Sunday, 24 July 2011

Robert Schiller can’t distinguish politics from economics.


Americans are not too good at distinguishing politics from economics. This article by Robert Schiller in the New York Times is a classic example.

This paragraph is particularly poor:

“Over the long haul, we should engage in balanced support of the economy, find worthwhile jobs for the unemployed and not inject stimulus for its own sake. That means we need tax increases matched by higher expenditures on public goods. Of course, both ideas aren’t very popular right now — but they should be. Granted, they won’t balance the budget immediately; trying to do so would damage the economy. Instead, we should plan to restore budget balance eventually, with matching additions on both sides of the ledger.”

First, who ever said that stimulus was implemented “for its own sake”? Stimulus is effected for the RESULTS it hopefully brings: increased employment, etc. About 95% of the population knows this. How come economics professors like Robert Schiller don’t?

Second, he says he wants “tax increases matched by higher expenditures on public goods”. Well pretty much the only effect there will be to bring a straightforward expansion in the public sector at the expense of the private sector. It will do nothing for job creation. Moreover the question as to what the size of the public sector should be is a PURELY POLITICAL QUESTION. What’s Robert Schiller, wearing his economist’s hat doing expressing a view on this subject?

Third he claims “we should plan to restore budget balance eventually”. Complete nonsense. First, an expanding economy requires an expanding money supply, and an expansion in the monetary base can come from only one source: a deficit. Second, on the over-simple but not totally unrealistic assumption that the national debt remains more or less constant as a proportion of GDP, that expanding debt can, again, come from only one source: a deficit. Third, given the target rate of inflation of 2% or there abouts, both the national debt and monetary base will shrink at about 2% a year unless topped up from somewhere. That topping up, again, can only come from a deficit. That’s quite a lot of deficit.

Which explains why, in case Schiller and his fellow economically illiterate professors of economics hadn’t noticed, most countries for the last century or two have been running more or less constant deficits.

Here is a list of 150 economists who quite clearly cannot distinguish between their own political views and economics, in that they argue for a reduced public sector as some sort of solution for America’s problems.

If they think that a reduced public sector is any sort of solution, they need to explain why Sweden has a standard of living comparable to the U.S., while having its debt and deficit under far better control than the U.S., plus public spending as a proportion of GDP way above that of the U.S.

And before some politically motivated economist accuses me of advocating a bigger public sector, I am not.


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