Justin Fox, editorial director of Harvard Business Review, is fast becoming one of the writers I enjoy most. Apart from being a very smart guy, Justin is a genial and constructive liberal who is open to pro-market insights. And he’s also done wonders with HBR, a magazine that’s become a must-read. Recently, he wrote a post on remarks by Intel CEO Paul Otellini:

“I think they’re flummoxed by their experiment in Keynesian economics not working,” Otellini said of Washington Democrats. Um, really? The experiment in Keynesian economics undertaken in the U.S. over the past couple of years — and it was well under way in 2008, before Obama was elected — has almost certainly worked in the sense of preventing even bigger job losses, as Dylan Matthews explained earlier today. It just hasn’t worked miracles.

But that’s not quite what Dylan explained. Rather, he linked to the CBO’s latest estimates of the impact of the stimulus, which, as Peter Suderman noted in March, aren’t an independent test:

In response to a question at a speech earlier this month, CBO director Doug Elmendorf laid out the CBO’s methodology pretty clearly, describing the his office’s frequent, legally-required stimulus reports as “repeating the same exercises we [already] did rather than an independent check on it.” CBO tweaks its models on the input side, he says—adjusting, for example, how much money the government has spent. But the results the CBO reports—like the job creation figures—are simply a function of the inputs it records, not real-world counts.
Following up, the questioner asks for clarification: “If the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis, right?” Elmendorf’s response? “That’s right. That’s right.”

This shouldn’t imply that the stimulus hasn’t improved short-term GDP performance at the margin. It just tells us that the CBO’s analysis isn’t quite as useful as Justin suggests.

Fox then goes on to highlight other remarks by Otellini that he found more sensible:

But some of Otellini’s other, less of-the-moment arguments made sense. The U.S. corporate income tax rate — at 39 percent, it’s the second highest in the developed world after Japan’s, and Japan’s may be about to drop – is counterproductively high. It’s probably the only tax in the U.S. these days that’s conceivably on the wrong side of the Laffer curve; if we lowered the rate, we might take in more money. Our immigration laws are ridiculously unfriendly to talented workers from overseas (actually, that was Carly Fiorina’s argument at the same event, but I’m sure Otellini would agree). As a nation, we sometimes seem to be actively discouraging R&D and locating manufacturing facilities here. But none of that’s new to the Obama presidency, or even to the 2000s. I think it’s been going on since at least the 1980s, when Washington policymakers and corporate chieftains began to fall under the thrall of financial markets and the financial sector (book recommendation of the day: Gerald Davis’s “Managed by Markets: How Finance Re-Shaped America).” Got a plan for what to do about that, Mr. Otellini?

I’m sympathetic to everything Justin says up until the end. Justin has written a very well-regarded book — The Myth of the Rational Market — so I don’t disagree with him lightly. Many of the pathologies that plague the financial markets do have their origins in the 1980s, as Nicole Gelinas argues in her wonderful book After the Fall.

But the capital markets were also a constructive force of change, a case Jim Manzi made in “Factory Man” in National Review last year. Jim begins his article by describing his experiences “as one small part of a self-conscious movement to rescue American manufacturing from its projected obsolescence.” After deriding New York finance-types, he came to see them as allies:

As a general rule, people resist change in business. There are good reasons for this: It is easy to theorize about improvements, but the law of unintended consequences applies to all complicated organizations, not just governments. But there are also less-good reasons for it: predominantly, that change is hard, human beings are lazy, and it’s hard to get incentives aligned properly so that the necessary people are willing to act.
The power of capital markets to force change was revealed to me when a large manufacturing company where I was consulting was confronted by a leveraged-buyout offer. The financial wolf was at the door, and I was placed on a small team tasked with figuring out the changes that would have to be made to meet the new financial targets and avoid losing the company to the raiders. Suddenly, in the face of crisis, much of the previous resistance melted away. In the end, the company did pretty much what the buyout group would have done. It was sloppy and painful, but the company emerged healthier and growing. It turns out those finance guys in New York were doing something important to prevent the decline of American manufacturing into mediocrity and irrelevance after all.
Repeated application of the process of financial pressure followed by operational response has paid off. The U.S. has a very productive manufacturing sector. It just looks much different from what most of us imagined it would be. One of the most important differences is that it doesn’t employ many more people than it did in 1947.

That’s a long excerpt, but an important one. “Financial pressure followed by operational response” is an important idea to keep in mind, as it is one of the key reasons for public sector underperformance in many domains. Not every financial innovation of the post-1980 era has been beneficial, as Gelinas and Amar Bhidé have explained. (I believe Justin edited Amar’s piece.) But the financial sector also made great contributions in that era.