Home > Off Blog > Brad Delong thinks John Cochrane is certifiable. Hopefully, they’ll get adjoining padded cells, with bunk-beds so Paul Krugman and Lawrence Mishel can join them.

Brad Delong thinks John Cochrane is certifiable. Hopefully, they’ll get adjoining padded cells, with bunk-beds so Paul Krugman and Lawrence Mishel can join them.

February 23, 2010 Leave a comment Go to comments

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By way of Brad Delong; we present a PBS debate on economic policy between John Cochrane, who thinks you should sit at home and starve, and Lawrence Mishel, who wants you to work while you starve.

How best to cut your wages to increase the growth rate of the economy? That is the question! Trapped between the economists who want to increase the rate of GDP growth by using inflation to cut your wages, and economists who want to increase the rate of GDP growth by using unemployment to cut your wages, the only thing certain about the next period is that your wages are toast.

This, as usual, is presented to you as a Hobson’s Choice. Cochrane warns you that spending money to combat unemployment will result in huge deficits, which eventually will require you to pony up higher taxes to pay off. Mishel warns that not spending money to combat unemployment will result in you, and millions like you, being locked out of the workforce for a very long time.

You have 30 seconds to make a decision: Spend $200,000 for job paying $32,000, and starve; or, don’t spend the money and starve?

The clock is ticking…


JEFFREY BROWN: Senate Minority Leader Mitch McConnell hit that point in a statement lambasting the stimulus.

“In the first year,” he said, “Americans have lost millions of jobs, the unemployment rate continues to hover near 10 percent, the deficit continues to soar, and we’re inundated with stories of waste, fraud and abuse.”

But, the president said, the Recovery Act had been run cleanly and transparently. He also claimed the program will save or create another 1.5 million jobs this year.

In the meantime, the Federal Reserve estimated today that unemployment will stay between 9.5 percent and 9.7 percent through 2010.

And now two very different views on the stimulus package one year out. John Cochrane is professor of finance at the University of Chicago Booth School of Business and was an early and vocal opponent of the stimulus plan. Lawrence Mishel is president of the Economic Policy Institute, a Washington think-tank. He’s principal author of “The State of Working America,” an annual study of U.S. labor markets and living standards.

John Cochrane, a year later, what do you — what do you see? How effective was the stimulus package?

JOHN COCHRANE, professor of finance, University of Chicago Booth School of Business: Well, it may have been politically effective, but the idea that it was going to raise output or increase employment, I don’t think has panned out. So, I would give it a net zero on — on those questions.

JEFFREY BROWN: What about the claim that the stimulus money helped stave off the possibility of a second depression?

JOHN COCHRANE: Well, I don’t think that claim is true.

I mean, the stimulus, in the end, is taking money from one place and giving it to another place. And it’s too easy to forget that you had to take money from somewhere in order to do any stimulating.

JEFFREY BROWN: Lawrence Mishel, you think the president had it about right?

LAWRENCE MISHEL, president, Economic Policy Institute: I think he does.

Professor Cochrane has a theory, but the evidence, I would offer, suggest that it did have an effect. If you go to the economic forecasters, who make their money doing this, they confirm that the — you know, we have saved around two million jobs in the process.

If you look at what actually happened in the economy, in the beginning of 2009, we were losing 750,000 jobs a month. In the last three months, we were losing about 35,000. This wasn’t by accident that we went from a deep, you know, decline in the economy to an actual growing economy.

Now, we’re far from where we need to be, but the reason we’re far from where we need to be is because we were in a really deep hole. In March 2009, before the Recovery Act had any impact, we had an unemployment rate of 8.6 percent and we had already lost a historically large proportion of all our jobs.

JEFFREY BROWN: Where do you see the biggest impact?

LAWRENCE MISHEL: Well, I think the early impact was from a lot of the things, like giving money to the states, so that they didn’t lay off our teachers and our public safety officers. There were tax cuts to individuals. There were payments to Social Security recipients and veterans.

There was the start of doing some of the transportation and energy projects, all these kinds of things, and unemployment benefits, which went to millions of people who help support spending throughout the economy.

You know, you can measure this. We know that it helped support incomes and spending during this time.

JEFFREY BROWN: So, John Cochrane, you just don’t see these jobs, or you see jobs that were not caused by anything — anything from the stimulus money?

JOHN COCHRANE: Well, it’s lovely to tout the benefits, but let’s not forget the costs. Like any time the government spends money, it has to come from somewhere. So, you get to see the jobs that the stimulus — I don’t want to say created, but the jobs supported by the stimulus.

What you don’t see is every dollar of stimulus had to come from somewhere. And if you add up even the administration’s numbers, you get hundreds of thousands of dollars per job. And all that money is going to have to be paid by your and my taxes at some point.

JEFFREY BROWN: What was the — staying with you, what was the alternative? What did you want to see? What do you want to see?

JOHN COCHRANE: Primarily, get out of the way. Now, let me say, even if there wasn’t an alternative, that doesn’t rescue the stimulus. If you have a heart attack and the doctor wants to cut your arm off, you can say, cutting the arm off isn’t going to work, even if you don’t know how to fix a heart attack.

