David Brooks's columns always make me feel special and boost my self-confidence. Having a firmer grasp of the issues than a New York Times columnist must count for something, right?

Let's see if we can figure out today's puzzle where he writes:

The Democrats, besotted by the myth that the New Deal ended the Great Depression, have consistently overestimated their ability to turn the economy around. They regard the Greek crackup as a freakish, unlucky break, even though this sort of thing is a typical feature of a financial crisis. 

An impressive amount of errors in this paragraph. The common belief about the Great Depression is that aggregate demand created by World War Two pulled us out. It was a large fiscal stimulus. There were other policies like loose monetary policy with Roosevelt going off the gold standard; additional stimulus via WPA programs and post-war inflation which helped with deleveraging.

Economists like Dean Baker didn't overestimate the stimulus when he pointed to the drop in demand caused by the popping of the housing bubble. Krugman didn't overestimate the stimulus when pointing to CBO measures of the drop in demand, to name just a couple left-leaning economists.

Brooks may be characterizing the Obama administration or the Fed's view of Greece, but I don't think most economists find the Greek crackup surprising. They borrowed too much and now, after a financial crisis and economic slowdown are in real trouble. This isn't analogous to what's happening in the US, Spain, etc., so in the current context Greece is unique. Greece is a small economy but the reason it's getting so much play is because it's fate is tied to the Euro Zone.

Republicans, who should know better, also have an inflated sense of the power of government. In the presidential debates, Rick Perry, Mitt Romney and Jon Huntsman argue about which one oversaw the most job creation during his term as governor, as if governors have an immediate and definable impact on employers’ hiring decisions. 

Well the states and localities have cut a lot of jobs since the financial crisis, so governors had an impact.

The reality, of course, is that the economy is not a patient. It is a zillion, zillion interactions. Government is not a doctor. Most of the time, it is a clashing collective enterprise that is occasionally able to produce marginal change, for good and for ill. 

True up to a point. Not really here nor there. Seems like filler.

Democrats should be learning about the limits of social policy. As in the war on poverty, as in the effort to transform American schools, as in the effort to create prosperity in the developing world, it is really hard to turn around complex systems. 

Difficult but not impossible. Almost impossible if the opposition party is trying to sabotage the social policy in question. The original stimulus and the Fed's actions have helped immensely according to a number of respected sources including the aforementioned, bipartisan Congressional Budget Office.

Republicans should be reflecting on the fact that if a Republican president were in office right now, and even if he or she did sensible things, the economy would still be in the dumps. It would be Republicans losing “safe” Congressional seats in special elections.

Good luck with that.


The key to wisdom in these circumstances is to make the distinction between discrete good and systemic good. When you are in the grip of a big, complex mess, you have the power to do discrete good but probably not systemic good. 

Again, according to many experts who are respected in their fields, the stimulus and Fed actions since the crisis have done systemic good. The problem is that they weren't enough to make this fact unarguably obvious.

When you are the president in a financial crisis, you have the power to pave roads and hire teachers. That will reduce the suffering of real people who would otherwise be jobless. You have the power to streamline regulations and reduce tax burdens. That will induce a bit more hiring and activity. These are real contributions. 

Now you're talking, David! Well the first bit. The lack of regulatory oversight got us into this mess with the unopposed rise of the housing bubble and the rise of a shadow banking system which was vulnerable to a Diamond-Dybvig-type crisis.* There is little evidence that the reduction of tax burdens which are not directly tied to hiring have contributed to job creation. Companies are profitable and sitiing on cash but still not hiring. Tax cuts may help with the delveraging process which is something.

But you don’t have the power to transform the whole situation. Your discrete goods might contribute to an overall turnaround, but that turnaround will be beyond your comprehension and control. 

That turnaround will be "beyond your comprehension?" Whoa! Deep, man.

Over the past decades, Americans have developed an absurd view of the power of government. Many voters seem to think that government has the power to protect them from the consequences of their sins. Then they get angry and cynical when it turns out that it can’t. 

My view is that many voters don't understand how the government saved us from another Great Depression brought on by a crisis created by the sins of the political, media, and financial elite. They're angry because the economy is horrible. They're cyncial because they find out that working hard and playing by the rules often isn't rewarded.

-------------------------------
*Don't know what a Diamond-Dybvig-type crisis is? Neither did I until I read a recent speech by Krugman:

Banking crises are, after all, a theme running through much of modern economic history. Nobody should be able to call himself a macroeconomist unless he has a working knowledge of what went down in 1931, both in the United States and in Europe. And you don’t have to go back to the 1930s, either, as long as you’re willing to step outside the United States and core Europe. With the Scandinavian crises of the early 1990s, the Asian crises of the late 1990s, Argentina, and so on, there should have been ample reason to at least consider whether it might happen here

Nor are crises a case of something that can happen in practice, but not in theory. Diamond-Dybvig [1983] isn’t a perfect model of what we’ve just gone through, but it is a canonical model showing how bank runs can happen — and it's hardly obscure. Nobody should be looking at the stability of a financial system without thinking to himself, “Hmm. Is there a way this system could experience a Diamond-Dybvig-type crisis?”

It's true that Diamond-Dybvig tells us that deposit insurance ends the possibility of bad equilibria in which everyone tries to pull out of the banks, creating a self-fulfilling prophecy of financial collapse. And I’m afraid that the way many economists read the paper was as an essay in economic history, a description of what could go wrong in the bad old days. But this was a crude mistake. In fact, a proper reading of the D-D paper, far from making the profession comfortable about the stability of our system, should have raised major doubts.=

For the right question to ask after reading Diamond-Dybvig is, what constitutes a “bank” from the point of view of this model? And the answer is that it doesn’t have to be a big marble building with a row of tellers — that is, a depositor institution. As far as the model is concerned, a bank is any institution that borrows short-term and uses the funds to make longer-term, illiquid investments. And that, right there, should have led to the next question: what institutions do we have that fit this definition, but are not depository institutions, and are not covered by either deposit insurance or the regulations designed to limit the moral hazard that insurance creates?

If economists had followed that line of thought, they would have been led right to the risk posed by the rise of shadow banking. They would have seen that money-market funds and repos were functionally just like deposits, but without the safeguards. They would, in short, have realized that a 1931-type banking crisis was very much a real possibility in 21st-century America. But they didn’t.