07 January 2015

Ideological Blinders

Greg Mankiw muses as to why people doubt his sincerity.  I think he should be flattered that people think he is evil and smart as opposed to the alternative.

Mankiw has a recent paper questioning whether wealth is concentrating, as Thomas Piketty shows, and questioning whether a global tax on wealth is a reasonable strategy.  The paper provides some good examples as to how ideology may prevent one from seeing various alternatives.  If you consistently appear to fail to see alternatives, it raises questions about whether you are smart or are somehow motivated to not see those alternatives.

Dylan Matthews provides one of the comments on Mankiw's paper via Brad DeLong: Mankiw completely misses the point that the founding fathers of America owned slaves.  Which is pretty much Piketty's point -- slavery being an extreme example of inequality.

In his paper, Mankiw creates a simple model of a steady state economy that consists of workers and capitalists.  The workers earn a wage and spend everything they make.  The capitalists take all the other output, and, after replenishing their capital and growing the economy, consume the excess production.  There's an optional amount of taxation as well to transfer consumption from capitalists to workers.

Mankiw asks the extent to which taxes can be used to make the consumption of workers and capitalists more equal, and suggests two possibilities. First, we might try to maximize worker income by minimizing taxes.  Second we might try to make the ratio of worker income to capitalist income as close to 1 as possible, essentially by destroying wealth.

However, there's a 3rd alternative.  In the model the workers end up looking a lot like slaves.  They are not allowed to own any capital of their own.  They are not paid high enough wages that they can afford to save any of their income.  There's a little bit of capitalist in all of us, and a little bit of worker in all of us.  In an alternative model, the workers would be able to save up some of their earnings and the capitalists would earn some wages for the work they do.

In Mankiw's model, there are N workers per capitalist.  Piketty's point is not to have two distinct classes whose incomes are made similar through redistributive taxation.  Piketty's goal is to have a single class where incomes are made similar by having N approach 1.

Mankiw takes a model that has complete inequality as its core feature and concludes that inequality is completely natural and normal.  But a more natural model starts with a society where all men are created equal.

Apparently Mankiw's ideology prevents him from seeing this flaw in his argument.  Do the ideological blinders make him evil?  Or the alternative? 

06 January 2015

Economic Recovery?

Jeffrey Sachs believes the economy has recovered.  And Sachs believes that Paul Krugman contradicts himself when he states that the economy needs more fiscal spending and that there has been an "Obama Recovery".

Unfortunately, Sachs is guilty of reading shallowly and not thinking through his position.  What Krugman does point out is that the Republicans have claimed that Obama's policies will utterly destroy the economy.  Supposedly Obamacare is a job-killer and supposedly Obama is anti-business.  And yet a recovery is occurring anyway.  And, unlike the Bush Recovery, Obama's recovery is driven by private sector employment and not public sector employment.

Meanwhile, Sachs claims we are still practicing Austerity in the United States because the deficit is falling.  Sachs seems to be unaware that state spending is up quite a bit as we emerge from the depths of the recession.

Also, Sachs seems to think that everything is golden now that we've had a couple of quarters of good GDP growth following a poor 2013-2014 winter quarter.  He doesn't seem to be aware that GDP is far below potential.  Unemployment stands at 5.8% not because we have been adding jobs at a fantastic pace, but because we have been losing workers.

Yes, the economy is starting to show signs of improved strength.  This improvement comes as austerity is ending: it's been a year since the sequester and state spending has improved.  But the economy would be in a much stronger place if the Serious People had not blocked a strong fiscal stimulus years ago.  The economy would be in a much stronger place if Europe were not practicing Austerity and were contributing more to the global economy.

It doesn't make any sense to avoid borrowing idle money offered to us at low interest rates and using that money to invest in infrastructure and productivity.  Once we have restored the economy to full potential -- once the labor force is back up to snuff and wages are starting to grow again -- when spending on safety nets has been reduced and tax receipts are rising from a stronger economy -- when interest rates have normalized and capital is no longer idle -- then there is plenty of time to raise taxes to eliminate the deficit and start paying down the debt.

