Wednesday, July 28, 2010

Intramural Warfare Among Economists

The most important issue affecting the American economy and this November’s mid-term elections is jobs. The administration has been desperately trying to increase jobs and lower unemployment. The one tool it has most directly deployed is stimulus spending, i.e., big deficits.

Economists disagree strongly on the effects of the previous $787 billion stimulus, and whether additional stimulus would help or harm the economy. The two camps are well defined.

Prominent members of the “big stimulus” camp include Nobel prize winners Paul Krugman and Joe Stiglitz. They are joined by such outspoken economists as Brad DeLong, Alan Blinder, and the Financial Times Martin Wolf. The “deficit reduction” camp includes Nobel winner Vernon Smith, Niall Ferguson, Ken Rogoff, John Taylor and Jean-Claude Trichet. (Apologies to other prominent economists and universities omitted; the two camps are meant to be illustrative.) We might call the first Princeton-Berkeley and the other Harvard-Stanford. These universities have top-flight graduate programs in economics (ranking 1, 3, 5, 6 in the U.S. News list).

Little is expected from Congress until after the November election and the new Congress is seated next January. Most forecasters project continued high unemployment in the New Year and the new Congress will be called upon to take action. What should it do based on the recommendations of the rival camps?

The disagreement cannot be settled by an experiment in which the patient, the U.S. economy, is sliced in half and given two different remedies to test for their effectiveness. It is a contest of theories and analyses of historical data, with each side claiming the other is wrong, misguided, sloppy in the analysis of data, and other harsher terms.

Which camp has the better solution to fix the economy? Can someone develop “objective” criteria which helps voters choose politicians that pledge to follow the “correct” advice. If not, then what...? (Are economists overpaid for their advice? Would flipping a coin would be just as good on how to address the most important economic problem of the day?)

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