A Decade of Debt

|Peter Boettke|

That is the title of a new working paper by Reinhart and Rogoff.  

Shouldn't the issues they raise be an obsession among all economists who work in the area of macro and public economics?  

Is there a political economy model that can explain how to get out of this crisis situation?

Isn't this was Buchanan and Wagner warns us would be the political legacy of Lord Keynes?  Or as Luigi Zingales more recently put it: 

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

Perhaps it is time to take the gloves off in the fight of the century.  Economic science, as well as the history of political economy, tells us something valuable and enduring about all of this and we ignore it at our own peril.

Comments

[Bob]

Hey Pete, Could your call to "take the gloves off" in the fight of the century, mean use the big guns of Bastiat and Mises because these guys don't pull any punches. In the fight to stop an industrial wind turbine that proposes to be dangerously sited 1100 feet from residents in Union Beach NJ, I have been citing Bastiat's quotes in newspapers to persuade people that government sponsored plunder is wrong and immoral. Readers have responded that they must read Bastiat's work.

[Peter Boettke]

Bob,

The more people read Bastiat the better off we will all be!!!

Pete

[Daniel Kuehn]

It's not apparent to me at all that this isn't taken very, very seriously. I think, because a lot of economists are juggling a lot of different concerns, you are too heavily discounting their concern over this. Come to the next budget talk we host at the Urban Institute, Pete. I can even forward you the invitation the next time we have one. Then tell me mainstream/center left economists aren't deeply concerned about this.

I also think the diagnosis of how we got here is a little off. It has its origin in some observations that Buchanan made about other issues in public choice, but not really in Keynesianism.

[Pietro M.]

Excellent quote from Zingales.

[Peter Boettke]

Daniel,

Can you tell me why you would consider the Urban Institute "mainstream" but consider say the Cato Institute non-mainstream? I mean this seriously. I hear a lot about say GW or AU being mainstream, and GMU being non-mainstream, or this or that argument. I tend to think we all have a problem with myopia when it comes to where we are in the world. This is also true of the various rankings of departments --- ever notice where the department that the person doing the study is ranked, or where they went to graduate school?! We should really just state clearly there are 5 top schools --- Harvard, Chicago, MIT, Princeton and Stanford -- and then there is all the rest, each with strengths and weakness here or there that could make them very important players or not. And as far as "think tanks" are concerned in economics, there is NBER and Brookings, and then all the rest -- including AEI, etc. There was a time when Hoover was a major think tank, but I think it is accurate to say it is no longer the same player it once was. But all other Washington, DC based think-tanks are like the Washington area based universities --- good, but not great centers for economic thinking. (though some of the joint ventures with Brookings by CATO and Urban do produce good work). When you have a stricter definition of "mainstream", then it becomes much harder to push arguments aside as being outside of the mainstream. Instead, you have to engage them.

BTW, obviously I think some people are taking the argument seriously --- note the link to a paper by Harvard professor Rogoff. But I don't think we are seriously thinking about our way out. This is just like the Economist magazine piece of March 19th on Taming Leviathan --- getting the debt crisis under control is the political question of our age. Personally, I don't believe this is a tax and spend issue, but a rethinking the responsibilities of the state issue.

One final thing -- The public choice issues on the public debt were tied to the Keynesian notion of functional finance and the core idea of using the budget to balance the economy. This is the Buchanan argument from Public Principles of the Public Debt, and then developed later in Democracy in Deficit.

Pete

P.S.: Thanks for the invitation -- I rarely go into DC for economics talks by design, this is not a world I fit in comfortably even at CATO, and I have never been to Reason. But if I was to go to DC, I wouldn't mind going to a serious discussion of these issues at the Urban Institute.

P.S.S.: Walter Williams worked at the Urban Institute at one time.

[Daniel Kuehn]

The Urban Institute is just more towards the center of the distribution of thoughts. We have a mix of center-right, center-left, and then some solidly liberal. But it's a center-of-gravity point. The methods and the economics are certainly "mainstream" and in that sense "mainstream" implies "consensus position".

Cato I'd call mainstream from a disciplinary perspective for the most part (it does "consensus economics"), but obviously their politics is less mainstream. GW I'd call mainstream, but AU has (along with some mainstream people) a real heterodox streak in their economics and (I'd imagine - starting this fall) some fairly leftist political dispositions. GMU seems to me to be a mix like AU - some mainstream "consensus" economics and some more heterodox stuff. Would you disagree?

