Alvaro Vargas Llosa has an article at TNR that is really quite misguided. Vargas Llosa urges Obama to resist his "socialistic intellectual formation" and not "throw money at the recession." His concern is that supply of money has increased as the Fed and other government agencies have tried to deal with the recession, because in the eight years prior to the Great Depression the money supply also increased. This, he suggests, means that there should be no stimulus legislation, presumably because there is no distinction between an increasing money supply and increasing the money supply in response to a fincancial crisis. Needless to say, he does not offer a policy alternative. Perhaps because most credible economists think a spending plan is a good idea. Wait, has he found two who disagree?
[Obama] has two advisers who could help hold his formation in check: Paul Volcker, whose tight-money policy at the Federal Reserve in the 1970s facilitated the prosperity of the Reagan years, and Christina Romer, whose 1994 paper "What Ends Recessions?" sought to prove that fiscal spending was not the cause of recovery after the eight recessions that took place between World War II and the early 1990s.
Ah, whoops. That paragraph actually mis-states Romer's argument -- Noam Scheiber explains why. And of course, both of those advisers have endorsed Obama's stimulus plan. Why, here's Romer herself telling you it's a good idea.
Then there's the old entitlement spending and deficit panic. One simply notes that Obama has a plan to deal with entitlement spending, and that's health care reform, since Medicare costs are the real long-term financial problem, while Social Security outlays are in relatively healthy fiscal shape. The deficit should worry us, but in the long term -- you don't worry about how much the water costs when your house is on fire. I'd note that economist Mark Zandi has analyzed the House's stimulus legislation and notes that the short-term costs of a deficit are not prominent:
The $825 billion, two-year fiscal stimulus plan proposed by House Democrats is large enough to provide a substantive near-term boost to the economy, but not so large as to result in measurably higher interest rates. Global investors remain avid buyers of U.S. Treasury bonds despite fully anticipating the costs to the Treasury of responding to the current financial and economic crisis.
Zandi too worries about the huge deficits of such a program in the long-term -- as does anyone concerned with fiscal responsiblity -- but also makes the case that immediate action is necessary despite these longer-term risks. And Obama has made clear that he expects to take action on long-term fiscal stability once the immediate crisis is past.
As to Llosa's argument that the New Deal delayed economic recovery, well, that's why God gave us Eric h Rauchway.
Llosa doesn't just come right out and say it, but presumably he's interested in a strategy of letting the recession continue on this present path, toward double-digit unemployment by 2010. At the very least, it doesn't seem like a great economic policy, and it also seems awful cold-blooded.
-- Tim Fernholz
