Thursday, July 8, 2010

Baker Pwns Brooks

Once again, Dean Baker has proven himself indispensable. His point of departure is a recent claim by David Brooks that additional economic stimulus from the federal government would "risk national insolvency on the basis of a model." Baker dismantles Brooks's canned insights bit by bit:

Mr. Brooks doesn't tell readers how he has determined that further stimulus carries this risk. He doesn't explain how raising the country's debt to GDP ratio by 4-8 percentage points over the next few years would jeopardize the creditworthiness of the U.S. government. This is certainly a rather strong assertion, given that even with this additional indebtedness, the debt-to-GDP ratio in the United States would still be far lower than it had been at prior points in its history.
What comes next is even stronger -- and by stronger, I mean as it would seem to anyone with a passing familiarity with economics:
Financial markets also don't seem to share Mr. Brooks view that national insolvency is a serious concern. The people who are putting their money on the line are willing to buy 10-year Treasury bonds at just 3.0 percent interest rates. That would seem to suggest that insolvency is not a real concern ...
The very people who grovel before the elegance of classical economics would have to cede this one; it so happens that we have a way to market-price the risk of government insolvency, that being the interest rate on x-year treasury bonds. A 3% interest rate for ten-year bonds simply doesn't support Brooks's hysterics.

Having dispatched the "insolvency" alarmism, Baker moves on to Brooks's assertion that "[t]he Demand Siders don’t have a good explanation for the past two years" of economic woes. Baker will have none of this:
Demand siders rely on something called "arithmetic" to reach this assessment ... Demand siders did not believe that $150 billion in annual stimulus [the net amount, as calculated by Baker in the article] from the government could offset the contractionary impact of a reduction in annual spending by the private sector of $1.2 trillion ($1.2 trillion > $150 billion). That is how demand siders explained the failure of the stimulus to have much impact in reducing the unemployment rate.
There is much more insight and analysis to be found in the complete article. Dean Baker is essential reading.

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