David Frum On Conservative Economics: Were We Wrong?

By Justin Gardner | Related entries in Business, Economic crisis, Economic recovery, Economy, Money, Republicans

A very sobering piece to write, no doubt, but needed nonetheless. Especially when you consider the revised GDP numbers from 2008.

From Frum Forum:

Two years ago, Commerce estimated the decline of the US economy at -0.5% in the third quarter of 2008 and -3.8% in the fourth quarter. It now puts the damage at -3.7% and -8.9%: Great Depression territory.

Those estimates make intuitive sense as we assess the real-world effect of the crisis: the jobs lost, the homes foreclosed, the retirements shattered. When people tell me that I’ve changed my mind too much about too many things over the past four years, I can only point to the devastation wrought by this crisis and wonder: How closed must your thinking be if it isn’t affected by a disaster of such magnitude? And in fact, almost all of our thinking has been somehow affected: hence the drift of so many conservatives away from what used to be the mainstream market-oriented Washington Consensus toward Austrian economics and Ron Paul style hard-money libertarianism. The ground they and I used to occupy stands increasingly empty.

A decline of -8.9%.

Conservatives…let that sink in for a moment.

Anybody now think the stimulus was too big?

This from the Economist:

We can’t know exactly how things would have played out in a world in which key policymakers had better data. If the true scope of the economic disaster in the fourth quarter had been clear, however, it seems certain that Ms Romer’s models would have shown a need for more stimulus, that the White House would have agreed to push for more (and perhaps a lot more), and that Congress would have been much more receptive to a bigger bill. A drop of 8.9% does seem much more terrifying, after all, than a 3.8% decline. Bigger stimulus would have reduced the economic deterioration in subsequent months. The Fed might also have been more aggressive.

Of course, it’s not impossible that knowledge of the dire state of the economy would combine with a bigger stimulus plan to shake faith in American finances. It is unlikely, however. At the end of 2008, America’s net debt-to-GDP ratio was less than 50%. Other large economies were also tanking, and money was flooding into Treasuries. In late December of 2008, yields on 10-year Treasuries fell to near 2%.

America had plenty of room and every reason to borrow and spend heavily. What it didn’t have, unfortunately, was an accurate picture of the economic situation. And that was a crippling limitation indeed.

Frum closes it out with this tribute to Susan Sontag’s famous challenge to her left-wing brethren in 1982:

Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?

Your thoughts?


This entry was posted on Thursday, August 4th, 2011 and is filed under Business, Economic crisis, Economic recovery, Economy, Money, Republicans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

15 Responses to “David Frum On Conservative Economics: Were We Wrong?”

  1. Simon Says:

    “Anybody now think the stimulus was too big?”

    Yes; nothing in the practical results of the stimulus will support the conclusion that more would have done a better job. Nor is there any basis in sound theory for such a conclusion, and if Frum has in mind a basis in even unsound theory, he doesn’t mention it: His leap from economic decline figures to the conclusion that the proponents of a larger stimulus might have been right barely rises above the level of non sequitur.

    One must also wonder whom Frum is hanging out with if he believes (as he appears to) that the undeniable drift of many conservatives to a Paulista stance on hard money reflects a broader trend in Conservative thinking away from free market economics. (I am entirely mystified by the dichotomy he asserts between a market-oriented status quo ante and a new Austrian focus.) To the contrary, most conservatives that I know have offered the two obvious—and I think obviously correct—responses to charges that the market failed in the economic crisis. First, pointing out that such charges rest on the nonsensical permise that there was a free market in play—banking was and is one of the most heavily regulated sections of the economy, a degree of ilberalization notwithstanding. And second, I don’t think that most free-market conservatives are opposed to all regulation, and regulation that promotes market efficiency by diminishing information asymmetries—the kind of regulation that would actually have helped in this case—is not typically disfavored.

  2. Tillyosu Says:

    First, pointing out that such charges rest on the nonsensical permise that there was a free market in play—banking was and is one of the most heavily regulated sections of the economy, a degree of ilberalization notwithstanding.

    Thank you. And so, I might add, is the housing market.

