Skip to comments.Battle of the econ pundits
Posted on 04/25/2013 5:36:31 AM PDT by 1rudeboy
Policymakers need a dose of humility when analyzing the relation between debt and growth
Water boils at 212 degrees, a fact that everyone learns in grammar-school science class if not earlier at home. There is a minor complication: Water boils at different temperatures depending on the atmospheric pressure; its boiling point is lower at higher elevations and vice versa. But once you know the altitude, a precise boiling point can be quickly determined by anyone. There’s an app for that.
Economics isn’t science, at least not like chemistry or physics. It’s hard to run controlled economic experiments. The behavior of people is a lot tougher to analyze and predict than that of water molecules; linkages and casual relationships aren’t so clear-cut. And efforts to apply scientific methods to the world of economics and finance can yield disappointing results, as all those science-minded analysts who worked on Wall Street during the financial crisis would (or at least should) attest.
So it really should be no surprise that the relationship between two important economic variables, debt and economic growth, is a knotty one. A 2010 study linking higher government debt to slower growth — one cited frequently by debt hawks in the U.S. and Europe — is now under dispute and its authors, Carmen Reinhart and Kenneth Rogoff, have been subjected to withering invective. The Harvard duo’s original research found that economic growth collapses at debt-to-GDP levels above 90 percent. But a trio of University of Massachusetts academics now counter that Reinhart and Rogoff are “wrong” and that their work is flawed by “selective exclusion of available data and unconventional weighting of summary statistics that inaccurately represent the relationship between public debt and GDP growth.” Oh, and the Reinhart-Rogoff paper also has an embarrassing Excel-spreadsheet error.
Reinhart and Rogoff cop to some of these charges and deny others, while maintaining that their research continues to show historical episodes of higher debt associated with a “quite large” cumulative impact on growth. But which way does the causality run? Does the linkage between debt and growth vary depending on other economic variables such as a nation’s ability to borrow in its own currency? And what if that debt fuels higher levels of government spending? Good questions — but politicians and pundits looking to quickly turn academic research into talking points aren’t likely to ask them.
And don’t think for a second that policymakers or academics wishing to become “policy entrepreneurs” in the mold of John Maynard Keynes have learned any humility or nuance. In a Financial Times op-ed laying out their case against Reinhart and Rogoff, two of those UMass economists, Robert Pollin and Michael Ash, make this categorical and unsubstantiated claim: “Government deficit spending, pursued judiciously, remains the single most effective tool we have to fight against mass unemployment caused by severe recessions.”
Really? Many economists would argue that monetary policy provides the better tools for dealing with economic shocks. And not to create a simplistic false equivalence, but it is worth noting that there are conflicting studies on the impact and efficacy of fiscal stimulus and a wide range of estimates for spending and tax-cut multipliers.
For instance: The Congressional Budget Office estimates that in 2012, the American Recovery and Reinvestment Act raised real GDP by between 0.1 percent and 0.8 percent and increased the number of people employed by between 0.2 million and 1.1 million: kind of a wide range. Also, as economist Russell Roberts of the Hoover Institution frequently says, good luck teasing out the precise, multiyear impact of an $800 billion stimulus package on a $16 trillion economy when at the same time the Federal Reserve is engaging in experimental monetary policy, Congress is implementing massive regulatory overhauls of the finance and health sectors, and revolutionary innovations in technology are reshaping U.S. energy production.
One more thing: When the econ pundits are all done slicing and dicing Reinhart and Rogoff, maybe they can turn their analytical gaze to fave liberal economists Peter Diamond, Thomas Piketty, and Emmanuel Saez. Their research — typically presented without counter by the media — into inequality (it is skyrocketing) and taxation (it should skyrocket) forms much of the support for progressive claims that America’s three-decade pro-market tilt has failed.
In short, life is complicated, which is why markets often succeed spectacularly where top-down planning fails miserably. In his Nobel speech, Friedrich Hayek paraphrased 16th-century Spanish scholars who taught that something’s “price depended on so many particular circumstances that it could never be known to man but was known only to God.” And the proper response by policymakers to this reality is neither policy paralysis nor knee-jerk calls for Son of Stimulus nor demands for an immediate balanced budget — but caution and humility. That’s the big lesson to be drawn from the Reinhart-Rogoff imbroglio. That, and to always double-check your math.
— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.
Yet every day we all set prices for things we buy and sell. imho there actually are things we can verify with economic trends --and ideology fails while respect for reality works well.
History, of course, teaches us that Pollin and Ash are wrong. we only need to look at the total failure of the recent "stimulus" to know this to be true. Unfortunately, this is what is being taught in our institutions of higher learning today, and Paul Krugman is held up as a maven who must always be believed, no matter what.
