Can You Find Twelve Errors in Ben Stein's Column?
People who get upset over the appearance of Ben Stein's columns in the Sunday NYT simply fail to understand their purpose. They are not to be treated as serious analysis of the economy or economic issues.
Rather, Stein's columns are meant to be treated like a puzzle. Readers are supposed to find all the various inaccurate statements and outright errors that appear in each column. They are like the game where two pictures are juxtaposed and the reader is supposed to find the twelve subtle differences between the pictures.
Let's see how many of the errors we can find in today's piece, which is supposedly reflecting backward from 2089 on the collapse of the U.S. economy:
1) The piece begins by asserting that the United States was "starting from an extremely strong economic and fiscal position in the year 2000."
Actually, those of us who can remember back to 2000 will recall that the economy was driven by a $10 trillion stock bubble that began to burst in March of 2000. The loss of this bubble wealth sent consumption downward. It also pushed down investment, which at least in the tech sector was directly financed by the crazy stock valuations of this era.
Furthermore, the country had a badly over-valued dollar which was leading to a large and growing trade deficit. Every year the deficit was reaching new records as a share of GDP.
So the assertion that the country was starting from a strong economic position is completely untrue.
2) Stein asserts that there was a: "public shaming of the leaders of the banking sector in front of Congressional committees — a sort of Great Cultural Revolution in America." In fact, most of the bankers responsible for promoting the housing bubble continue to be incredibly wealthy. While many no doubt found their appearances before Congress to be unpleasant (perhaps a bit like a TV reality show), they undoubtedly view it as a very small price to pay in order to keep their tens and hundreds of millions of wealth.
Furthermore, since Congress went ahead and gave the banks hundreds of billions of taxpayer dollars before and after these appearances, they were extremely well-paid for their troubles. The victims of the Cultural Revolution in China would have been delighted to be given a similar option. In fact, they probably would have preferred this option even if they did not have to fear persecution in the Cultural Revolution.
3) Stein asserts that: "there was a spectacular constriction of credit, despite the flooding of the economy with dollars." Actually people are borrowing plenty of money to refinance their mortgages. There has been a plunge in demand for new loans, but that is what happens in a recession.
The constriction of credit has been on the demand side. Households that have lost more than $6 trillion housing wealth are less able to borrow since they have no equity. Also, businesses that have seen their markets collapse due to the falloff in consumption are less anxious to borrow to expand.
4) Stein asserts that the constriction of lending might be due to fear of further public shaming by bank executives. There is no evidence anywhere that any bank is not making loans because the CEOs are worried that they will subsequently be shamed by Congress.
5) Stein asserts that banks' reluctance to make loans because of a fear of public shaming will lead to a long recession. In fact, the major cause of recession is the loss of the bubble wealth that had fueled the consumption boom of the last decade.
6) Stein asserts that: "the confidence that American lenders had in the rule of law, probably one of the main pillars of the economy, was demolished by government actions that invalidated some lenders’ long-held legal rights in favor of ad hoc attempts to please various political constituencies."
This presumably refers to the auto industry bailouts in which speculators complained because the government did not give them as much money as they wanted. In fact, there is no issue of the rule of law here. The government decided to put money into G.M. and Chrysler in order to benefit the workers and the region. It has no obligation to also give additional money to bondholders.There is no reason to believe that the bondholders would have received more money on their bonds if the government had not intervened.
Those who care about the rule of law would not be upset by the government's actions in this case. Of course those who like to see money redistributed upward to wealthy speculators would be upset.
7 and 8) Stein claims that: "confidence was further eroded as the government embarked upon unprecedented “stimulus” moves costing trillions of dollars in the aggregate."
This one contains two errors. The size of the stimulus package was approximately $700 billion, once we remove the one-year fix to the Alternative Minimum Tax which is put in place every year. $700 billion is not "trillions."
The second error is the claim that confidence was eroded by the stimulus. Is there any business that canceled plans for new investment or adding workers because the government is repairing roads and helping state and local governments meet their budget shortfalls? That seems pretty unlikely.
9 and 10) Stein asserts that: "it is not clear upon what evidence the stimulus packages were based, because no one had ever been able to prove that taking money from taxpayers, and having the government spend it instead, would meaningfully enlarge the scale of economic activity."
Of course the theory of the stimulus is very clear to those who got through a first year intro econ class. The economy needs demand in a downturn. This can come from any source, but since consumers are unlikely to spend following the loss of trillions of dollars of stock and housing wealth and firms are unlikely to invest when demand is weak, the government is the only sector that can pick up the slack. This is a very clear theory that dates from Keynes.
Second, the government is not "taking money from taxpayers." The stimulus cuts taxes, it does not increase them. That is why it is leading to a larger deficit.
11) Stein asserts that: "the flood of liquidity into the economy had translated into unnerving inflation as sellers constantly anticipated higher prices, while labor demand remained soft as buyers resisted buying, especially durable goods."
Businesses don't raise prices when they see unchanged costs and weak demand. In econ 101 students are taught about supply and demand. If the basics of supply and demand are unchanged in a weak economy, any business that raises its prices because it thinks the Fed has printed too much money will soon find itself out of business. Stein can do stock pickers a great public service if he will identify any such business in future columns.
12) Stein asserts that: "environmental and other regulation made it impossible for executives to compete with the industry of countries that ignored such issues as the environment."
In fact, European countries already have stricter regulations in almost every area than any that are being considered by the Obama administration and the EU enjoys a trade surplus, so they obviously have no problems competing.
13) (Stein's bonus mistake, he only promised 12.) Stein concludes: "Foreign holders sold as quickly as they could. The dollar collapsed, and the yuan replaced it as a global reserve currency. The resulting hyperinflation in the United States and the accompanying collapse of the republic are by now known to every schoolchild..."
Actually, if China and other foreign countries stopped buying dollars their export market in the United States would collapse. Similarly, as the dollar fell, U.S. goods would suddenly become hyper-competitive in world markets, leading to a huge surge in exports. So, rather than leading to a collapse of the U.S. economy, a plunge in the dollar would lead to an explosion of manufacturing in the United States and would likely be the basis for a new era of prosperity.
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