July 15, 2003

Wow! "If Politicians Want Greater Savings, They Will Have to Run a Bigger Deficit"

Wow! I wrote too soon. The previous post (just below this one) was not even the nadir for that particular issue of National Review. The nadir comes in the column that closes with "If politicians want greater savings [i.e., to boost the growth rate of American wealth and production], they will have to run a bigger deficit."

Thomas E. Nugent on Five Financial-Market Fallacies on NRO Financial: ...I am sure you have heard more than one economist or politician bemoan low savings rates in the U.S. as if higher savings rates would somehow help the economy. I guess these guys think that increased savings means more capital for business investment. How silly is that! In aggregate, one personís savings is another personís income. If I decide to spend less and save more, then someone else wonít have that income. The economy slows as a result and there is less need for capital investment. And banks can lend money unconstrained by the size of their checkbooks, so if businesses want to borrow to increase capital expenditures, there doesnít have to be a higher level of savings to accomplish that end. However, the most important aspect of savings is deficit spending by the government. When the government runs a budget deficit it creates private sector savings. Or, when the government runs a surplus (another term for government saving) then the non-government or private sector runs a deficit, i.e. less saving. So if the politicians want greater savings, they will have to run a bigger deficit.

The author is trying to make two different and completely inconsistent arguments, neither of which he understands. The first argument is Robert Barro's--that people view the government as their fiscal agent, and so take steps to offset any changes in the government deficit that pushes actual national savings away from whatever level households desire. (I remember hearing Robert Barro at lunch in April 1983 confidently predict a rapid upturn in private savings to accompany and offset the Reagan budget deficits: I'm still waiting. When I was in the Treasury, the rule of thumb I used was 1/4--that private saving would change to offset 1/4 of the change in the budget deficit.)

The second argument is the "vulgar Keynesian" argument that investment is determined completely independently from the forces that determine desired saving, so that an increase in desired saving has no effect on investment and serves only to reduce GDP. (Few believe this argument today in any form--and certainly nobody except Tom Nugent believes in both it and in "Barrovian equivalence").

And then there are the parts of the paragraph that are simply and completely incomprehensible: "How silly is that! In aggregate, one personís savings is another personís income. If I decide to spend less and save more, then someone else wonít have that income." But you just said that the saving would be someone else's income. "Banks can lend money unconstrained by the size of their checkbooks, so if businesses want to borrow to increase capital expenditures, there doesnít have to be a higher level of savings to accomplish that end." No. Banks can't lend money unless someone has deposited money in the bank: loans plus reserves equals deposits--and those deposits are somebody's savings. Investment does need savings to finance it. "However, the most important aspect of savings is deficit spending by the government." But deficits are unsaving, antisaving: surpluses are saving. And, of course, the incomprehensible capper: "So if the politicians want greater savings, they will have to run a bigger deficit."

There is a major, major failure of institutional oversight, here: what we have here is a failure to communicate between those who fund National Review (and want it to advance sound conservative ideas) and those who assign articles on economic policy. As I've said before, there are many, many, many very smart and thoughtful people--academics, investors, Wall Streeters, and others--who are conservative in belief and would love to write economics coverage for National Review. So why is the quality of what we get so very, very low? It can't all be that ideological purity gets a 100% weight, and that competent people are regarded as politically unreliable because they are prone to have thoughts and then wander off the reservation, can it?

Posted by DeLong at July 15, 2003 06:08 PM | TrackBack

Comments

I sympathize, I do; the National Review also recent ran columns that claimed that (a) the Dred Scott case was decided under the Due Process Clause of the 14th Amendment, despite the notable difficulty that the Amendent wouldn't be written for another decade, and that (b) the "right to privacy" originates in Roe v. Wade, not Griswold v. Connecticut like it actually does. Somehow, having taken a single class in Constitutional Law at the undergraduate level, I'm better informed than the legal writers at the National Review.

Posted by: Daniel J. Linehan on July 15, 2003 06:36 PM

It would have been an extraordinary act of judicial assertion of power indeed to have held that Dred Scott remained a slave had the case been brought after the ratification of the Thirteenth and Fourteenth Amendments...

Posted by: Brad DeLong on July 15, 2003 06:48 PM

I doubt that National Review will give Paul Krugman any column space.

Posted by: bakho on July 15, 2003 07:12 PM

this Nugent piece has to be the most hilarious piece on the economy ever. It got to be a satyric piece. I will forward it to economists and non-economists.

Posted by: econBras on July 15, 2003 07:38 PM

I don't think it is a matter of ideology. It's groupthink pure and simple. The ability to take and espouse anti-logical and anti-historical positions is proof that you are part of the group. Clinging to past positions that are not part of the current orthodoxy is a sign of weakness.
These guys remind me more and more of N.I.C.E., in C. S. Lewis's 'That Hideous Strength'.

Posted by: Dick Durata on July 15, 2003 07:45 PM

Now, now, Professor, you are at least a former member of the "Washington elite" and as such, regarding your deficient understanding of savings, well ... let's have Nugent's co-author and co-thinker Warren Mosler explain ...

"the Washington elite have forgotten (or never knew?) the fundamental economics 101 accounting identity: a government surplus is NECESSARILY equal to the (same period) private sector deficit (including domestic business and individuals, and any foreigners dealing in $US). Therefore, the U.S. surplus of $250 billion reduces private sector savings EXACTLY by the same amount."
http://www.mosler.org/docs/docs/ten_trillion_tax_cut.htm

There's only a public and private sector -- so if one runs a surplus it must be at the expense of the other's deficit. So public savings can only be increased by a deficit in private savings that reduces them by like amount, and vice versa. QED.

When I asked a friend of theirs for a bit more explanation of this over usenet once, it was explained it to me this way...