We'll get what we deserve.
But the continual exercise of this practice over an extended period of time eventually builds disequilibria that cannot be ignored. Even for a country such as the U.S. that benefits from control of its central bank and the status of its currency as the global reserve asset government debt can reach a point whereby the assumption of incremental debt to “stimulate” the economy has a greater negative effect on future output then it has a positive effect on current output. In other words, you are simply foregoing future growth (and substantially more of it) in order to prop up current employment and consumption.
If the U.S. has not reached this point it is rapidly approaching it. Rather than papering over our structural economic problems with artificial stimuli, almost as a junkie postpones his need to kick with every additional dose of drugs, we need to focus on how to increase real economic output. That is, goods and services that consumer across the globe will purchase at the offered price.
I imagine Pollin and Ash would agree with this in principal. But they would have no idea how to accomplish the objective other than by way of further federal government stimulus. They refuse to accept that slow U.S. growth is in large part due to excess regulation and the burden placed on economic actors by these regulations and our Byzantine tax system. We meed to reform these things and allow the price mechanism and the unfettered allocation of capital to productive uses to breath free again before faster growth can occur. Another idiotic stimulus package will only delay the necessary reforms and add to the burden of future generations who will have to get on with the tough job of domestic economic renovation.
What money that the government can borrow is not invested in productive enterprise? There isn't a penny in a bank anywhere that is not invested each and every night.
Government borrowing just reduces the amount of funds available for productive investment and dumps them down a non-productive rathole. A government job creates no additional value -- it is an economic deadweight on the economy.
DING DING DING DING DING DING DING DING! Well, almost. In fact, much of money the government borrows isn't in productive enterprise, but would be if the government hadn't borrowed it.
Fundamentally, when a business borrows $100,000 and agrees to pay back $110,000 at the end of the year, it's doing so because it expects that use of that $100,000 during the year will enhance its productivity by more than $10,000. Business investing can only be successful if the money goes toward productive enterprise. Government borrowing gobbles up funds that would otherwise be spent on productive investments.
It's actually not all that hard, if one is more interested in predicting how people will react to policies than in justifying the policies one wants. The simple principles, rules, and models taught in Economics 101 work very well for predicting people's behavior. Many more advanced models which try to explain why those rules don't apply in various situations are often less accurate than the simple models for the simple reason that the rules continue apply even when they proponents of those "more advanced models" don't want them to.
Interestingly, the more advanced models have even more trouble predicting future trends than present behavior, but even simplistic evaluation of incentives often allows accurate prediction of trends even for things which are hard to directly measure. For example, one needn't measure how many people do X today to know that a policy that makes X profitable is apt to massively increase the number of people who do it. If the cost of the policy is proportional to the number of people who do X, any cost predictions which are based upon the number of people doing X today are going to be far less accurate--even if the number of people doing X is known precisely--than predictions which figure the costs will grow without bound unless or until the policy is rolled back.
Technically, they're wrong and always will be. Government is peopled by market failures. Government employees are people that couldn't cut it in the market economy. They're rent seekers, in the economic meaning of the word. Their skills are obsesquiousness and genuflection.
If "government" could better invest funds than individuals, we'd be speaking Russian or Chinese today.
A great deal of assets held by banks are invested in fed funds, Treasury bills, tax exempt government bonds, agency securities and other government securities. Quite the opposite of an “investment” by your definition. During periods of slow or negative economic growth, the percentage of bank assets held in these sorts of assets increase as there is slack business and consumer loan demand and banks prefer low-risk investments during times of economic stress.
If one believes that economic recessions are caused by inadequate aggregate demand, having the government create “artificial” demand to fill the void left by consumers and businesses may make sense under certain circumstances. This is not a controversial opinion among economists, even free market conservative economists. Heck, even Hayek accepted this premise, although only for the short term.
On the other hand, Keynes assumed that these counter-cyclial fiscal policies would be used in the context of a government in structural fiscal balance. Moreover, he argued that the government should run a surplus during flush times. Clearly, these conditions do not exist today. If any economists suggests that the problem with the U.S. economy is one of insufficient demand or inadequate fiscal stimulus, I strongly suggest they seek immediate psychiatric care. Are you listening Herr Krugman?
Quite true, but it doesn't change my point. All those investments in government crowd out private investment. I meant to emphasize that money is not lying idle as I'd thought you were implying.
Government spending certainly helps the new government hire. And that new government hire certainly helps the economy of the town he lives in. And the state where he resides definitely appreciates the new tax revenue.
None of that, however, should be interpreted to mean that increased government spending has helped the economy. Government spending is -- though sometimes necessary -- always a drain on economic growth.