But our economy went through a credit crunch. Get out of the credit crunch. That’s a situation where it can rebound very quickly, if only it had stable pro-growth policies ready to let it do so.

JEFFREY BROWN: But get out of the way at a time when businesses were not hiring.

JOHN COCHRANE: The question is, would businesses have hired more or less?

JEFFREY BROWN: And you’re saying they would have hired on their own?

JOHN COCHRANE: The economy can recover very quickly from a credit crunch, left on its own, with stable, low-taxes, pro-growth policies in place.

It doesn’t need trillions of dollars of government spending to get it going again. That leads to grease [Greece? rtp]. If stimulus spending led to prosperity, borrowing trillions of dollars and spending it on social programs or government employees, Greece would be the richest country in the world, and not one that’s about to default on its debt. That’s our danger.

JEFFREY BROWN: Larry Mishel.

LAWRENCE MISHEL: The situation we were in is that monetary policy had already driven interest rates down to basically zero. That wasn’t getting us much growth.

There was no hiring going on. There was lots of people being laid off. You know, the idea that we should just sit there and do nothing, and we just have to tough it out, and the market will take care of us is exactly the thinking that got into this deep mess.

All administrations, Republican and Democrat, tend to, in a deficit — in recession, you’re supposed to run a deficit. And the reason why you run a bigger deficit is to pump demand up, so that there’s more good and services being bought and jobs being created.

You know, that’s — that’s what was done. That’s what needs to be done. And we actually need to do much more of that, because we’re going to see unemployment at 8 percent two years from now. And that’s quite unacceptable. That’s higher than it ever got to in the last two recessions.

JEFFREY BROWN: What — staying with you, what about the issue we raised in the setup about the difficulty of — of counting, basically, of saying this job goes with a certain set of money? Is that valid?

LAWRENCE MISHEL: Well, there’s two ways that you can go about this. You know what the effect of certain kinds of spending is on the economy and jobs.

And the administration’s actually done something pretty marvelous of trying to actually track where all the money went, who got it, and how many jobs were created. And, if anything, they understate the amount of jobs being created. Yes, so, I think there’s been a tremendous effort to actually document the impact of this.

And I think it’s had a great impact. The problem is, we were in a really deep hole. We have not gotten out of that hole yet. We need to be creating 300,000 or 400,000 jobs a month. Now we’re just about breaking even.

JEFFREY BROWN: Well, the same sort of question for you, Professor Cochrane, because I want to help people understand this. It’s — it’s not possible to see an alternate universe at this point, right, what — what would have happened?

JOHN COCHRANE: That’s the difficulty in economics always. It’s easy to say, oh, the model said this; the forecasters said that. But it’s hard to know what would have happened.

A trillion-and-a-half dollars is a lot of money to spend on maybe even a million jobs.

JEFFREY BROWN: And what do you see — what do you see or what do you want going forward at this point, because, as Lawrence Mishel just said, now the question is, should we be spending more for another stimulus package?

JOHN COCHRANE: Well, that’s a lovely idea, but the idea that we’re going to spend another trillion-and-a-half of deficit, increase it even more than that, and spend it on jobs programs, that’s just not happening.

What we need to do is get back to growth as quickly as possible, and that needs a stable tax system, not the chaos we have now, and pro-growth policies. It’s our only hope.

JEFFREY BROWN: And the trillion-and-a-half you’re referring to, where — where is that coming from?

JOHN COCHRANE: That’s the current deficit. The idea of stimulus was just to increase the deficit. From a macroeconomic point of view, deficit is deficit.

And the point, the idea is that maybe deficit spend would increase jobs. We have already done a trillion-and-a-half. Are we supposed to do $3 trillion?


LAWRENCE MISHEL: The fact is, we do have a huge deficit. We have a huge deficit because we have a huge recession. That’s because a lot of people aren’t paying taxes because they’re out of work, and we’re spending other money on safety nett programs that happen in a recession.

That’s what you would want to do. I remember President George W. Bush saying, at a time of war and recession, you want to have a deficit. I don’t understand why…

LAWRENCE MISHEL: … why — and I hear every conservative economist say, at this moment, we don’t want to cut spending or raise taxes. So, all of a sudden, you know, we hear this other alternative universe.

JEFFREY BROWN: Go ahead. Brief response, Mr. Cochrane.

JOHN COCHRANE: This is not partisan. I didn’t like Bush’s deficit spending any more than I like President Obama’s.

LAWRENCE MISHEL: Yes, but the idea of somehow we will get the taxes right and all this kind of stuff, we have tried that before. We had huge tax cuts in the — early 2000. We had the worst recovery on record. We had the only time — only business cycle where the working class did worse at the end of it than they were in the beginning, actually no growth in income for a typical working family.

You know, if we want to do nothing, we can — we can get that, or we can actually take aggressive action and create millions of jobs and get out of this mess.

JEFFREY BROWN: All right, we will leave it there.

Lawrence Mishel and John Cochrane, thank you both very much.


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