Wednesday, July 09, 2014

On Being Right, On Being Wrong

In the early days of the "Lesser Depression" that followed the financial crisis of 2008, Nobel laureate economist Paul Krugman made three fundamental claims about how the economy performs during a depression. Krugman said that while the economy remained depressed and interest rates were at the "zero lower bound,"
  • The government "printing money" would not would not cause inflation
  • The government running massive budget deficits would not lead to higher interest rates
  • Fiscal austerity would be economically contractionary
And so it came to be, despite howls of outrage by right wing economists, commentators, and politicians. Remember Paul Ryan's accusation that the Fed was "debasing the currency?"

Economics is different from the hard sciences because it is difficult to conduct economic experiments to test your hypotheses. Krugman's claims, however, came from a fully articulated economic model, and the severely depressed economy proved to be a remarkable "natural experiment" in which that Keynesian model could be verified.

It has now been over five years—half a decade!—since The Wall Street Journal editorial page warned ominously of sharply higher inflation and interest rates. The "bond vigilantes," suggested the Journal, would have their way with the government's misbegotten policies of fiscal and monetary imprudence.

So what happened? Interest rates fell to historic lows. The yield on the 10-year bond was over 3.5 percent when the Journal issued its warning; it subsequently tumbled to less than 1.5 percent, despite trillion dollar deficits and massive expansion of the Fed's balance sheet, and remained at historically low levels. Throughout the half decade since the Journal's warning, the government has been able to borrow essentially for free, since the real (the nominal rate minus inflation) interest rate paid on government bonds has remained close to zero. The bond vigilantes are nowhere to be found.

Inflation has also remained very low, at or below the Fed's target. This despite vast new monetary reserves due to the Fed's "quantitative easing"—a more technical term for "printing money."

Meanwhile, economic growth has been tepid, with millions still unemployed or under-employed. No surprise: Despite the long-gone Obama "stimulus" (which Krugman said from the beginning was far too small) and the deficits caused by soaring safety net expenditures, government policy has been one of de facto austerity, with massive cutbacks in state and local spending, large net reductions in government jobs, and anemic levels of aggregate government spending growth. In fact, the miserly spending by government has been quite unprecedented in comparison to past periods of economic weakness; the norm is for the government to adopt a fiscal posture that leads the country out of recession. But not this time.

It's hard to over emphasize how remarkably important Krugman's predictions were. Taken together, they constitute a fundamental understanding of how a depressed economy works, an understanding that has profound implications for economic policy, even as it violates conservative orthodoxy.

Have conservative economists, commentators, and politicians stepped up to say that they were wrong? They have not. Mostly they offer conspiracy theories (the government is lying about inflation) or explanations involving "uncertainty" among businesses and the markets caused by ad hoc government actions. In the ideologue's mind, ideology can never be disproved, certainly not by evidence. Being an ideologue means never having to say you're sorry. Has The Wall Street Journal explained what became of the bond vigilantes? Don't make me laugh.

Conservative beliefs burnt to smoldering ashes should cause everybody to take note. Being profoundly wrong should have consequences. Take Obamacare, for example. There was every reason to predict it would work. After all, it was closely modeled on Romneycare in Massachusetts, which has been undeniably successful.

But conservatives just knew Obamacare would be a stunning failure. In particular, they were overwhelmingly convinced that
  • Enrollment would be low
  • Those who do sign up won't pay
  • More people will lose coverage canceled by Obamacare than gain it
  • Insurance premiums will increase dramatically
  • Young people won't sign up, causing an demographic "death spiral"
  • Health care costs will soar
So who was correct? Enrollment substantially beat expectations, despite two months of a nonfunctional web site. Insurance companies say the vast majority of enrollees have paid. There has been a sharp drop in the number of uninsured, at least in states that adopted Medicaid expansion. The claims of canceled policies have collapsed under press scrutiny. Premium costs have come in below expectations, even as consumers have more choices. Insurance companies say the risk pool demographics are fairly good. And health care costs are rising slowly compared to historical rates.

Early estimates have insurance premiums rising by perhaps seven percent next year, but that's still far lower than the double digit increases we'd become accustomed to. And a number of additional insurance companies have announced they'll be joining the exchanges, which amounts to a vote of confidence in how things are going.

As always, conservatives respond to facts with a mix of conspiracy theories (the administration is cooking the numbers), but the incessant hammering on Obamacare has largely ended in the conservative media. Apparently they've moved on.

But this meandering story is a tale about being right and being wrong, and whether there are consequences. How completely, spectacularly wrong is it possible to be? Oh, my. Very.

In selling the 2003 invasion of Iraq, necons in and out of government claimed Iraq had weapons of mass destruction. It didn't. The Bush administration later explained its mistake by saying everybody believed Iraq had weapons of mass destruction. Everybody didn't. The Bush administration, particularly Dick Cheney, claimed Iraq had ties to Al Qaeda. It didn't. Neocons in and out of government claimed the war would be quick (weeks, not months), easy, and cheap (at most a few tens of billions of dollars). Americans would be greeted as liberators. A new democracy would flower in the desert and remake the Middle East.

