New York Times, March 19, 2013
Link to original article here.
On March 19, 2013 David Brooks published an article in the New York Times entitled “The Progressive Shift.” He argues that liberals have fundamentally shifted toward “a new world view” according to which “government is … the source of job growth.” His case study is the fiscal 2014 budget proposed by the Congressional Progressive Caucus, which recommends what Brooks describes as a “gigantic” increase in spending.
There are many problems with David Brooks’ analysis of both the new budget and the perceived change in progressivism. We focus on some misstatements that relate specifically to the Keynesian perspective on macroeconomics.
First, consider Brooks’s claim that Keynesian theory supports government demand stimulus only under very specific conditions:
“Now, of course, liberals have always believed in Keynesian countercyclical deficit spending. But that was borrowing to brake against a downturn when certain conditions prevail: when the economy is shrinking; when debt levels are low; when there are plenty of shovel-ready projects waiting to be enacted; when there is a large and growing gap between the economy’s current output and what it is capable of producing.”
Brooks also misprepresents the source of funding for a spending increase:
“…these Democrats want to take an astounding $4.2 trillion out of the private sector and put it into the government where they believe it can be used more efficiently.”
The argument that the government’s spending must come ”out of the private sector” is among the most common criticisms of fiscal stimulus. We address this concern in our section on fiscal policy. If the economy has slack resources, which is a reasonable assumption in 2013, then higher government spending mobilizes economic resources that would otherwise sit idle. The rise in demand creates new income. This new income does not “come out” of any existing source (such as the private sector); rather, it is created by the demand stimulus by reducing the extent of wasted productive resources.
Brooks continues to misrepresent sources of revenue throughout the article. Later in his column, he states:
“the entire Democratic government governing vision … is based on the notion that we can have a growing welfare state and pay for it by taxing the top 2 percent.”
The tax revenues generated from new income will offset at least a part of the cost of stimulus; a stronger economy will also help to pay the government’s bills. Furthermore, many the cost of many programs depend on the state of the economy. If government demand stimulus is successful, a stronger economy will be able to offer more jobs, reducing the size and cost of “welfare state” programs. And a stronger economy in the coming year will encourage private sector investment in new equipment and technologies, raising the potential to generate future income and tax revenues.
Furthermore, the facts and figures upon which Brooks bases his argument can be misleading:
“These Democrats try to boost economic growth with a gigantic $2.1 trillion increase in government spending. ... As an analysis by the group Third Way demonstrated, even if we threw every semiplausible tax increase at the rich, the national debt would still double over the next three decades.”
While $2.1 trillion sounds like a lot of money, Brooks does not tell his readings the relevant timeframe for this spending. Most Congressional budget estimates cover a ten-year period, in which case the figure Brooks labels "gigantic" would likely be about 1% of GDP. Similarly, the notion of our national debt doubling is frightening until put into context. A reasonable estimate of the growth in the U.S. economy is about 4% per year (2% inflation plus 2% real growth). If that is the case, GDP will rise by more than a factor of three over three decades, so even If debt is doubled, the ratio of debt to GDP would actually decline substantially.
“It’s a reminder that while Republicans may embarrass on a daily basis, many progressives have lost touch with what actually produces growth and prosperity.”
This concluding sentence aligns with common arguments that only private investment and entrepreneurship can be true sources of a stronger economy. The progressives’ budget would stimulate demand, not supply, and thus can have no sustainable impact from Brooks’ perspective. We argue, however, that both demand and supply play important roles in determining economic growth. With an economy operating well below its potential in 2013, we need a rise in demand to create the growth necessary to get back to levels of output and employment consistent with "prosperity." For further explanation, see our section on the Muddy Water Macro perspective.
The progressives may not be as out-of-touch as Brooks suggests; when insufficient demand constrains production and employment, stimulus to income and consumption can indeed be a source of growth.