I'm fairly "mainstream" in my economics and fairly center-left in my politics, but I'm not suggesting heterodox approaches are bad or the less-mainstream political positions are out-to-get people. I can just tell you - the debt weighs very, very heavily on the minds of mainstream center-left in Washington DC. When I first got to Urban five years ago I was the RA for the president - Robert Reischauer - a former CBO director. The debt was all he thought about it, and he was dead serious about it. A lot of people mistake disagreements on particulars with a lack of concern.

A note on think tanks - there are a lot of good think tanks that do more evaluation work, whereas Brookings and NBER do more academic work. Abt, Urban, Mathematica, etc. do work that is as high quality as Brookings - their reports and subject matter just aren't as sexy or cutting-edge. So there are many kinds of think tanks in this town, and if anyone at GMU wants to break into that world they should consider these less glamorous sorts of places too - we do important work!

- Everything's up on the web too, of course. Just driving home the point that you are not alone in concern about this.

- Yes - I know Williams was here - I've specifically tried to get a hold of some of the stuff he's worked on, but unfortunately we only have electronic versions of our stuff that I could find going back to the eighties, and I think he was doing his work here in the 70s.

[Barkley Rosser]

Pete,

Um, please do not identify a policy of massively increasing debt over time with Keynes. In his day, the UK regularly ran budget surpluses. His fiscal stimuli were temporary reductions of those surpluses, possibly going into deficits in deep depressions or wartime, but with some sort of balance over time. Even people like Samuelson tended to hold to that position, at least at times. While there certainly are some Keynesians who say "deficits do not matter" (a la Dick Cheney), that was not the position of Keynes.

[JP Koning]

"But I don't think we are seriously thinking about our way out."

Any sort of "fight of the century" among economists will probably be peripheral to the major arena, that being the opinion of financial participants allocating billions. "The way out" you speak of will eventually be forced on the various transgressors by bond vigilantes, speculators, investor flight etc and not by academic discourse.

[Troy Camplin]

There's always a "crisis" afoot to justify Keynesian policies.

And no, there is nobody in Washington who is serious about the debt/deficit. Certainly nobody with a title in government. Show me a budget that cuts programs rather than the increase in those programs -- show me a budget that cut a trillion dollars from the current budget -- and I'll believe in the seriousness of cuts.

Of course, for the libertarian, the federal government could do everything it is legal for it to do for well under a trillion dollars a year.

[Daniel Kuehn]

re: "There's always a "crisis" afoot to justify Keynesian policies."

This is just wrong, Troy. What about the budget deficits we were racking up before 2008? Everyone's favorite Keynesian wasn't crying crisis then. He was insisting on running surpluses.

It's tiring to continually be expected to justify fantasy versions of Keynesianism that sound good in a snappy blog comment.

re: "And no, there is nobody in Washington who is serious about the debt/deficit."

You have no clue what you're talking about, Troy. Gridlock over sincere dedication to different solutions presents implementation problems, and politicians with short time horizons gum things up too, but don't tell me nobody is serious about the debt and deficit.

One difference you do see between people who are serious and people who like to pretend they're serious is that serious people see a distinction between the short, medium, and long term, and serious people see a difference between debts within historical norms and debts outside of historic norms. Serious people also recognize that "running deficits" and "increasing the debt burden" are two different things.

[Jerry O'Driscoll]

Cato is actually the source of some of the most serious ideas for reducing the deficits. They have department-by-department, program-by-program spending recommendations.

Politic are the problem. The job of politicians -- what gets them votes and dollars, the two currencies of politics -- is to protect and enhance the benefits to their constituencies. It is not s system designed to work for the greater good.

We are not yet in a crisis, only in the contemplation of one. First there must be an actual fiscal disaster. We have only the prospect not yet the reality of one. Only when there is absolute necessity will politicians act. And one cannot assume they will do the right thing even then.

To paraphrase Lenin, it must get worse before it can get better.

[Daniel Kuehn]

re: "Politic are the problem. The job of politicians -- what gets them votes and dollars, the two currencies of politics -- is to protect and enhance the benefits to their constituencies."

YES! (I feel obligated to note enthusiastically when we agree, Jerry)

re: "It is not s system designed to work for the greater good."

