April 20, 2013
There are some things that we can learn from economics, just as there are things we learn from astronomy. The vast majority of people in the United States believe that the earth goes around the sun because of what astronomers tell us. After all, we all see the opposite every day in the sky.
For this reason, when a major newspaper tells us that when it comes to economics it is all just so confusing (except for what they insist you believe), it is doing a serious disservice. While some aspects of economics are difficult, many of the fundamentals, such as why we have a prolonged economic slump and millions of people are unemployed, are not. (Lack of demand in the economy, if you have to ask.)
In this vein, the Post article, “It’s an old numbers game. What if they’re wrong?” seems almost like a deliberate effort to confuse readers into thinking there is nothing that can be done about the economy except to have the government reduce deficits.
The second paragraph tells people:
“How much debt can the nation manage? The United States was at about 102 percent in 2012, with the amount of debt held by the public closer to 75 percent. To some, that signals danger. Others say we could handle even more. In certain wonky circles, the debate over what ratio is sustainable is almost endless. And yet, serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come.”
This is almost completely wrong. For example, many economists would not even look to the ratio of debt to GDP as being an important variable since debt can be quickly reduced by selling assets. If a high debt level is some horrible burden on the economy, then the United States could just sell several trillions of dollars of assets and immediately lower its burden. People who understand balance sheets know this.
Also, the price of debt fluctuates with interest rates. Debt issued at low interest rates can be repurchased at steep discounts when interest rates rise. This means that if debt-to-GDP ratios are what matters, we will have a great opportunity to quickly reduce this ratio when interest rates rise later in the decade as is widely predicted. This is a reason that serious people tend to focus on the interest burden, which is near a post-World War II low.
The last claim that:
“serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come,”
can be called an outright lie. Serious people look at how overall levels of spending and taxes will affect growth and jobs in the near future. They also look at how spending on various types of investment (infrastructure, education, and research) will affect the economy in decades ahead. They may look at what the numbers for 2018 and beyond show for the direction of debt to GDP, but since they know both that our predictions for this period are subject to enormous error and that several new budgets will be passed in the interim, they are unlikely to pay too much attention to the numbers that we write down in 2013 for these years.
The piece also spreads bizarre confusion in its discussion of the U.S. trade deficit with China. It is of course true that much of the price of goods imported from China is attributable to inputs from elsewhere, including the United States; this is hardly news. Economists have recognized this problem for decades. The OECD recently compiled a useful data set showing trade balances that measure the value-added being exported and imported between countries. In the case of the U.S. and China, the OECD data show a deficit that is roughly one-third smaller than the standard measure, but still quite large.
The piece should have noted this OECD data rather implying that we have to just throw up our hands because we can’t know anything. That may be true at the Washington Post, but the rest of us can use data to make judgments about policy.
Comments