  3. Justin Gardner Says:

    Yes; nothing in the practical results of the stimulus will support the conclusion that more would have done a better job. Nor is there any basis in sound theory for such a conclusion.

    I would completely agree if I was a conservative economic ideologue. But I’m not. Neither is Frum. Neither is the Economist. You’re looking for perfect proof. You’ll find none. But there is proof that the economy did come out of the hole we were in after the money started flowing into the economy. But since we were worse off by more than double, it wasn’t enough. That’s not a hard line to draw.

    And then this…

    And second, I don’t think that most free-market conservatives are opposed to all regulation, and regulation that promotes market efficiency by diminishing information asymmetries—the kind of regulation that would actually have helped in this case—is not typically disfavored.

    Who said anything about “all” regulation? And let’s not pretend that Republicans politicians are for sensible, reasonable business regulation. That’s laughable. Also, have you not noticed the “Tea Party” Repubs and their shift towards Paulian style economics?

    But let me just unpack yours and Tillyosu’ assertion. So you’re saying that two industries that nearly caused the collapse of the global economy (we’ll leave AIG out of this discussion for right now) due to not being regulated properly because of free market principles of self regulation…should have just been left alone? To do what exactly? Fall completely apart?

  4. Paul Says:

    Forgetting that housing and banking regulations have the consistency of swiss cheese. Ah free market economics the god that can never fail, not that I have much more faith in liberal economics these days.
    My feeling is that at the end of the day markets and economies are made up of people who can and do act irrationally especially when stressed or fearful, so that even if you implemented the most perfect economic policies ever devised by man you could still have the economy tank.

  5. New Direction Says:

    Two years ago, Commerce estimated the decline of the US economy at -0.5% in the third quarter of 2008 and -3.8% in the fourth quarter. It now puts the damage at -3.7% and -8.9%: Great Depression territory.

    A decline of -8.9%.

    Conservatives…let that sink in for a moment.

    Okay, I’m letting it sink in… and my reaction is:

    The Democrats were given overwhelming majorities in both chambers of Congress in 2007, having been elected on their campaign slogan of “A New Direction For America“. And within 2 years of having total control, they had totally destroyed the U.S. economy and plunged us into a recession.

    Quite an accomplishment!

    After that, we all got to witness the further damage they inflicted by ramming through their “Hope and Change” agenda over the following two years, before the Republican takeover of the House in 2010 put some brakes on the Democrats’ runaway train of economic destruction.

    I imagine the American voters will finish the job they started in 2010 and vote the rest of the incompetent Democratic boobs out of office in 2012. For most people, the “new direction” and “change” the Democrats have inflicted on this country just plain sucks.

  6. kranky kritter Says:

    Every time anyone ever talks about the free market, thy are really talking about “what passes for a free market.” As Justin suggests, there is and never will be a perfect free form. That’s the way it is. Get over it.

    His leap from economic decline figures to the conclusion that the proponents of a larger stimulus might have been right barely rises above the level of non sequitur.

    Translation: “my head’s exploding!” What a total load of crap, Simon. But then throwing an apostate (even an occasional apostate) under the bus is one of the tip top reasons for your infrequent visits here. You just hate it whenever one of the ducks strays a step or two from the party line.

    To the contrary, most conservatives that I know have offered the two obvious—and I think obviously correct—responses to charges that the market failed in the economic crisis.

    Really, two? As long as I have known, the faith-based response to this charge is invariant. It’s that the free market never fails because it can’t, its outcome is always correct. And any appearance of failure can only be evidence that government regulation has made the market dysfunctional. It’s a faith-based tautology. A religion, in other words.

  7. Tillyosu Says:

    So you’re saying that two industries that nearly caused the collapse of the global economy (we’ll leave AIG out of this discussion for right now) due to not being regulated properly because of free market principles of self regulation…should have just been left alone? To do what exactly? Fall completely apart?

    Emphasis added. I can’t speak for Simon, but that’s not what I took from his comment. I understood him to mean the exact opposite of what is bolded above – that the financial collapse happened despite the fact that the banking industry was one of the most heavily regulated. And indeed he’s right.