04 January 2015

The Problem with Government Debt (Part II)

While trying to understand why government debt is a bad thing, the second thing I found was this.  The author, Keith Hennessey, states that he is an economics policy teacher at Stanford's Graduate School of Business.  You would think that a teacher of Stanford graduate students would be able to make clear, concise arguments.  Apparently not.

Mr. Hennessey quotes four problems with government debt from a CBO report.  Summarized:
1) Interest payments will rise as interest rates return to normal;
2) Federal borrowing reduces capital stock and wages;
3) “Lawmakers would have less flexibility … to respond to unanticipated challenges;”
4) “A large debt poses a greater risk of precipitating a fiscal crisis"

We would hope that Mr. Hennessey would help us understand some of the background behind these statements, particularly (2): How does borrowing reduce capital stock and wages?

Mr. Hennessey "expands" on each of the points.  His expansion of point #4 is particularly instructive, but not in a way we would expect.  Primarily we learn that Mr. Hennessey has really poor communication and reasoning skills:

Those on the left who argue that high debt isn’t a problem like to (a) pretend that this increased risk is the only consequence of high debt, and then (b) dispute that the higher risk is significant enough to cause concern. I worry that when the U.S. has doubled its debt/GDP in five years, and when our future debt path looks like it does, that the risk of a fiscal crisis is significant. But this risk is unknowable, and even if we could somehow measure this risk, we can never know when that crisis would occur. My stronger arguments are (1) fiscal crisis risk is undoubtedly higher at a higher debt level; (2) the risk is only going to increase on our current path as debt increases; and (3) there are three other costs to higher debt, so even if you’re not worried about crisis risk, you need to address those other costs.

Hennessey's statement that "fiscal crisis risk is undoubtedly higher at a higher debt level" is content free.  The argument has already conceded this point; the question is whether or not the increased risk is significant.  The sun is a finite source of energy, but that isn't something we need to worry about in practice today.  Is increased fiscal crisis risk with higher debt levels similarly a theoretical issue along those lines?

The statement "the risk is only going to increase on our current path as debt increases" is also content free.  Yes, if risk increases as debt increases than risk will increase as debt increases.

Finally "there are three other costs to higher debt..." is a non-sequitur.  We are expanding on point #4.  Arguing that point #4 is a problem because there are three other problems makes no sense.

Point #3 is a circular argument.  Hennessey implies that we shouldn't run deficits during a fiscal crisis because it limits our ability to respond to a fiscal crisis by running a deficit.  This argument is also self-contradictory.  Presumably the reason we want to run a deficit during a fiscal crisis is to reduce the impact of the fiscal crisis.

Point #2 is never explained.  Hennessey says "lower government debt means more shiny new factories with high wage American jobs."  But, in the current context of a fiscal crisis, that is not true.  The reason interest rates are low is because the private sector does not want to build shiny new factories.

Point #1 makes no sense.  The argument is that we must reduce borrowing today while interest rates are low because if we don't change our current behavior, then when interest rates rise, we will be borrowing money at high interest rates.  However, if we can change our behavior today, then we can also change our behavior tomorrow.  Instead of stopping borrowing money while interest rates are low, we should stop borrowing money when interest rates are high.

Also, high interest rates imply that the economy has normalized.  Interest rates will be high because the private sector will want to build shiny new factories.  Employment will be high.  Spending on safety nets will be reduced.  Reducing the debt then when spending is already falling makes more sense.

I find it shocking that a Stanford Graduate School lecturer cannot explain the model he is using in clear language, but must resort to simply repeating ideological idioms without any evidence and even without a compelling explanatory narrative.

The Problem with Government Debt (Part I)

Recently, I rummaged around the web trying to learn what the concrete problems are with government debt.  The first thing I ran across was this.  The Heritage Foundation offers us 17 reasons why we have a "big bad" debt.  The article perhaps offers a lesson in poor communication skills.  Let's look at the 17 reasons one by one.

1)  $53,769 – Your share of the national debt.  "every American will be on the hook for this massive debt burden"
Well, not really.  We don't all pay equal taxes.  As Romney pointed out, 40-some-odd percent of us don't pay taxes at all.  And so the point here is that debt is bad because it has to be paid back?
Result: inaccurate reason.

