Friday, 30 March 2018

The US national debt.

John Taylor  (of “Taylor Rule” fame) and three other economists have an article in the Washington Post in which they complain about the size of the US national debt.

One of their main concerns is the simple minded point that the debt consists of BIG NUMBERS: they claim it will reach $20 trillion in five years time. Well the US economy is a BIG ECONOMY, so its national debt is quite likely to be a big number.


I have some equally dramatic news: the total money supply for the US is a big number too! Do we conclude that hyperinflation will break out tomorow?

A better measure of the size of the debt is the debt/GDP ratio, which in the case of the US is not even half where it was in the case of the UK just after WWII. That large UK debt did not prove a big problem, even though the UK was near bankrupt at the time and not the sort of debtor that you’d think any sensible creditor would want to lend to.

Taylor & Co are actually right to be concerned about the size and debt and deficit, but their arguments are short of brilliant, to put it politely.

For example they completely fail to mention the most important point of all here, which is that deficits (and thus a rising debt) are fully justified in recessions, as explained by Keynes almost a century ago, but there is much less justification for large deficits when the economy is at or near capacity, which is where the US economy is right now. (Paul Krugman made the latter point, but evidently Taylor & Co don’t get it.)

Next, Taylor & Co say “To address the debt problem, Congress must reform and restrain the growth of entitlement programs…”.

Well now, if it’s essential to cut down on “entitlements” (aka social security), how come numerous countries round the world, particularly in Europe, devote a much larger proportion of their GDP to social security than the US, but nevertheless manage to keep their deficits under control? Well the explanation is desperately simple: the latter  countries collect enough in tax to more or less cover the cost of their social security system!

It’s very easy in principle to have your country devote anything between 0% and 50% of its GDP to social security: just collect enough tax to foot the bill.

Moreover, the question as to how big a country’s social security system should be is a clearly POLITICAL point: it is thus not a point on which professional economists like Taylor ought to express an opinion while wearing their economist hat. I’m not interested in Taylor’s personal political views, and doubtless he is not interested in mine.

I’m giving his article only five out of ten.

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