Polarized Economists

Imagine that one set of physicists said gravity would be weaker on the moon than on Earth, and another said it would be the same.

You probably can't, especially if you recall those long-ago pictures of astronauts moonwalking. In the realm of pure science, a little plain evidence goes a long way toward establishing what's true.

In the realm of economics, nothing is so clear. You don't have to imagine two sets of economists painting opposite pictures of reality. All you have to do is follow the controversy over President Obama's proposed economic-stimulus plan.

Obama can point to an impressive array of economists who agree that the economy needs a huge shot in the arm. About 200 of them, including a half-dozen Nobel laureates, joined a petition backing the American Recovery and Reinvestment Act of 2009 before it was passed by the House.

Endorsing a letter drafted by the liberal Center for American Progress Action Fund, the economists said the then $825 billion plan "proposes important investments that can start to overcome the nation's damaging loss of jobs" and would "put the United States back onto a sustainable long-term-growth path."

Still, this is economics, not something straightforward like astrophysics. The Cato Institute, a conservative think tank, came back with its own petition for economists. More than 200 of them, including three Nobel Prize winners, signed a letter challenging Obama's plan.

These economists said they "do not believe that more government spending is a way to improve economic performance." Instead, they said, "lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth."

Adam Smith published his seminal Wealth of Nations in 1776, and it's safe to say that economic debates have vexed American policymakers ever since. But perhaps not since the Great Depression has the nation faced so stark a choice about which set of economists to heed.

Gallup and the like do not poll economists, so data are hard to come by. Still, anecdotal evidence supports Obama's assertions that a large slice of economists agree on the need to take big, bold action to address the deepening recession.

As Obama put it Thursday in a speech to House Democrats, the alternative is that "an economy that is already in crisis will be faced with catastrophe. This is not my assessment. This is not Nancy Pelosi's assessment. This is the assessment of the best economists in the country. This is the assessment of some of the former advisers of some of the same folks who are making these criticisms right now."

Obama was alluding to support for major stimulus from economists such as Harvard's Martin Feldstein and Greg Mankiw; Feldstein was a top adviser to former President Ronald Reagan, and Mankiw served under former President George W. Bush. Both back big federal action, albeit with a different mix than the House Democrats' plan.

Feldstein, for instance, would scrap other infrastructure spending in favor of outlays to shore up a war-battered military. Mankiw has called for a permanent reduction in the payroll tax offset by a "substantial increase in the gasoline tax," phased in as the need for stimulus abates. "Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift," he wrote in his blog Thursday.

Some stimulus supporters continue to worry that the Obama plan may be too small - and that it will be made worse if centrists in Congress continue to chip away at it in the name of bipartisan compromise.

Paul Krugman, the Princeton professor, Nobel Prize winner and columnist, warned Friday in his blog that a group of senators were doing just that - seeking to cut $100 billion from the plan, "not because they have any coherent argument saying that the plan is $100 billion too big, not because they can identify $100 billion of stuff that should not be done, but in order to be able to say that they forced Obama to move to the center."

Krugman has long argued that a massive stimulus is crucial - perhaps $1.2 trillion or larger - not just to jump-start the economy, but also to overcome twin pitfalls today's economists have rarely seen: deflation, a general decline in prices, and what's known as a "liquidity trap," in which people and businesses sit on money rather than spend or invest, because they expect prices and asset values to decline. Japan suffered both problems during its "lost decade" in the 1990s.

At the other end of the spectrum, there are some economists who say they believe the government should do little or nothing - except for making permanent tax cuts - because of their belief that, even in extremis, the economy is best left to self-correct.

Edward C. Prescott, a University of Arizona economist who spends half the year as senior monetary adviser to the Federal Reserve Bank of Minneapolis, said in an interview last week that any intervention could be counterproductive.

"You can't spend your way to prosperity," said Prescott, also a Nobel Prize winner. "I think, basically, if people would tolerate it, the economy would pop right back."

How can so many highly trained, evidence-driven professionals fall so short of agreement? One answer is that economics relies on evidence that can take decades to unfold, is not easily subject to experimentation, and suffers from basic disagreements such as over what genuinely counts as a "public good."

Did President Franklin D. Roosevelt's massive public-works program help mitigate and end the Great Depression? Not according to Prescott, who contends that Roosevelt made it worse - but refuses to count as employed those Americans who worked for the Works Progress Administration, which hired millions of the jobless and built highways, bridges and public buildings still used today.

Many economists beg to differ, and they counter that one of Roosevelt's biggest failings was to heed advice to cut spending and raise taxes in 1937, causing joblessness to spike in a renewed downturn.

So, is economic thinking today truly as polarized as such disputes might suggest?

Not according to Mark Zandi, co-founder of Moody's Economy.com of West Chester. Proudly middle-of-the-road, Zandi was an adviser to Sen. John McCain during his candidacy last year and signed onto the Center for American Progress letter urging passage of the stimulus.

Zandi sees wide agreement on the need for stimulus, if not on the exact size and composition. He says the key remaining questions are over "multipliers" - how much bang you get for each type of buck spent, or not collected in taxes - and about the value of particular spending projects.

Zandi said the wide variety of smaller projects might be a plus, even if one inescapable drawback of fiscal stimulus is that what one person sees as a valuable long-term investment, another may deride as pork.

"We as policymakers don't really know what is going to work well," he said. "It's a bit counterintuitive, but this potpourri approach may be better than putting your eggs all in one basket."

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