No one expects great insights from the people who write on economic issues on the Post’s opinion pages, but Fareed Zakaria’s latest piece is an extraordinary exercise in confusion. Zakaria is anxious to tell us that tax cuts “don’t work,” but he never tells readers what he means by “work.”
The story on tax cuts is pretty simple: people either spend the money or they save it. Whether or not tax cuts “work” will depend on the extent to which they do one or the other and the extent to which we want them to do one or the other. The latter point is key.
When the economy is very weak, like the present (also in 2001-2003), then we would like to see additional demand. If we give people big tax cuts and they then spend the money, then this is exactly what we would want to see. The increased consumption provides a boost to demand and leads to more growth and jobs.
In the current downturn, an analysis by my colleague David Rosnick indicates that 50-70 cents of each dollar of tax cuts were spent. Zakaria’s piece seems to imply that spending was close to zero. This claim would seem absurd on its face given that many households are living on the edge and would not have the option to save their tax cuts even if they wanted to.
Of course, this doesn’t mean tax cuts are an especially effective form of stimulus. If the government were to spend money on teachers, roads or in other areas, then 100 cents on the dollar are directly added to the economy. Most of what is paid out is respent. So the story is that tax cuts “work” in this context, just not very well.
The other question is whether tax cuts “work” when the economy is not in a downturn. Both the Reagan and Bush tax cuts were sold as supply-side tax cuts. They would give people more incentive to work and invest. For the latter to be the case we would want people to save their tax cuts. However, it seems that people generally spend their tax cuts.
It would be very difficult to make the case that either the Reagan or Bush tax cuts worked as a spur to investment. Investment fell sharply as a share of GDP in the 80s from the 70s and in the 00s from the 90s. While there were other factors that can explain both declines, clearly the tax cuts could not have had much of a positive effect on investment given its fall in both cases.
It is not clear how Governor Romney is pitching his tax cut. His explanation seems to vary by the day and the audience. If Zakaria wanted to write a piece that was useful for readers he might have tried to clarify what he meant by “work,” unfortunately all we get here is a story that essentially says that Zakaria doesn’t like tax cuts.
The print version of the piece refers to the “Simpson-Bowles commission’s plan.” Of course there was no commission plan since no proposal received the necessary majority to be approved. The web version correctly identifies the plan as simply being the proposal of the commission’s co-chairs former Senator Alan Simpson and former Morgan Stanley director Erskine Bowles. It’s good to see that the web version got this right although it is unfortunate that many people will read the incorrect print version.
No one expects great insights from the people who write on economic issues on the Post’s opinion pages, but Fareed Zakaria’s latest piece is an extraordinary exercise in confusion. Zakaria is anxious to tell us that tax cuts “don’t work,” but he never tells readers what he means by “work.”
The story on tax cuts is pretty simple: people either spend the money or they save it. Whether or not tax cuts “work” will depend on the extent to which they do one or the other and the extent to which we want them to do one or the other. The latter point is key.
When the economy is very weak, like the present (also in 2001-2003), then we would like to see additional demand. If we give people big tax cuts and they then spend the money, then this is exactly what we would want to see. The increased consumption provides a boost to demand and leads to more growth and jobs.
In the current downturn, an analysis by my colleague David Rosnick indicates that 50-70 cents of each dollar of tax cuts were spent. Zakaria’s piece seems to imply that spending was close to zero. This claim would seem absurd on its face given that many households are living on the edge and would not have the option to save their tax cuts even if they wanted to.
Of course, this doesn’t mean tax cuts are an especially effective form of stimulus. If the government were to spend money on teachers, roads or in other areas, then 100 cents on the dollar are directly added to the economy. Most of what is paid out is respent. So the story is that tax cuts “work” in this context, just not very well.
The other question is whether tax cuts “work” when the economy is not in a downturn. Both the Reagan and Bush tax cuts were sold as supply-side tax cuts. They would give people more incentive to work and invest. For the latter to be the case we would want people to save their tax cuts. However, it seems that people generally spend their tax cuts.
