1937 Again?

The debate for another or continuing fiscal stimulus has continued to be a Major point of debate in columns and blogs. The New Keynesian economists are making a big push for additional stimulus spending, or at least calling attention to the idea that they have most of the good arguments on their side, but are still losing the policy battle. Brad DeLong has an column in The Week called "Keynes and Co have lost the stimulus argument" in which he outlines this idea and explains the reasons he believes this to be happening. The Week also has a surprising column by Robert Shrum called "David Brooks' neo-Hooverite plea" in which he takes New York Times Columnist David Brooks to task for opposing Krugman arguments for more economic stimulus in his column piece called, "A Little Economic Realism". The back and forth of this argument is a good primer in the larger debate over austerity vs. stimulus. If school was in session, I would be using these columns as homework readings and the basis for class discussion.

This economics debate is really the material that economics teachers should be grabbing. On the core economics, I have not found anyone with a good counter-argument for Krugman. Simply put, his argument is strong on the economic theory and policy. However, the fact that his arguments are not winning the day in terms of policy is telling - and an educational moment.

The big question a lot of people are asking is whether Obama is about to repeat Roosevelt's 1937 austerity program. In the mid-Thirties, the Depression seemed to be lifting (the way the economy was seeming to do this spring). At that point, Roosevelt scaled back spending and raised taxes to balance the budget. This sent the economy back into the Depression. It was this burst of austerity that killed the New Deal programs' historical average (i.e. people who say that the New Deal did not work to create jobs of improve the economy generally ignore the austerity of 1937. Up until 1937, the New Deal was working). When looking back at history, students often wonder how anyone could have opposed Roosevelt in enacting the New Deal because in historical hind-sight it seems so foolish - and cruel hearted. Well, now we see it up close in our time and it is easier to understand the politics of that period and to see where the "cruel heartedness" comes from. Too bad this teachable moment is coming in the summer.

The interesting thing is that economic theory has come so far, and is a lot more sophisticated, yet the voice of economists is being drowned out by non-economists. As Shrum points out, Krugman's economics are right (the Economist made this point last week), yet Brook's arguments, which downplay economists' models, is winning the debate. While this reality causes Krugman, DeLong and other anguish, they largely chalk it up to the ignorance, cruelty and self-serving nature of the people that oppose them. I think a larger question, which part of the reason for this blog, is whether economists have spent too much time talking to themselves and not enough on educating the larger public in economic theory and policy. The analogy for the time is this. Economists are like doctors who have a medicine to fight a disease and the public is like the patients who need the medicine, but do not trust it or are afraid of the side-effects. Right now, economists lack the credibility to get people to take their medicine and results could be bad. How bad? Long slow recovery with chronic high unemployment for the next four years - that is the diagnosis.