George W. Bush proclaimed victory beneath a banner saying "Mission Accomplished" a couple of months after the invasion, even as a massive insurgency was soon to erupt. Four years later, with 150,000 U.S. troops in Iraq, another 20,000 were on the way to conduct "the surge." Four years after that, the U.S. formally and completely exited Iraq.

The promised short little war took over eight years. Cheap? Not in lives. Over 4,000 Americans dead, and hundreds of thousands of Iraqis. Not in money. The final cost is not yet totaled or paid, but the ultimate tally is estimated to be in the trillions of dollars. (By the way, the current difficulties at the Veterans Administration are a direct consequence of the Iraq war, and the U.S.'s failure to plan for a large influx of severely injured veterans needing care.)

And democracy flowering in the Middle East? Please.

Now a new Iraqi insurgency is very much in the news. An extreme Sunni Islamist group known variously as ISIS or ISIL or (now) "The Islamic State" has captured large portions of Syria and Iraq, including the large Iraqi city of Mosul. The far better equipped Iraqi army dropped its weapons and fled before the much smaller militant contingent. (Bush: "As Iraqis stand up, we will stand down." Uh huh.) American military advisers say the Iraqi army is not now capable of retaking the territory, although it can probably defend Baghdad.

The success of ISIS has depended fundamentally on Sunni dissatisfaction at being mistreated by the majority Shiite Iraqi government. International advisers have long pleaded with prime minister Nouri al-Maliki to construct a broadly inclusive government that shares power and wealth among Iraq's three large sectarian groups, but Maliki has been unwilling to do so. The Shiites have largely rubbed the Sunnis' noses in their powerlessness. The Sunnis have had enough.

Now Iraq is suddenly embroiled in sectarian civil war, with the Kurds setting up a soon to be independent state in the north, the Sunni radicals setting up a wannabe Islamic "caliphate" in the middle, and the majority Shiites in the south. The "flowering" now occurring in Iraq's midsection is not democracy but a potential jihadist and terrorist stronghold that could have worldwide security implications. In selling the 2003 invasion, the Bush administration (Paul Wolfowitz, in particular) insisted Iraq had scant potential for sectarian division. Oh, yes, it is possible to be wrong, and all the more so when you are guided by ideology, not evidence, reason, or—God forbid!—understanding.

Now the U.S. has sent several hundred military advisers and security personnel to Iraq. It is uncertain how things will progress, but after eight years in country, the U.S. is not yet rid of this nasty neocon mess. Could conservatives been more wrong?

Ideology and theological certitude is everywhere you look on the conservative right. Right wing ideologues reject established science, and are thus happy to deny the reality of climate change despite overwhelming scientific consensus on the matter, and the plain evidence that the planet is dramatically warming. Right wing theists deny evolution, which is the foundational underpinning of modern biology, and they strive where possible to keep it from being taught in schools.

The story never ends, but I must, so I'll leave you with a tale of ideological and fiscal malpractice in my home state of Kansas. Governor Sam Brownback has implemented a plan to dramatically slash the state's personal and business income tax, despite warnings that doing so would lead to massive budget shortfalls. Brownback is convinced that the move will lead to an eruption of economic growth a la Texas, and he's reportedly been urged on by supply-side high priest Art Laffer, who somehow still manages, at this late date, to get the attention of some conservative politicians. Never mind that Laffer's economic predictions about the self-funding wonders of tax cuts were discredited during the Reagan years, and quickly rejected by Reagan himself.

So how are things going in Kansas? Well, the state's economy lags the nation's. The fiscal year closed at the end of June with revenues $338 million below predictions. That's real money in such a small state. The state's credit rating has been downgraded. State funding for higher education has been slashed year after year. And the Kansas Supreme Court has ruled that the state's funding of K-12 education is so unacceptably low that it violates the state's constitution, which requires a minimum level of education funding. Still, there's always room for tax cuts.

Where will it all end? In discourse with right-wingers, don't bother appealing to reason or evidence. It doesn't work. Conservatives have faith in faith. On the right, being demonstrably correct is irrelevant. Being demonstrably wrong is not a liability. Conservatives just know a thing is true, because they just know, and they have their own self-constructed media echo chamber to reinforce that belief.

Somehow, the nation needs to stop listening to, and empowering, ideologues—while cultivating a culture of informed critical thinking. But here's the thing: we'll not, unfortunately, be able to bring conservative ideologues along, because their brains aren't wired to think critically. Sad to say, we'll just have to cut them loose, and proceed without them. The sooner, the better. There is no other way.

Copyright (C) 2014 James Michael Brennan, All Rights Reserved

The latest from Does It Hurt To Think? is here.


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