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Obama Derangement Syndrome (academic edition) July 12, 2010

Posted by Dwight and Lynn Furrow in Dwight Furrow's Posts, politics.
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This is what happens when you are so enamored of an ideology that all reason is suspended. Even well-trained, intelligent economists can succumb to ODS (Obama Derangement Syndrome.)

Economist Mark Thoma asks:

What has happened to Ed Prescott?:

Stephen Williamson: …Ed Prescott did pathbreaking work in the economics profession, and his Nobel prize is well-deserved. His work with Finn Kydland made macroeonomists more quantitatively disciplined, and serves as a benchmark for most of the work done in macro in the last 30 years, including New Keynesian economics, models with financial frictions, and incomplete markets models. However, I doubt that there were any people in the room yesterday who took Ed seriously. Ed’s key points were: 1. Monetary policy does not matter. 2. Financial factors are the symptoms, not the causes, of the recent downturn. 3. The recession was due to an Obama shock, i.e. labor supply fell because US workers anticipate higher future taxes. Bob Hall suggested that this would require a Frisch labor supply elasticity of about 27, which seems ridiculous. However, Ed stuck to his guns and thus seemed – well, ridiculous. As a basic framework, the real business cycle model is obviously useful – you can’t argue with a basic framework of preferences, endowments, technology, and optimal choice. I think we know by now, though, that financial factors have a lot to do with what we are measuring as TFP (total factor productivity). We certainly should not be listening to suggestions that central banks are irrelevant – these institutions can clearly reallocate resources in a big way when they want to.

Prescott isn’t alone in pushing the “Obama shock” idea. The claim is that the recession is due to a labor supply shock where workers collective decide to work less due to one government program or another, or some type of technology shock.

So let me get this straight. There are professional economists who think that, beginning in late 2007 when Obama was still a U.S. Senator, substantial numbers of people decided to stop working because they were afraid that in 2009he would become President and their taxes would increase?

I would guess a third-grader would know that is ridiculous.

First of all, I don’t know anyone who makes a decision about whether to work or not based on future tax rates. Secondly, if I did make my decisions to work based on future taxes and I thought taxes would go up, wouldn’t I work harder now to take advantage of the lower present rates and protect myself against future losses? Finally, one of the first things Obama did upon taking office was lower taxes. So wouldn’t these workers be scrambling to find jobs now to take advantage of the low tax rates while they last?

What is going on here is that right-wing economists have a lot invested in the “efficient markets hypothesis”—the view that free markets always get the allocation of resources and hence prices right. When the market doesn’t get it right they have to invent some ad hoc explanation of the anomaly that protects their pet theory.

Obama sends right-wing ideologues over the edge. Their brains are so addled they cannot come up with even a remotely plausible hypothesis.

Their intellectual dishonesty is mind-boggling.

book-section-book-cover2 Dwight Furrow is author of

Reviving the Left: The Need to Restore Liberal Values in America

For political commentary by Dwight Furrow visit: www.revivingliberalism.com

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