’m tempted to agree with you that we should go for broke, but, in reality, I think we need to commit ourselves to the best possible strategy to get the most done, all things considered. I think, as I’ve said above, such a strategy depends heavily on the narratives that are used.

    The far right isn’t going to suddenly see the light, nor will trying to just ignore them and push through everything that we believe should be pushed through work out well in the long run. The difficult reality is that the distribution of values, beliefs, ideologies, and passions in this country is a crucial variable in any effort we make to progress in the direction of ever-more sound public policies. We need to do more than make the same arguments that aren’t working now; we need to find the right frames and narratives to make those arguments resonate on an emotional level, and resonate with those who are currently disinclined to accept them. That’s a very non-trivial challenge, but it is the most crucial one we face.

  • Ray Springfield:

    Economic hard times give rise to extremism. The world saw this in 1930’s. Fascism and communism grew to compete with democartic capitalism. I think that without the New Deal that conditions in this country would have lead to further extremism than occurred.

    Labor battles, and the rise of organized crime correlated with this period. Correlation is not causation.

    Nevertheless, the economic situation in which the USA finds itself cannot be promising. The rise of the WTO and globalization has caused massive pressure on the AMerican middle class, which hs been the consumer driven engine for the world since WWII. Withoout restoring some new manufacturing base, these trends will continue.

    Keynes v. Monetarist policies aside, the bottom line is that 2001 to 20009 was disastrous.

    The right wing has no good answers. The far left can’t get any legislation through. I agree that massive government investment in the new energy economy is the only way to move this country forward.

  • Here’s what I interpret as the take-away from CU Economics Prof. Philip Graves’ article, linked to above (with my apologies to Phil for oversimplifying): Public investments in public goods that are complementary to private goods have larger multipliers, whereas public investments in public goods that are substitutes for private goods have smaller multipliers. So, for instance, if we invest in highway construction we will presumably be stimulating demand for cars in the process, increasing the multiplier of the investment by virtue of the increase in demand for the complementary private goods. This provides one useful consideration when identifying optimal public investments for economic stimulus purposes.

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