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Shaving the Big Shaggy

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Dean Baker takes the shears to David Brooks before flaying him and turning his skin into a nice hat:

[Saith Brooks,] “The Demand Siders don’t have a good explanation for the past two years.”Hmmm, is that right? Seems to me that we have a very simple theory to explain the past two years. There was a huge bubble in housing that burst beginning in 2006. This led to a plunge in residential construction that cost the economy more than $500 billion in annual demand. In addition, the loss of $6 trillion in housing wealth, coupled with the loss of around $7 trillion in stock wealth, has cost the economy more than $500 billion in annual consumption demand. This is the result of the wealth effect on consumption, a phenomenon that economists have been writing about for close to a century. In addition, there was a bubble in non-residential real estate that collapsed about a year after the collapse of the housing bubble. This cost the economy about another $150 billion in demand. That gives a total loss in annual demand of around $1.2 trillion. All of this was completely predictable and predicted by at least some demand siders.

It was also easy to see that the stimulus approved by Congress was inadequate. Demand siders rely on something called “arithmetic” to reach this assessment. After pulling out the $80 billion fix to the alternative minimum tax, which had nothing to do with stimulus, and the $100 billion or so designated for later years, the stimulus provided for roughly $600 billion in spending and tax cuts over the years 2009 and 2010. This comes to $300 billion a year. Roughly half of the federal stimulus was offset by cutbacks and tax increases at the state and local level, leaving a net stimulus from the government sector of roughly $150 billion a year.

Demand siders did not believe that $150 billion in annual stimulus 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. Perhaps this explanation is too complicated for Mr. Brooks (he repeatedly complains about the high IQs of the demand siders), but it actually seems fairly straightforward. If he wants to be honest, he could at least say that he doesn’t understand the demand siders’ explanation, rather than asserting that demand siders do not have an explanation.

At some point, philosophers will need to set aside their current work and describe several new species of logical fallacy sired by David Brooks. Meantime, it takes a very special kind of idiocy to proffer advice against “reckless” actions to folks who occupy political institutions that are barely capable of passing even the most innocuous correctives to the economic, ecological and foreign policy catastrophes of the past decade.

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