It would be very difficult to make the case that either the Reagan or Bush tax cuts worked as a spur to investment. Investment fell sharply as a share of GDP in the 80s from the 70s and in the 00s from the 90s. While there were other factors that can explain both declines, clearly the tax cuts could not have had much of a positive effect on investment given its fall in both cases.
It is not clear how Governor Romney is pitching his tax cut. His explanation seems to vary by the day and the audience. If Zakaria wanted to write a piece that was useful for readers he might have tried to clarify what he meant by “work,” unfortunately all we get here is a story that essentially says that Zakaria doesn’t like tax cuts.
The print version of the piece refers to the “Simpson-Bowles commission’s plan.” Of course there was no commission plan since no proposal received the necessary majority to be approved. The web version correctly identifies the plan as simply being the proposal of the commission’s co-chairs former Senator Alan Simpson and former Morgan Stanley director Erskine Bowles. It’s good to see that the web version got this right although it is unfortunate that many people will read the incorrect print version.
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In a blogpost in the NYT Uwe Reinhardt asked how much we would be willing to pay to extend a person’s life by a year. The examples he refers to in the piece involve drugs that are very expensive, but can be expected to extend life.
This is an unfortunate way to frame the issue. With few exceptions drugs are cheap to produce. The reason they are expensive is because the government gives drug companies patent monopolies. This allows them to charge very high prices for drugs that extend life, since anyone else will be arrested and thrown in jail if they manufacture the drug and offer to sell it at a lower price.
If we adopted a different mechanism for financing drug research, for example expanded government funding for research (we already spend $30 billion a year through the National Institutes of Health) or established a prize fund that would buy out patents, as advocated by Nobel Prize winning economist Joe Stiglitz, then we would not face this situation with drugs. Almost invariably the drug in question would be cheap and making it available to someone who needed it to extend their life would be a no-brainer.
This doesn’t remove all the hard questions. There would still be an issue as to how much we are willing to spend to find cures to cancer and other deadly diseases. We also would face situations where life-saving measures actually did involve substantial resources, such as when highly skilled physicians must spend many hours carrying through a complex operation. However, if we had a better system for financing drug research many of the cases that might pose the moral dilemma raised by Reinhardt would disappear.
In a blogpost in the NYT Uwe Reinhardt asked how much we would be willing to pay to extend a person’s life by a year. The examples he refers to in the piece involve drugs that are very expensive, but can be expected to extend life.
This is an unfortunate way to frame the issue. With few exceptions drugs are cheap to produce. The reason they are expensive is because the government gives drug companies patent monopolies. This allows them to charge very high prices for drugs that extend life, since anyone else will be arrested and thrown in jail if they manufacture the drug and offer to sell it at a lower price.
If we adopted a different mechanism for financing drug research, for example expanded government funding for research (we already spend $30 billion a year through the National Institutes of Health) or established a prize fund that would buy out patents, as advocated by Nobel Prize winning economist Joe Stiglitz, then we would not face this situation with drugs. Almost invariably the drug in question would be cheap and making it available to someone who needed it to extend their life would be a no-brainer.
This doesn’t remove all the hard questions. There would still be an issue as to how much we are willing to spend to find cures to cancer and other deadly diseases. We also would face situations where life-saving measures actually did involve substantial resources, such as when highly skilled physicians must spend many hours carrying through a complex operation. However, if we had a better system for financing drug research many of the cases that might pose the moral dilemma raised by Reinhardt would disappear.
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As we all know, the folks at the Washington Post have some trouble with arithmetic. Back in 2007 a lead editorial on NAFTA told readers that Mexico’s GDP had quadrupled from 1988 to 2007. The actual increase was a bit more than 83 percent.
In the same vein, columnist David Ignatius sang the praises of Turkey’s economy in the paper today. He told readers:
“its economy has grown an annual average of 5.3 percent since 2002, the fastest rate of any country in the Organization for Economic Cooperation and Development; gross domestic product has more than tripled.”
Let’s see, 5.2 percent growth for a decade? That translates into an increase of 66.0 percent in my neighborhood. If we go directly to the IMF’s site we find that Turkey’s GDP has increased by 61.8 percent over this period. That’s pretty good (much better than Mexico), but quite far from tripling.