    I simply wanted to add that the housing industry, the collapse of which was the proximate cause of the crisis, fits that description as well. But I would go even farther than Simon and argue that the housing crisis was the result of government intervention in and control of the housing market. Government involvement in the housing market served to artificially warp demand creating a price bubble that, when it collapsed, upended the balance sheets of many financial institutions sparking the financial crisis.

  8. kranky kritter Says:

    The Democrats were given overwhelming majorities in both chambers of Congress in 2007, having been elected on their campaign slogan of “A New Direction For America“. And within 2 years of having total control, they had totally destroyed the U.S. economy and plunged us into a recession.

    Huh. My impression is that the destroying had been already done by the time Obama took office. The numbers widely accepted by most economists about the size of the recession and when it ended bear this out.

    If you have data which suggests otherwise, please share it with us. We are all most urgent to get this right.

  9. Justin Gardner Says:

    @New Direction,

    The Dems were not given overwhelming majorities to pass anything they wanted. They did not have a super majority and, therefore, had to compromise on the stimulus plans. Part of those compromises were tax cuts that weren’t very stimulative.

    Also, we’re not in a recession. And the economy isn’t anywhere close to being “totally destroyed.” It was close in 2008, though. Who created that? Oh let’s see…

    Also, unemployment just dropped today. Signs are pointing back up.

    Listen, I know people are angry, but everybody needs to check their facts. A catastrophe was averted. There’s no disputing that at this point.

  10. Paul Says:

    “The Democrats were given overwhelming majorities in both chambers of Congress in 2007, having been elected on their campaign slogan of “A New Direction For America“. And within 2 years of having total control, they had totally destroyed the U.S. economy and plunged us into a recession.”

    The housing market was already tanking by 2007 and the all the other causes for the recession were already there so don’t give me this whole the Dems destroyed the economy nonsense. As a rule politicians have less influence on the economy then we give them credit for.

  11. WHQ Says:

    Let’s guess what the following refers to, note that it was ultimately a bipartisan failure, one that may have been the greatest contributor to the housing bubble and bank crisis, and that it was an act of DEregulation.

    The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate and by a bi-partisan 343–86 vote in the House of Representatives. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90–8 (one not voting) and in the House: 362–57 (15 not voting). The legislation was signed into law by President Bill Clinton on November 12, 1999.

  12. Justin Gardner Says:

    WHQ…exactly. The “self-regulating market” myth resulted in what we saw. Regulations were systemically stripped away and if you all can’t accept this fact, I’ve got nothing to talk to you about regarding this.

    Conservative economic philosophy, which has ruled Washington for the past 3 decades, got it wrong. That’s why Frum is posing the question. If any conservatives here can look at a -8.9% drop in GDP in a single quarter and not draw the line from that to conservative economic philosophy, you’re being willfully ignorant.

  13. Tillyosu Says:

    Let’s assume, Justin, that I am willfully ignorant. Please enlighten me and draw the line directly from “conservative economic philosophy” to an -8.9% drop in GDP. No generalities please. I’m a stickler for facts and figures.

  14. theWord Says:

    After inheriting the worst economy in decades Obama has not really been able to do what he thought to make it better, in two years you think it made total sense to turn the reins back to the people who created the mess in the first place who had also come up with no new ideas to address things other than more of the same. They just got what they considered a win in the budget negotiations that they had ginned up in the first place. We are now hearing we may be downgraded (costing everyone – but it’s not a tax so that and the billions lost in the collapse of markets worldwide are nothing you will even see acknowledge as a result of your party’s actions) Why was it that Obama was to blame in two years and almost everything he had to deal with was inherited and the plans to address it have been for the most part crammed down the country’s throat by your party. Seems a bit magical to arrive there without laying the blame heavily on the GOP.

  15. New Direction Says:

    Conservative economic philosophy, which has ruled Washington for the past 3 decades

    LOL!

    Until I read this howler, I hadn’t realized that this place was some kind of parody blog — a sort of political pale imitation of The Onion.

    But no one could write a statement as disconnected from reality as yours and still expect to be taken seriously.

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