MAYBE! (I have trouble embracing this one too enthusiastically without knowing a better option)

[Broadstone]

"but don't tell me nobody is serious about the debt and deficit."

Right, so who and what from Washington then is considered serious in Kuehn's view? Pray tell it's not the net reduction of 352 million dollar from the budget, or Paul Ryan's plan to increase government outlays and increase of the public debt. Not mention we haven't even touched upon the issue of unfunded liabilities from Social Security, Medicare, and Medicaid.

"But I don't think we are seriously thinking about our way out."

After reading Rollback, I don't think an escape plan can be even considered an option at this point.

[Troy Camplin]

Daniel, you are naive. You are naive if you think anyone in government is serious about cutting anything. They threaten to shut down government over cuts in rates of increase, that is all. You are naive if you think that government really will help you or anyone else. You are naive if you think that is why anyone goes into government. You are naive if you think Krugman in his popular pieces is anything but a partisan.

There's always a recession or a war or a threat or . . . something. The poor, the elderly, the children, global warming, etc. always justify more and more and more spending. Crisis after imagined crisis justifies more and more money spent. And Keynesians -- whether naive Keynsians like both Bushes or those with Ph.D.'s -- use these to justify more and more spending. Politicians and demagogues love Keynes because you can use him to justify just about any government spending program you want. Keynes believed almost anything at least once, and wrote about it. But most of what he believed what folk economics and little else. That's why the folk all believe in it.

[Daniel Kuehn]

Troy -
You said "Washington", not "government". There are considerably fewer who care in government, but there are many (particularly those not working on a two, four, or six year time horizon).

Can't bring myself to think of anything nice to say on the rest of that diatribe

[Daniel Kuehn]

Troy, you're not asking "who cares about the debt" - you looking for "who agrees with me that we should cut spending dramatically".

Those are two very different things. Be explicit, and don't act like the difference is over concern about the debt.

[Troy Camplin]

They are two different things. I care about both. But if spending were within the realm of what is the valid role of government, we wouldn't have this problem at all. The debt will eventually accomplish the same thing, but I don't think destroying a country is a good thing. The problem is that those in government, and many Keynesians, like Krugman, don't seem to care (unless the GOP is in charge -- then they care!). I am sure one can find exceptions, but the exception does not negate the rule. And never believe the rhetoric of either a politician or a demagogue. Those are people who can only be judged by their actions.

[Daniel Kuehn]

re: "The problem is that those in government, and many Keynesians, like Krugman, don't seem to care (unless the GOP is in charge -- then they care!)."

Do you honestly connect it to the GOP?

I'm curious how many people who say this genuinely believe that or if they're just saying that to score political points. You don't think it has anything at all to do with macroeconomic conditions in the 2000s and today? He was calling for the potential for stimulus after the crisis started but before Obama was elected, after all. And he's still calling for it now that Congress is essentially controlled by the Republicans (with a majority in the House and essentially veto power in the Senate). Do you genuinely think that the policy advice is politically motivated? Really?

I'm just curious. A lot of people say things like that in an off-handed way, but I always wonder who is serious.

[Daniel Kuehn]

Serious about the claim, I mean.

Generally I find that the people who are serious about stuff like hat turn out to be the least serious people.

[Troy Camplin]

I always find it suspicious when people have a sudden shift in opinion when their people are in charge. I think the conservatives who are starting to question the legality of the bin Laden action are equally ridiculous, because you know they wouldn't be doing anything of the sort of Bush had done it (and you know there are liberals who would be attacking Bush over it rather than defending Obama). Krugman is a partisan's partisan. But I will say he is a leftist first. In his popular pieces, at least, reality always gives way to those two considerations for Krugman. I don't take any demagogue seriously for exactly that reason. Sadly, that is what Krugman has reduced himself to.

[Daniel Kuehn]

Wow, I guess you are serious.

[Troy Camplin]

The academic Krugman is a different creature from the popular one. And even there, the economic geographer is a much better economist than the Keynesian one. It is the Keynesian one who rules Krugman's popular pieces, when he's not being a partisan demagogue. Krugman has made himself a joke. It's sad to see. And if you weren't a hero worshipper unwilling to question the great and almighty among your pantheon, you'd be able to see it.

[Daniel Kuehn]

"And if you weren't a hero worshipper unwilling to question the great and almighty among your pantheon, you'd be able to see it."

Excuse me?
Don't ever talk to me like that, Troy.