So chalk up another big arithmetic error in the measurement of developing country GDP in the WAPO. Math is so hard.
As we all know, the folks at the Washington Post have some trouble with arithmetic. Back in 2007 a lead editorial on NAFTA told readers that Mexico’s GDP had quadrupled from 1988 to 2007. The actual increase was a bit more than 83 percent.
In the same vein, columnist David Ignatius sang the praises of Turkey’s economy in the paper today. He told readers:
“its economy has grown an annual average of 5.3 percent since 2002, the fastest rate of any country in the Organization for Economic Cooperation and Development; gross domestic product has more than tripled.”
Let’s see, 5.2 percent growth for a decade? That translates into an increase of 66.0 percent in my neighborhood. If we go directly to the IMF’s site we find that Turkey’s GDP has increased by 61.8 percent over this period. That’s pretty good (much better than Mexico), but quite far from tripling.
So chalk up another big arithmetic error in the measurement of developing country GDP in the WAPO. Math is so hard.
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In the 90s, and in the years of the last decade before the housing crash, most economists and pension managers who made projections of stock market returns were making absurdly optimistic assumptions. Because price to earnings ratios in the stock market were well above their historic average it would be impossible for it to give its historic rate of return. This was simple arithmetic, which some of us tried to point out at the time.
Now that the market has plunged, it will be possible for it to produce its historic returns. This basic fact should have been mentioned in this NYT piece on public pension. This means, for example, that when the article tells us that San Diego:
“would require future hires to enroll in a defined-contribution plan, similar to a 401(k) plan. In the future, public employees will be responsible for investing their own retirement money, and if their investments fail, the city’s taxpayers will not have to step in.”
San Diego has probably not saved its taxpayers a penny. It simply means that its workers will have less secure retirements for two reasons. First, workers will face the risk that the market will be down in the year that they retire, a concern that is irrelevant to city governments that in principle live indefinitely. Second, the administrative costs of 401(k)s are typically much higher than for defined benefit pensions. That means more of the workers’ money will go to the financial industry and less to their retirement.
Since workers value a secure retirement, the switch from a traditional pension to a 401(k) will mean that San Diego’s government now will attract less qualified workers, since it has effectively cut their pay, even though it has not saved its taxpayers any money. The NYT should have included the views of an economist who could have explained this simple point to readers.
In the 90s, and in the years of the last decade before the housing crash, most economists and pension managers who made projections of stock market returns were making absurdly optimistic assumptions. Because price to earnings ratios in the stock market were well above their historic average it would be impossible for it to give its historic rate of return. This was simple arithmetic, which some of us tried to point out at the time.
Now that the market has plunged, it will be possible for it to produce its historic returns. This basic fact should have been mentioned in this NYT piece on public pension. This means, for example, that when the article tells us that San Diego:
“would require future hires to enroll in a defined-contribution plan, similar to a 401(k) plan. In the future, public employees will be responsible for investing their own retirement money, and if their investments fail, the city’s taxpayers will not have to step in.”
San Diego has probably not saved its taxpayers a penny. It simply means that its workers will have less secure retirements for two reasons. First, workers will face the risk that the market will be down in the year that they retire, a concern that is irrelevant to city governments that in principle live indefinitely. Second, the administrative costs of 401(k)s are typically much higher than for defined benefit pensions. That means more of the workers’ money will go to the financial industry and less to their retirement.
Since workers value a secure retirement, the switch from a traditional pension to a 401(k) will mean that San Diego’s government now will attract less qualified workers, since it has effectively cut their pay, even though it has not saved its taxpayers any money. The NYT should have included the views of an economist who could have explained this simple point to readers.
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The Washington Post doesn’t leave its readers in doubt over whose side it takes in the class war. It routinely uses both its opinion and news pages to attack ordinary workers and the programs on which they depend, like Social Security and Medicare. It rarely points out obvious facts, like the projections of exploding costs for Medicare are primarily driven by the excessive rents collected by folks like drug companies, suppliers of health care equipment, and highly paid medical specialists.
In keeping with this spirit, the Post told readers about the “need for unions to reorganize” following Scott Walker’s victory in his recall election. By “reorganize” the Post doesn’t mean developing new strategies to protect their members’ interests. It meant accepting lower pay and benefits.
