Monday, November 15, 2010

Partisanship and Opportunistic Explanations of Reality

It seems that in explaining our current economic difficulties, certain individuals are opportunistically choosing explanations with implications favorable to their preexisting policy preferences and biases. For example, a lot of Republicans and conservative economists gravitate towards "uncertainty about government policy" as the number one reason that the economy is not recovering faster and downplay the issue of aggregate demand.

This is unfortunate. You would think that educated people would be able to overcome their prejudices and be able to consider things dispassionately based on evidence. The argument that "uncertainty" about political policy is holding the economy back just doesn't make much sense.

First of all, in a democracy, there is always policy uncertainty. The only way to eliminate it would be to replace democracy with dictatorship. Given the pervasiveness of uncertainty, on what basis do we say that uncertainty is higher now than earlier? I think the majority of reasonable investors knew that the housing market was overvalued and that there was a bubble that would eventually pop. The issue was when. Despite this massive uncertainty that should have given investors pause long ago, the housing bubble continued to grow for years. If the level of certainty is so important, why didn't the much more significant risk and uncertainty of the housing bubble bursting than the much smaller political uncertainties that now exist cause an economic slowdown?

Second, Republicans grandstanding on issues like extending unemployment insurance create a lot more economic uncertainty than either healthcare reform or financial reform, both of which are modest. But such uncertainty (which greatly affects aggregate demand and thus the economic climate facing small business) is usually never mentioned by those who gravitate towards uncertainty.

Third, the level of policy uncertainty has never really been that high. Obama campaigned on health care reform; it is not exactly shocking that it would be pursued after a successful election. Modest financial reform was inevitable after the aftermaths of the financial crisis and actually financial reform decreases uncertainty by making a future financial crisis marginally less likely and providing more predictable resolution authority if (and when) one does occur again.

Third, health care reform has already happened and so has financial reform. Of course, there are important questions surrounding implementation, but there is certainly much more political uncertainty surrounding Republican efforts to repeal or defund these policies than there is any residual uncertainty regarding implementation of policies whose broad outlines are already set. Yet those pointing to uncertainty as the "thing" holding back recovery never suggest that Republicans should back off attempts to repeal or defund healthcare reform or financial reform.

Fourth, as this brilliant post by Ezra Klein shows, there was more political uncertainty than surrounding health care reform and taxes during the Clinton administration, yet the unemployment rate actually fell and the economic growth accelerated. Strangely, those who assert that our current problems are caused by political uncertainty never mention the many cases where political uncertainty is higher than now, but economic growth quite robust. What does this show? That the argument that the problem is "policy uncertainty" has absolutely no grounding in history.

Unfortunately, the people who make the argument that it is all about uncertainty, whether they have Ph.D.s in economics or not, are not basing choosing their preferred explanations based on evidence and fact, but rather that which concurs better with their preexisting political preferences.

I think this is deeply unfortunate. One would wish that if an education could do one thing, it would be to cause all of us to look at evidence and facts first, and ideological preferences second. Unfortunately, education is not THAT powerful. If someone is determined to believe something for ideological reasons (and many people are), education is usually no match. First comes the ideological opinion (for conservatives, the opinion is that government is almost always the problem), then comes a highly selective and biased rendition of facts to support the opinion.

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