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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.
Now, wasn't that fun? I can hardly wait for the next Ben Stein economic errors puzzle.
--Dean Baker
COMMENTS (18)
Glad to see you've taken over the Ben Stein watch. It's a tough job, but someone's got to do it.
Posted by: fusion | May 24, 2009 10:44 AM
War is peace. Freedom is slavery. Ben Stein is a genius.
Posted by: anonymous | May 24, 2009 11:01 AM
Dean,
Your "friends" at the Washington Post just ran for Memorial Day Sunday two articles more or less decrying Spain's Universal Jurisdiction and how it among other things is allowing them to try six of the Bush' Administrations top oficials particularly Lawyers for advocating torture. I am not a torture nor law reporter but it has been all over the internet that they have not used Universal Jurisdiction to indict the Bush 6 but have Spanish jurisdiction based on complaints by Spanish citizens who were tortured. It is one thing to have a difference of opinion another to deliberately distort the facts. Get back to WaPo, I hope you can do an expose on this, they are pushing the limits of propaganda.
SS
Posted by: SS | May 24, 2009 1:05 PM
Now, wasn't that fun?
Actually, it was. You're in very good form here, Dean.
Posted by: cemmcs | May 24, 2009 2:03 PM
So all you have to do is have a famous father (noted economist and writer Herbert Stein) and you can write in the NYT about a subject in which your only experience is your undergrad major?
(Ben Stein went on to Yale Law School).
Posted by: uptown | May 24, 2009 5:55 PM
But from Dean's puzzle, it appears that he didn't pay attention in his Intro classes, even if it was his major.
Posted by: PeonInChief | May 24, 2009 7:52 PM
Nice job Dean deconstructing Ben Stein. At least this time Stein spared us the usual gratuitous reference to his beloved Yale.
In a more functional, healthy universe, Dean would have the weekly NYT platform, and Stein would be the one trying to solve the puzzles.
Posted by: some guy in a cube | May 24, 2009 11:40 PM
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.
If the fed does, in fact, print too much money, then the basics of supply and demand are changed. The supply of money increases, and prices will therefore rise.
Posted by: Tim G. | May 25, 2009 3:43 PM
You were going great guns until number 6. Bondholders or speculators - it doesn't matter. Their legal rights were trampled. This will have only negative knock-on effects.
Posted by: Steve Goldstein | May 25, 2009 4:38 PM
RE: your quote: "There is no reason to believe that the bondholders would have received more money on their bonds if the government had not intervened."
First, you have it backwards. The Gov sponsored offer to the GM bondholders has more cash (Pending interest) in it then the bondholder's counteroffer ($0).
Second, there is evidence that the Govt intervention is determental to bondholders:
"Henderson essentially rejected the counteroffer, saying GM can't do it because it has been told by the Treasury Department that it can't give more than 10 percent equity to the bondholders"
http://www.delawareonline.com/article/20090505/BUSINESS/905050315/1003/RSS01
The rule of law issue has been overstated. The U.S. has not done anything against the law. You can argue that Tarp is a bad law, but it is the law.
I would ask Mr Goldstein to specify exactly which law he thinks was broken.
Cooercing GM into offering an unfair deal is not against the law. And if the Bankruptcy judge approves a stripping sale which leaves the GM with all of the liabilities and none of the assets, then it is still legal.
But don't pretend that the Govt has on net helped the GM bondholders. The evidence is that the bondholders are angry at the govenment. The explanation that they are just trying to get a better deal won't wash because it just is not very likely that the Govt position changes.
Posted by: AndrewDover | May 25, 2009 5:11 PM
As much as I despise Ben Stein, if you include the Federal Reserve's actions then the stimulus is in the trillions and has to be either withdrawn, paid for through debt (and hence future taxes) or inflated away (the inflation "tax" as it were). Withdrawing the stimulus - at least anytime soon - would likely deepen the recession. It seems more likely that the ultimate impact will be higher inflation...
Posted by: Paul Dickson | May 26, 2009 9:04 AM
That was fun!
Posted by: Peter K. | May 26, 2009 12:54 PM
Thirteen. That would be a Baker's dozen. Who could have known?
Posted by: Michael Brün | May 26, 2009 12:57 PM
Regarding the trade deficit, it's not likely that a falling dollar will have much effect since the effects of currency valuation are dwarfed by the impact of disparities in population density between the U.S. and badly overpopulated nations.
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today's recession is the answer.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?
At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.
Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, "Five Short Blasts"
Posted by: Pete Murphy | May 26, 2009 1:29 PM
Reading Sunday NYT Stein article, I was able to find only 7 gross mistatements. I feel like such a slacker and bow to superior analysis!
Posted by: Juli Niemann | May 26, 2009 4:47 PM
Looks like Stein's economic work is of the same quality as his Intelligent Design promotion.
Posted by: steve s | June 5, 2009 5:05 AM
this pete murphy guy is funny. people can't consume as many products as they want despite rising production output because of crowding?
considering that our economy is based on consumption, that's kinda weak. and also, maybe it's not "crowding" that is the cause of lower consumption but perhaps unequal distribution of wealth?
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