Feb 13, 2009

Does Newsweek Even KNOW Any Real Economists?

Newsweek and Slate really should hire an economist to write on, you know, economics. All their columns dealing with economics tend to be written by Daniel Gross. Now, maybe he's nice guy, and he's clearly written a lot about business and investment. However, the man isn't an economist (he got a Master's in history from Harvard) and rarely, if ever, uses empirical evidence to support his claims. Well, guess what? He did it again.

Greg Mankiw, economics professor, from Harvard, has quite a comeback
. Basically, what he says is that when times become more uncertain, people's average propensity to consume (APC) decreases (i.e. people consume less and save more). Gross erroneously assumes that the decrease in the APC also decreases a person's marginal propensity to consume (MPC), that is, the change (increase or decrease) in consumption for each additional dollar of cash-at-hand. That, in fact, is completely wrong, because it is the opposite of the law of diminishing returns (let's call it "the law when returns are diminished"). When someone has less certainty about income (and less income with which to consume), that person will spend more for each extra dollar in his pocket. That means when the APC is lowered, the MPC increases. Giving people more money in the form of a tax cut (preferably a payroll cut, as opposed to a onetime credit, since people respond to a permanent increase in income more than a single payment) will make each dollar they receive worth more to the economy as a whole, since it is more likely to be spent on consumption. Will it be as much as in regular times? Probably not. Will it be more than if the government chooses to spend the money instead? Almost certainly so, since government injections will be short-term and will not affect consumption (70% of the economy, and the part that's hurting the most right now) at all.

It also needs to be pointed out that the President is being totally dishonest in this entire debate. He promised that all bills would have a five day waiting period between passage and his signature (think that's going to happen? We'll probably have a $1,000,000,000,000 law tonight, after the Senate passes it in the next few hours and it goes to the White House). He promised transparency, though the bill isn't even transparent to the members of Congress (who only received the 1,100 page monstrosity at 10pm last night; it became available to the public a few hours later--in the middle of the night). Finally, he has said numerous times that there is no disagreement about a government stimulus package. Hundreds of economists disagree, and the Congressional Budget Office (non-partisan, thank you) says that the bill will cause the GDP to DECREASE by 0.1 to 0.3 percent. The bill will deepen the recession. Is that a stimulus?

I'm not saying that tax cuts are the only answer, but I'm certainly saying that they are more of an answer than what is before us now. What's for certain, at least, is that Newsweek should have the brains to hire an actual economist who doesn't get smacked down so easily by people who know what they're talking about.

UPDATE: I was right. Obama broke his five-day promise, though not by as much as I expected. He gave it four days. However, that opens up another question: if the bill was not important enough to be signed immediately by the president, why could it not have spent the 48 hours before the public that the House unanimously voted on? Couldn't lawmakers have taken those extra few days to, you know, read the bill that they voted for (or against)?

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