That call would make sense if there was evidence that union pay was substantially out of line with private sector pay. It turns out that this is not the case.
It is also striking how obsessed the Post is over the need to reform unions when it is so little concerned about incredibly larger abuses in the corporate sector. Corporate management routinely rips off its shareholders by appointing boards who are almost completely subservient to management.
This allows the top executives of even money-losing companies to collect paychecks in the tens of millions of dollars. While the Post is little bothered by this ripoff of the public, it rants endlessly over autoworkers who earn $60,000 a year or public employees who can get pensions of $2,000 a month.
The Washington Post doesn’t leave its readers in doubt over whose side it takes in the class war. It routinely uses both its opinion and news pages to attack ordinary workers and the programs on which they depend, like Social Security and Medicare. It rarely points out obvious facts, like the projections of exploding costs for Medicare are primarily driven by the excessive rents collected by folks like drug companies, suppliers of health care equipment, and highly paid medical specialists.
In keeping with this spirit, the Post told readers about the “need for unions to reorganize” following Scott Walker’s victory in his recall election. By “reorganize” the Post doesn’t mean developing new strategies to protect their members’ interests. It meant accepting lower pay and benefits.
That call would make sense if there was evidence that union pay was substantially out of line with private sector pay. It turns out that this is not the case.
It is also striking how obsessed the Post is over the need to reform unions when it is so little concerned about incredibly larger abuses in the corporate sector. Corporate management routinely rips off its shareholders by appointing boards who are almost completely subservient to management.
This allows the top executives of even money-losing companies to collect paychecks in the tens of millions of dollars. While the Post is little bothered by this ripoff of the public, it rants endlessly over autoworkers who earn $60,000 a year or public employees who can get pensions of $2,000 a month.
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The Post is one of those papers that doesn’t expect the people who write on economics to have any knowledge of the topic. Hence we have Matt Miller telling us this morning about how resolving the euro zone crisis will require that German Chancellor Angela Merkel devise a plan for “apportioning pain.”
Of course the opposite is true. The pain is wholly unnecessary and self-defeating. The obvious way out of the euro crisis is to require that the European Central Bank abandon its obsession with reinforcing its Maginot Line (its 2.0 percent inflation target) and instead act like a central bank.
This would mean guaranteeing the debt of the crisis countries and supporting a higher inflation rate across the euro zone. The former step would allow the crisis countries to borrow at an affordable rate. The latter step would allow them to regain competitiveness within the euro zone. If Spain and Italy can keep their inflation rates near 1.0 percent, while inflation in Germany and northern Europe runs at a 4-5 percent rate (driven by higher wage growth), then the economies of the peripheral countries will soon be competitive again with Germany and other core countries.
This is the only way to resolve the fundamental problem of the euro zone, which is the lack of competitiveness of the peripheral countries. It does not really require pain, except perhaps from psychopaths who suffer from the thought of prices rising 4-5 percent a year rather than 2.0 percent.
It is also worth noting that Miller wrongly says the crisis countries were profligate. While this may be true of Greece and Portugal, it certainly was not true of Ireland and Spain, both of which were running large budget surpluses prior to the crisis.
The Post is one of those papers that doesn’t expect the people who write on economics to have any knowledge of the topic. Hence we have Matt Miller telling us this morning about how resolving the euro zone crisis will require that German Chancellor Angela Merkel devise a plan for “apportioning pain.”
Of course the opposite is true. The pain is wholly unnecessary and self-defeating. The obvious way out of the euro crisis is to require that the European Central Bank abandon its obsession with reinforcing its Maginot Line (its 2.0 percent inflation target) and instead act like a central bank.
This would mean guaranteeing the debt of the crisis countries and supporting a higher inflation rate across the euro zone. The former step would allow the crisis countries to borrow at an affordable rate. The latter step would allow them to regain competitiveness within the euro zone. If Spain and Italy can keep their inflation rates near 1.0 percent, while inflation in Germany and northern Europe runs at a 4-5 percent rate (driven by higher wage growth), then the economies of the peripheral countries will soon be competitive again with Germany and other core countries.
