Grasping Reality on TypePad, by Brad DeLong

I have spent three hours on the phone over the past two days trying to offset the consequences of three pieces of journalistic malpractice in the coverage of Christie Romer down the hall--Kelly Evans and Brenda Cronin of the Wall Street Journal who fear she is a milksop who will not dare contradict Larry Summers, Mike Allen of the Politico and James Barnes of the National Journal who say that she is a secret supply-sider, and John Judis who says that she is opposed to Obama fiscal policy.

That's three hours I am never going to get back.

In all of these conversations, eventually my interlocutor says: "But if what you say is true, then you are saying that the journalist"--Cronin or Evans or Judis or Allen or Barnes--"is simply not competent to write the story. Is that what you are saying?"

And I have come around to replying: "Yes. That is what I am saying."

Does anybody have a suggestion as to a more polite way that I can deal with people who say: "But if it isn't true, why did this reputable news organization"--the WSJ or Politico or the National Journal or TNR--"print it?"

Anybody? Anybody? Bueller?

First, Kelly Evans and Brenda Cronin of the Wall Street Journal:

Romer Joins a Crowd of Strong Voices as Chair of Council of Economic Advisers - WSJ.com: One Obama adviser said Ms. Romer wasn't known for being confrontational and might have a difficult time dealing with Mr. Summers, who will be the president's top economic adviser and can be intellectually intimidating...

Christie has known Larry since before Larry cinished his Ph.D. Christie has never had any difficulties dealing with Larry. Witness http://www.jstor.org/stable/pdfplus/2534535.pdf:

In addition to questions about DeLong and Summers's interpretation... one can also question their method.... Estimating potential GNP is very difficult and inevitably involves many choices. Throughout their analysis, nearly all of DeLong and Summers's choices cause the postwar gap to be smaller than would result from an easily justifiable alternative choice. Thus, I would suggest that 1.5 should be viewed as an upper bound on a plausible ratio... it would be easy to derive sensible gap-based measures that showed either no improvement or a worsening of macroeconomic performance.... Let me give a few examples of how their estimates of potential output are biased...

No difficulties in contradicting the intellectually intimidating Summers. None. Zero.

Second, Mike Allen of the Politico repeating a piece of misinformation from James Barnes of the National Journal http://www.nationaljournal.com/njmagazine/nj_20080329_8.php:

At the same time that Obama is calling for higher income taxes on people making $250,000 or more, the Romers have found that tax increases are generally bad for economic growth and that they primarily discourage investment -- the supply-side argument that conservatives use to justify tax cuts for the rich...

But Romer and Romer's "The Macroeconomic Effects of Tax Changes" http://emlab.berkeley.edu/users/cromer/draft1108.pdf does not make the (false) supply-side argument that cutting taxes in a time of deficits will cause the economy to grow faster and so reduce the deficit. In a time of deficits, they say, it is raising taxes that causes the economy to grow faster:

Panel (d) shows that the point estimates for the effect of a deficit-driven tax increase of 1% of GDP on GDP are consistently positive. However, there are too few tax changes of this type for the effects to be estimated precisely. The maximum impact is a rise in GDP of 2.48% (t = 1.03). While one should be very cautious in reading anything into such imprecise estimates, the results are suggestive...

Third, John Judis of the New Republic:

Mistreating Depression: Barack Obama announced today that the chair of his Council of Economic Advisors will be Christina Romer.... Obama uncharacteristically stumbled over his words in introducing her. He seemed to be learning who she was as he spoke--and that may say more about the appointment than the actual words of praise he uttered.... Obama... appoint[ed] someone--whether wittingly or not--whose views on the economy appear to place her well to the right of mainstream Democratic economic opinion.... Romer's view is that what ended the depression was an expansion in the monetary supply, due to the inflow of gold from abroad. "Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942," Romer wrote in a 1991 paper for the National Bureau of Economic Research. That's a view that would lead one to emphasize monetary over fiscal fixes--that is, changes in the federal funds rate and money supply over increases in public investment and cuts in taxes. This policy perspective would seem to de-emphasize or even oppose the kind of massive public investments that Obama now seems to be considering...

As Eric Rauchway says:

That Romer article on the Great Depression: Romer’s argument goes something like this: (1) Per E. Cary Brown, and Keynes before him, the New Deal did not provide enough fiscal stimulus to spur recovery during the 1930s—not that it didn’t work, but that it wasn’t tried. (2) Yet there was significant recovery during the 1930s, both as to economic growth and to job growth. (3) So we have a mystery: where did the recovery come from? Did it come from the ordinary operations of the economy? No; there was an inflow of money from outside. (4) Why was there an inflow of money? Not because of the Fed—it wasn’t cooperative. But by stabilizing the banks and devaluing the dollar, Roosevelt’s administration set policy that drew overseas investments into the US. (5) This money came from overseas at first because of the devaluation, but it came in quantity later because it needed someplace safer to go than a Europe menaced by Hitler. Other countries’ misfortune was America’s good luck. (Which means you can’t necessarily say that there would have been a recovery without the war; the inflow of overseas investment owed partly to the war.) (6) Romer’s conclusion then is that “the rapid rates of monetary growth were due to policy actions and historical accidents.”

She’s very clear throughout that deliberate policy choices were key, and she thinks the deliberate policy choice of FDR to devalue in 1933/34 was most key. But there’s nothing particularly prejudicial there against fiscal policy. Nor an argument about the superiority of monetary policy. But an empirical case that owing to planning and luck, monetary policy worked in the 1930s.