When one Ivy League academic economist
is in trouble, the others can be relied on to come to the rescue. After all,
one doesn’t want one’s profession to look silly, does one?
And Michael Boskin (econ prof. at
Stanford) tries to come to Rogoff’s rescue.
Boskin starts by saying that deficits
are justified in a recession, but not otherwise. Agreed. And doubtless every
clued up Keynsian would also agree.
In other words, given NO RECESSION, it
irresponsible for a government to fund itself to any great extent from
borrowing: what it should do is to fund its spending (or at least the large
majority of it spending) via tax. (I deal with the EXACT proportion that should
be funded via tax vis a vis borrowing in a non-recessionary environment in a
footnote below.)
Boskin then tells us that
notwithstanding Rogoff and Reinhart’s flawed research, there are other
researchers who have shown that high levels of debt depress economic growth. He
does not tell us who the latter researchers are, so that claim can be taken
with a pinch of salt.
But let’s assume these “researchers”
exist and that they’ve found the evidence that Boskin claims. Unfortunately their
discovery is quite possibly a complete non-discovery, and for reasons alluded
to by Boskin himself. It’s that governments sometimes borrow for totally
unjustified reasons!!!!
That is, politicians sometimes fund
government spending from borrowing PURELY SO AS to ingratiate themselves with
voters – because voters notice tax increases more acutely than they do the
effects of more government borrowing. And do doubt that irresponsible borrowing
impairs growth.
I.e Boskin’s argument (and indeed
R&R’s) is as illogical as saying that because driving with too much alcohol
in your blood is excessively dangerous, therefor driving PER SE is excessively
dangerous.
Interest rates.
Boskin also tries to bolster his
argument by citing evidence that high deficits and debts tend to lead to high
interest rates. That evidence may easily be correct. But the explanation is
very mundane. It’s an explanation with which advocates of Modern Monetary
Theory (MMT) tend to well versed, and it is as follows.
In contrast, in a non-recessionary
environment, the private sector DOES NOT HAVE a desire for more NFA. Thus the
only way a government will be able to get the private sector to hold more NFA (and
not spend it) will be to offer a decent reward to the private sector for doing
so. I.e. interest rates will tend to rise.
So . . . given that there is always a
proportion of the World’s governments who behave irresponsibly (i.e. borrow
heavily in a NON-RECESSIONARY environment – just when they shouldn’t), it’s no
big surprise that if you take a sufficiently large sample of governments thru
history, you’ll find an association between borrowing and interest rates.
Is Krugman “irresponsible”?
Boskin then ends by claiming that Krugaman
in this debate says repayment of debt can be left for 10-15 years and that
that, according to Boskin, is “beyond irresponsible”. Well what Krugman
ACTUALLY SAID was this:
“It was irresponsible to be running
deficits when the economy was at full employment..” (see around 3 minutes).
Well that’s exactly the point I made above wasn’t it?
Moreover, Krugman says over and over
again in this debate that the REAL PROBLEM will come in ten to twenty years’
time when health care and similar costs will rocket, and those costs, if they
are incurred, will have to be funded not by borrowing, but by extra tax. Now
that doesn’t sound to me like the words of someone who plays fast and loose
with borrowing, deficits or debts.
In other words far from being “beyond
irresponsible”, Krugman agrees with the point I made above, and with which
Boskin seems to agree, namely that substantial deficits are justified in a
recession, but not when the economy is at full employment.
As to whether Krugman really does say in
that debate that debts can be left for 10-15 years, he certainly did not say
that in the first 20 minutes. And if Boskin wants us to believe the remarks he
attributes to Krugman, then Boskin needs to tell us exactly where in the debate
Krugman says that.
Normal procedure by academics who
attribute words to others is to let readers know EXACTLY where they can find
those words. And I’m not wading thru the full 50 minutes of that debate just to
find a quote which Boskin says is there.
What’s wrong with long term debt?
And finally, even if Krugman does say
that current debt levels can be left in place for 15 years, what if it? As
already pointed out, assuming the private sector WANTS TO HOLD a bigger stock
of NFA for the next 15 years than was the case 20 or 30 years ago, so what? If
that’s what the private sector wants, it won’t charge any significant interest
for holding that debt. So where’s the problem?
Conversely, if the private sector goes
into irrational exuberance mode in three years’ time, far from it being
irresponsible to leave existing debts in place for 10-15 years, it would be
irresponsible to desist from reducing those debts in three or four years’ time.
In short, it is nonsense to try to
specify in advance how big debts should be any given number of years in the
future: the size and pace of increase or decrease in those debts will depend on
what the private sector is doing at various points in the future – that is
whether the private sector is in subdued mode or irrational exuberance mode.
Footnote: why a significant deficit is
needed even at full employment.
Assuming a country aims for the standard
2% inflation and actually achieves that, then the monetary base and national
debt will decline in real terms at 2% a year. Assuming (for the sake of
simplicity) that those are to remain constant relative to GDP, then they will
need to be constantly topped up. And that can only be done via a deficit.
To illustrate with a back of the
envelope calculation, if the debt and base are to remain at 50% of GDP, and GDP
is constant, then the deficit would need to be 2% x 50% of GDP, i.e. 1% of GDP.
But that of course leaves out economic
growth. If growth averages say 2% a year, one would need yet more deficit
(another 1% of GDP worth). So total deficit needed on the above assumptions
would be equal to 2% of GDP.
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