This is the only way to resolve the fundamental problem of the euro zone, which is the lack of competitiveness of the peripheral countries. It does not really require pain, except perhaps from psychopaths who suffer from the thought of prices rising 4-5 percent a year rather than 2.0 percent.
It is also worth noting that Miller wrongly says the crisis countries were profligate. While this may be true of Greece and Portugal, it certainly was not true of Ireland and Spain, both of which were running large budget surpluses prior to the crisis.
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We evaluate teachers by how well their students do. If we applied a similar standard to economic reporters, then the whole lot of them would be sent packing tomorrow.
The Post told readers that Bill Clinton is an effective spokesperson for President Obama in part because:
“Clinton himself presided over an economic boom and a balanced budget gives him credibility to make the case against Romney and the Republicans.”
Actually, the seeds of the current disaster were put in place by the policies of the Clinton administration. President Clinton did nothing to try to check the rise of the stock bubble. Its collapse in 2000-2002 led to the longest period without job creation since the Great Depression, until the current downturn.
The economy only recovered from this downturn and began creating jobs again with the rise of the housing bubble. The burst of that bubble of course gave us our current downturn.
The stock bubble, not Clinton’s tax increases or spending cuts, was the reason that we had budget surpluses. In 1996, after all the Clinton era tax increases and spending cuts were already in place, the Congressional Budget Office still projected a deficit equal to 2.5 percent of GDP for 2000. The reason that we instead had a surplus of roughly the same size was that capital gains created by the bubble led to much higher tax collections than projected and the more rapid growth from the bubble caused spending to fall relative to the size of the economy.
The Clinton administration also laid the basis for the huge trade deficit the country now faces with its engineering of the bailout of the East Asian financial crisis. The harsh conditions of this bailout led developing countries to place a huge premium of acquiring reserves, the most important of which is the dollar. As a result, the dollar was pushed up to levels that made our goods uncompetitive internationally.
The resulting trade deficit is the fundamental imbalance in the U.S. economy today. Because of this trade deficit, by definition the country must either have negative private savings, as when the housing-boom-driven consumption boom pushed the savings rate to zero, or negative public savings (i.e. budget deficits).
While President Bush had ample opportunity in his two terms in office to reverse the economy’s course before it led to disaster in 2008, it was President Clinton who set the economy on the road to collapse. If the public does not understand this fact, it speaks to the awful state of economic reporting.
We evaluate teachers by how well their students do. If we applied a similar standard to economic reporters, then the whole lot of them would be sent packing tomorrow.
The Post told readers that Bill Clinton is an effective spokesperson for President Obama in part because:
“Clinton himself presided over an economic boom and a balanced budget gives him credibility to make the case against Romney and the Republicans.”
Actually, the seeds of the current disaster were put in place by the policies of the Clinton administration. President Clinton did nothing to try to check the rise of the stock bubble. Its collapse in 2000-2002 led to the longest period without job creation since the Great Depression, until the current downturn.
The economy only recovered from this downturn and began creating jobs again with the rise of the housing bubble. The burst of that bubble of course gave us our current downturn.
The stock bubble, not Clinton’s tax increases or spending cuts, was the reason that we had budget surpluses. In 1996, after all the Clinton era tax increases and spending cuts were already in place, the Congressional Budget Office still projected a deficit equal to 2.5 percent of GDP for 2000. The reason that we instead had a surplus of roughly the same size was that capital gains created by the bubble led to much higher tax collections than projected and the more rapid growth from the bubble caused spending to fall relative to the size of the economy.
The Clinton administration also laid the basis for the huge trade deficit the country now faces with its engineering of the bailout of the East Asian financial crisis. The harsh conditions of this bailout led developing countries to place a huge premium of acquiring reserves, the most important of which is the dollar. As a result, the dollar was pushed up to levels that made our goods uncompetitive internationally.
The resulting trade deficit is the fundamental imbalance in the U.S. economy today. Because of this trade deficit, by definition the country must either have negative private savings, as when the housing-boom-driven consumption boom pushed the savings rate to zero, or negative public savings (i.e. budget deficits).
