Monday, July 18, 2011

Blaming it on the Economists

So what was the New York Times supposed to say? Economists agree that the Republican Party is acting like a bunch of lunatics? No, you can’t do that. So they came up with an analysis piece that says that there is economic support for all sides in the debt ceiling debate. It’s like climate change: you have some scientists over here who say we’re in trouble, and over there are others who say not to worry. You aren’t allowed to tell the public who to believe, and you certainly can’t say that a party led by climate deniers is in the hands of idiots.

Now it is true that, if the question is whether, to reach a particular deficit target, it is better, ceteris paribus, to cut spending or raise taxes, economic research won't give you a clear signal—but that’s not the question.

The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.

The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek (or Ayn Rand) knows the score, you would find this dubious on its face.

The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.

Incidentally, you can tell the author of the article has no clue about the topic when he writes, “The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.” Aside from its larger conceptual problems, this sentence confuses stock and flow. Fiscal tightening can cut the deficit, but no one is talking about the budget surplus that would be required to pay off existing debts. “Paying back the debt” is the sort of thing that only the economically uninformed say, since budget surpluses are extremely rare, and debts are hardly ever reduced. You grow or inflate your way out of a debt overload, or you get whomped.


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