Wonkblog on the Great Yellen Speech

February 19th, 2013 at 4:01 pm

Just wanted to point you towards a characteristically excellent Wonkblog  treatment of the Yellen speech I was all worked up about last week.

Here’s my challenge for Ezra K and the others over there.  Your wonkery is unsurpassed and clearly you get the importance of what Yellen is yellin’ about.  Me too.  Paul K too.  But I’m stuck on this note I got from a friend with whom I shared the Yellen speech who said, essentially, “great speech, too bad no one will listen to her.”

Assuming you agree, can you explain why that’s so, and much more importantly, what we should do about it?  Can somebody…anybody…Bueller??

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3 comments in reply to "Wonkblog on the Great Yellen Speech"

  1. Dale says:

    I very much enjoy your television appearances, blog, and tweets. Thank you for all you do!

    I have been pondering the same question you raised about the Yellin speech – but on a more general basis. Meaning, why doesn’t solid critical thinking, learning from past experiences, and authoritative information no longer influence policy-making?

    I have a theory and would love to know if your experiences working in the White House support it. My theory is that a very high percentage of federal politicians do not understand how the U.S. economy works and how government spending/taxes impact the economy. They probably think that federal income and spending works like a household or state government (as you know, it doesn’t). Or they fall into the Austrian or Keynes economic camps – neither of which is accurate in describing “the system and how it works” today. How many understand that the U.S. system does not have a solvency constraint but instead has an inflation constraint? And therefore we need to “step on the gas” when there’s a recession and “ease up on the gas” when the economy is overheating?

    Exhibit A: The Republicans. “We are broke.” “We need to have a balanced budget.” “The debt will be inherited by our children.” “Deficits are the nations most critical problem.” Of course, all of these statements are patently false.

    Exhibit B: The Democrats. “Under Clinton, we had a surplus.” “Under Clinton, we balanced the budget.” During the Clinton years, inflation was under control and so there was no urgent need to cut spending. I think very few people understand that Clinton’s surplus choked consumer spending and was partly responsible for the recession in 2000. President Obama is the only president in modern times to cut government jobs coming out of a recession. He has agreed to large spending cuts and looks like he’s willing to do more – exactly the wrong action for increasing the rate of recovery.

    My theory is our leaders don’t listen to Yellin or others because the information doesn’t fit with their understanding of the economic system – and therefore they tune it out. Even worse, this flawed understanding is the mental framework on which policy-making occurs. Compound this by all the people in the “sausage making” process who have different mental frameworks, more or less flawed, and you can see why there’s confusion and no one can agree on what makes sense. And why few choose to listen to a reasoned voice.

    The opposite side of my argument is that most politicians understand how the economic system works and therefore the crazy talk and wrong-headed actions are just politics. I think you need to be pretty cynical to adopt this view.

    Am I missing something?

    • Jared Bernstein says:

      I don’t think you’re missing much–it’s certainly true that politicians deeply misunderstand how economies work, especially at times like this. Ergo, the austerity push. But remember, they’ve got lots of economists telling them backwards stuff as well, and add that to the ideological tilt against gov’t and cut, cut, cut almost always wins.

      • Dale says:

        So we have people who are not qualified making economic decisions that affect over 300M people (more if you count the U.S. affect on the global economy). And they rely on economic advisors that may or may not have the right story either – potentially setting up a “blind leading the blind” in a high stakes game called “The U.S. Economy”. Wow!

        This is one risky position to be in – that politicians will fumble upon the right decision.