While President Bush had ample opportunity in his two terms in office to reverse the economy’s course before it led to disaster in 2008, it was President Clinton who set the economy on the road to collapse. If the public does not understand this fact, it speaks to the awful state of economic reporting.
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This is what readers of a WAPO piece discussing the crisis in Spain must have concluded. The piece noted the financial problems facing Spain’s banks and government, and told readers:
“Only Germany has pockets deep enough to push down countries’ borrowing costs, guarantee fearful depositors’ investments and kick-start listless economies.”
This is not true. The European Central Bank (ECB), like the Federal Reserve Board, has essentially limitless ability to support banks in Spain and elsewhere. Such support would be essentially costless to Germany and the rest of Europe.
While the ECB could act at any time to explicitly or implicitly guarantee the debt of countries like Spain and Italy, which would immediately lower their interest rates to a sustainable level, it has chosen not to go this route. That fact should have been highlighted in a piece like this one.
This is what readers of a WAPO piece discussing the crisis in Spain must have concluded. The piece noted the financial problems facing Spain’s banks and government, and told readers:
“Only Germany has pockets deep enough to push down countries’ borrowing costs, guarantee fearful depositors’ investments and kick-start listless economies.”
This is not true. The European Central Bank (ECB), like the Federal Reserve Board, has essentially limitless ability to support banks in Spain and elsewhere. Such support would be essentially costless to Germany and the rest of Europe.
While the ECB could act at any time to explicitly or implicitly guarantee the debt of countries like Spain and Italy, which would immediately lower their interest rates to a sustainable level, it has chosen not to go this route. That fact should have been highlighted in a piece like this one.
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David Brooks is again prominently displaying his misunderstanding of economics in the New York Times. He told readers in today’s column:
“Every generation has an incentive to borrow money from the future to spend on itself. But, until ours, no generation of Americans has done it to the same extent.”
He then goes on to tell us that we are borrowing because we are more secure, arghhhhh!
Okay, let’s try to put this so that even David Brooks can understand it. First, we are not borrowing money from the future. What does Brooks thinks this means, are we calling up the Ghost of Christmas Future and asking for a loan?
Borrowing occurs in the present, from some to others. At present, the government sector is the big borrower. It is borrowing from the private sector, but also in part from the Federal Reserve Board. Because the economy is so far below its capacity, the Fed can simply create money to lend to the government to finance spending. And, this borrowing is aiding the future by sustaining demand in the economy. If the government spent less (or taxed more), it would simply reduce demand and increase unemployment.
Brooks may have some magical view of the world where jobs grow up magically in the private sector when the government reduces spending, but in the real world we need a chain of causation. Can anyone tell a story where firms will be motivated to increase spending and hiring when demand drops further due to government cutbacks? There aren’t many business owners who see their demand plummet and then go, “hey, great time to expand.”
In the real world, the government’s spending is employing our kids’ parents. This will improve their educational outcomes and life prospects, making the future richer, not poorer. The benefits for the future are even greater when government money is spent on forms of investment like infrastructure, education, and research and development.
Those who are troubled by the borrowing from China and other foreign countries need to start yelling about the over-valuation of the dollar and shut up about the budget deficit. The United States borrows from foreigners because of the trade deficit — not the budget deficit. The trade deficit is in turn determined primarily by the value of the dollar. If borrowing from China or anyone else is upsetting, then you should want to see the dollar fall to make U.S. goods more competitive internationally. The budget deficit has very little to do with this story.
Just to circle back to Brooks’ psychological explanation for borrowing, if NYT columnists were expected to have any clue on the topics on which they write, then Brooks would be familiar with the wealth effect. This means that people consume based in part on their wealth.
In the 90s, people consumed based on the wealth that was created by the stock market bubble. This required no change in people’s psychology — they always spent based on the wealth they had in the stock market. They just never had so much wealth as when price to earnings ratios soared from their trend level of around 15 to 1, to more than 30 to 1 at their bubble peaks.
The same story applied to the housing bubble in the last decade. Homeowners always spent based on their housing wealth. However they never had as much housing wealth as when the bubble drove prices by 70 percent above their trend level.
