The Dog Days

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by Thomas F. Cooley

Why framing the wrong problem killed the summer of recovery.

There is an epic and epically unpleasant debate that has taken place for much of the last year about stimulus and austerity. On one side are the born-again Keynesians who believe that our recovery is faltering because we simply haven't spent enough to jolt the economy into recovery. This lot includes the Obama administration and some of its harshest critics. They point to the experience of the 1930s when, after signs of recovering, the economy slipped back into recession.

Read the full opinion editorial on Forbes.com

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(I'm a class of 2008 Stern alumni who now works as a computer programmer in genetics/biology)

If you strip this editorial down to its two main points, you get the following:

1. Recession spending is a bad way to stimulate the economy because it creates uncertainty and recession spending is bad.

2. Increasing the capital gains tax, ending the Bush tax cuts, or most other forms of tax increase will help the economy by increasing investment incentive.


Cooley is arbitrarily saying that investment spending is more important to the economy than consumer spending/employment. The problem is that studies have been done on the effect various types of economic stimuli have, ranging from food stamps and increasing unemployment benefits to income/capital gains tax cuts, etc.

Surprise, surprise - Spending on social welfare programs is far more effective than tax cuts in benefit to the economy.(Mark Zandi from Moody's Economy.com) And this should be obvious; giving help to the consumers who will go out and spend the money will stimulate the economy far more than tax cuts aimed at businesses or the wealthy.

Also - where is the evidence that a lack of investing is even a problem? The market has been improving steadily for some time now. If they are unwilling to put people to work due to uncertainty about future tax policy, the government can instead. The same study I cited above indicates that infrastructure spending is a very effective form of stimulus.

It is absolutely reprehensible that people like Thomas Cooley continue to perpetuate the myth that we need to coddle our country's investors and businesses above everything else. This mindset is extremely harmful; it has no evidence aside from blind speculation - I've even heard his point on the 1937 recession from none other than Glenn Beck himself. The reasoning? X happened before Y, therefore X caused Y. It's child-like logic with no goal other than trying to sell their position to people who won't know any better.

It's a travesty.

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The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

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Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

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