2. Personal income will be lower.
This point references a couple of papers suggesting that high debt slows economic growth:
Kumar and Woo, July 2010
Cecchetti, Mohanty, and Zampolli, September 2011

These papers are rebutted by numerous economists.  Panizza and Presbitero (2012) provide various references.
Result: debunked reason.

3. Fewer jobs and lower salaries. High government spending with no accountability eliminates opportunities for career advancement, paralyzes job creation, and lowers wages and salaries.
This is an argument about high government spending, not debt.  High government spending might help to cause debt, but debt does not cause high government spending.
Result: Non-sequitur.

4. Higher interest rates.
An interesting argument, except that interest rates are currently historically low.  Perhaps high debt when interest rates are low, implying that capital is idle, is not a problem.  Perhaps high interest rates are the problem.
Result: debunked reason.

5. High debt and high spending won’t help the economy.
Lack of help is not evidence of harm.
Result: Non-sequitur.

6. What economic growth?
This reason is essentially the same as #2.  A paper by Reinhart, Reinhart, and Rogoff is referenced that is rebutted by Panizza and Presbitero above.
Result: Repetitive reason.

7. Eventually, someone has to pay ... and Washington has nominated your family.
This reason is the same as #1.
Result: Repetitive reason.

8. Jeopardizes the stability of Medicare, Social Security, and Medicaid.
The argument here is circular.  In order to prevent high debt from destabilizing safety nets, we must destabilize safety nets.
This argument also assumes the premise.  If high debt is not harmful, then there is no harm to letting safety nets increase the size of the debt.  This reason can only show that high debt is harmful if it has been previously shown that high debt is harmful.
Result: Circular reasoning.

9. Washington collects a lot, and then spends a ton
This argument is the same as #3.  It says that high spending is bad, and does not explain why high debt is bad.
Result: Non-sequitur.

10. Young people face a diminished future.
This is the same as #2 or maybe #3.
Result: Repetitive reason.

11. Without cutting spending and reducing the debt, big-government corruption and special interests only get bigger.
This argument repeats #3, but adds to it the unsubstantiated claim that government (or perhaps just "big-government") is corrupt and implies that special interests (e.g. senior citizens) are bad.  Whether or not government is axiomatically corrupt and special interests are axiomatically evil is worth discussion; but they are problems unto themselves and not reasons why high debt is bad.
Result: Repetitive reason.

12. Harmful effects are permanent.
Circular reasoning:  We have to show that high debt is harmful in order to show that high debt is permanently harmful.  Also, poorly argued.  If harmful effects are permanent, then reducing the debt cannot reduce those harmful effects.  If the effects can be cured, then they are not permanent.  Also, repeats #2.
Result: Repetitive, circular, non-sensical reason.

13. The biggest threat to U.S. security.
This is again circular reasoning.  We have to show that high debt is a problem in order to show that high debt is the biggest thread to U.S. security.
Result: Circular reasoning.

14. Makes us more vulnerable to the next economic crisis.
Yet another example of circular reasoning.  This argues that we should not go into debt during an economic crisis because it will hinder us from going into debt during an economic crisis.  Also, the premise of this argument contradicts the conclusion.  The argument assumes that going into debt during an economic crisis is helpful.
Result: Circular, contradictory reasoning.

15. Washington racked up $300 billion in more debt in less than four months.
That's an interesting factoid, but it's not a reason why high debt is a problem.
Result: Non-sequitur.

16. High debt makes America weaker.
This appears to be another circular argument.  Apparently high spending on the military is racking up high debts that will force us to cut spending on the military.  Perhaps America should stop trying to be the world's lone policeman and start working with other countries to share the burden.  Perhaps America should cut military spending and invest in infrastructure to increase our growth rate so that we can spend absolutely more money on defense but a smaller percentage of our income.
Result: Circular reasoning.

17. High debt crowds out the valuable functions of government.  By disregarding the limits on government in the Constitution, Congress thwarts the foundation of our freedoms.
This appears to be another argument that high spending, not high debt, is bad.
Result: Repetitive reason.

Anyway, it would be nice to see stronger reasoning, logic, and communication skills from organizations like the Heritage Foundation.  If you title an article "What Are the Real Problems with the National Debt?" it would be nice if the article stayed on topic.  If you want to talk about problems with high government spending, you might title your article "What are the Real Problems with Government Spending?"