If Brooks knew a bit of economics, he could have spared his readers from the 750 words of misinformation in this column. We would have more live trees and fewer confused NYT readers.
btw, Brooks deserves special abuse for this assertion:
“Nations around the globe have debt-to-G.D.P. ratios at or approaching 90 percent — the point at which growth slows and prosperity stalls.”
Sorry, this is fairy tale stuff. Yes, some respectable economists say it, but it’s still silly. Countries that have had high debt to GDP ratios are largely in this category because of a weak economy. Think of Japan with a debt to GDP ratio that is now well over 200 percent. This was not due to fiscal excesses. This was the result of the collapse of its massive stock and housing bubbles in 1990.
A similar story can be told for most of the highly indebted countries. The causation went from slow growth to high debt. Brooks is just repeating a story from the one percent to rationalize the refusal by the government to take action to create jobs.
David Brooks is again prominently displaying his misunderstanding of economics in the New York Times. He told readers in today’s column:
“Every generation has an incentive to borrow money from the future to spend on itself. But, until ours, no generation of Americans has done it to the same extent.”
He then goes on to tell us that we are borrowing because we are more secure, arghhhhh!
Okay, let’s try to put this so that even David Brooks can understand it. First, we are not borrowing money from the future. What does Brooks thinks this means, are we calling up the Ghost of Christmas Future and asking for a loan?
Borrowing occurs in the present, from some to others. At present, the government sector is the big borrower. It is borrowing from the private sector, but also in part from the Federal Reserve Board. Because the economy is so far below its capacity, the Fed can simply create money to lend to the government to finance spending. And, this borrowing is aiding the future by sustaining demand in the economy. If the government spent less (or taxed more), it would simply reduce demand and increase unemployment.
Brooks may have some magical view of the world where jobs grow up magically in the private sector when the government reduces spending, but in the real world we need a chain of causation. Can anyone tell a story where firms will be motivated to increase spending and hiring when demand drops further due to government cutbacks? There aren’t many business owners who see their demand plummet and then go, “hey, great time to expand.”
In the real world, the government’s spending is employing our kids’ parents. This will improve their educational outcomes and life prospects, making the future richer, not poorer. The benefits for the future are even greater when government money is spent on forms of investment like infrastructure, education, and research and development.
Those who are troubled by the borrowing from China and other foreign countries need to start yelling about the over-valuation of the dollar and shut up about the budget deficit. The United States borrows from foreigners because of the trade deficit — not the budget deficit. The trade deficit is in turn determined primarily by the value of the dollar. If borrowing from China or anyone else is upsetting, then you should want to see the dollar fall to make U.S. goods more competitive internationally. The budget deficit has very little to do with this story.
Just to circle back to Brooks’ psychological explanation for borrowing, if NYT columnists were expected to have any clue on the topics on which they write, then Brooks would be familiar with the wealth effect. This means that people consume based in part on their wealth.
In the 90s, people consumed based on the wealth that was created by the stock market bubble. This required no change in people’s psychology — they always spent based on the wealth they had in the stock market. They just never had so much wealth as when price to earnings ratios soared from their trend level of around 15 to 1, to more than 30 to 1 at their bubble peaks.
The same story applied to the housing bubble in the last decade. Homeowners always spent based on their housing wealth. However they never had as much housing wealth as when the bubble drove prices by 70 percent above their trend level.
If Brooks knew a bit of economics, he could have spared his readers from the 750 words of misinformation in this column. We would have more live trees and fewer confused NYT readers.
btw, Brooks deserves special abuse for this assertion:
“Nations around the globe have debt-to-G.D.P. ratios at or approaching 90 percent — the point at which growth slows and prosperity stalls.”
Sorry, this is fairy tale stuff. Yes, some respectable economists say it, but it’s still silly. Countries that have had high debt to GDP ratios are largely in this category because of a weak economy. Think of Japan with a debt to GDP ratio that is now well over 200 percent. This was not due to fiscal excesses. This was the result of the collapse of its massive stock and housing bubbles in 1990.
A similar story can be told for most of the highly indebted countries. The causation went from slow growth to high debt. Brooks is just repeating a story from the one percent to rationalize the refusal by the government to take action to create jobs.
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