We start with the private sector owning $2X of cash and X$ of gov't bonds, total private savings = $3x while gov't debt = $X. If we then redeem the gov't debt by running a surplus we must tax $X from holders of cash and transfer it to the bondholders while the bonds "go away". This leaves us with still $2X of cash in private savings but no bonds. So total private savings have dropped from $3X to $2X while the govt's saving of $X has eliminated the debt. So private and public savings are inverse to the dollar -- an "identity" even.

This is the "101 accounting identity" that you and your fellows in the Washington elite don't know about. So it is no wonder you don't understand why the deficit must go up to increase private savings.

I will leave it to those who like to play intellectual whack-a-mole to identify the coyote howler in this.

But I think you are *far* too kind in saying Nugent was "misunderstanding Barro". ;-)

BTW, for good fun people can go to http://www.mosler.org/ , to go through a lot more papers by Nugent, Mosler & Co. and play whack-a-mole for hours on end.

Posted by: Jim Glass on July 15, 2003 07:52 PM

What if the investor only needs 2X savings. The government goes into debt 1X to give the investor a 1X tax cut that the investor uses to buy the government bond. The invester takes 1X of savings and buys a time share. The net savings has now gone down from 2X to 1X. The investor still has the needed 2X, but the government will need to collect 1X in the future.

Jim, I do think you have nailed the problem with the Bush tax cut. All the money is going to the wealthy. With no need to buy more stuff and no productive place to invest the money, they are just buying government bonds issued to cover the debt. We have a transfer payment from the US treasury to the wealthy campaign contributors of Mr. Bush that gives almost no stimulus.

These geniuses haven't figured it out because they don't figure. They believe. Supply side theory states that if government cuts taxes, the economy will expand. That is the truth and it must be obeyed. If the truth is not supported by the facts, then the facts must be wrong or manipulated by evil secular economists.

Posted by: bakho on July 15, 2003 08:04 PM

I knew I had seen this wacky theory - about how private and public savings were just the flip side of an accounting identity much like the current account balance and the capital account balances are - appear somewhere else before but was too lazy to go looking for it. Thanks to Jim for unearthing this piece of intellectual idiocy.

Unlike Brad, I am now quite glad to see this kind of drivel show up in NRO. Think about the following: Don Luskin is not the least knowledgeable economics commentator for NRO. Thats just staggering to my mind, but hey more free entertainment and ridicule for all.

Posted by: achilles on July 15, 2003 08:07 PM

I'm not sure whether right-wing economics is a religious cult or just the result of excessive first cousin intermarriage.

Posted by: Charles on July 15, 2003 09:45 PM

Jim, do you have any clue what drug they are using?

Posted by: Stan on July 16, 2003 06:31 AM

I'll put my hand up as someone who believes in something like the "vulgar Keynesian fallacy" Brad identifies. The rate of interest is an important determinant of both savings and investment, but investment in particular is subject to a number of other influences, which can and often do set planned saving and planned investment moving in different directions.

Posted by: dsquared on July 16, 2003 06:48 AM

But would you say that a rise in planned saving has no effect on investment? Particularly in a world in which central banks are trying to target their beliefs about the full-employment level of real GDP, and so respond to rises in planned saving by cutting back on interest rates?

There are definitely times and places to be a vulgar Keynesian. But it's as unwise to always be a vulgar Keynesian as to always wear your scuba wetsuit...

Posted by: Brad DeLong on July 16, 2003 07:09 AM

It looks like Mankiw is being reduced to the role of cheerleader.

http://www.washingtonpost.com/wp-dyn/articles/A62123-2003Jul15.html

An average 3.7% economic expansion is not going to do enough for the employment figures.

I find Mankiw's use of present tense amusing:
"Because the deficit is shrinking, the accumulated level of national debt is not expected to become problematic."

Uh, projections are that the deficit is getting larger and will be larger next year than this year. The shrinking deficit is based on economic expansion that may or may not materialize. It looks like the Bush economic geniuses have targeted 40% of GDP as the right size for the national debt. At 4% interest that puts debt service costs at 1.6% of GDP and 8% of a budget that is running 20% of GDP. Those numbers may be fine for 2008 but they don't wash once the SS stream flips from inflow to outflow. Maybe that is the reason for his hints at reducing future SS payments.

Posted by: bakho on July 16, 2003 07:23 AM

More grist for the economic idiocy mill:

"The deficits forecast in today's report are uncomfortable," said Representative Jim Nussle of Iowa, chairman of the Budget Committee. But he told reporters, "Tax cuts do not cause deficits. When you reduce taxes, taxes stay in the pocket of people that earn it. We do not have to borrow money in order to reduce taxes. You only borrow money in Washington for spending."

Bang head here -----> * <-----

Posted by: David W. on July 16, 2003 07:40 AM

Maybe NRO could hire the person who wrote this WPost OpEd. They at least have done some homework and go beyond the he said uncurious reporting.

http://www.washingtonpost.com/wp-dyn/articles/A62129-2003Jul15.html

Dave, the GOP cannot bring itself to talk about revenue and how it is necessary for government to function.

Posted by: bakho on July 16, 2003 07:48 AM

Please please please. Listen to radical conservatives "thinkers." The idea is to deprive the government of revenue to force changes in social benefit programs. That includes Social Security and Medicare and Medicaid. The House of Representatives Medicare bill effectively privatizes Medicare and makes it an elective program for participants. Please attend to these folks!

Posted by: anne on July 16, 2003 08:41 AM

Of course, Brad, your economics are correct. However, an important part of the equation is that not only household are savings levels down, but that debt levels are way up.

Americans aren't just breaking even. They are in the hole and financing ever larger amounts of debt. This fact, coupled with concern over continued employment, concern over having sufficient retirment funds, and the observation that holding of purchasing today may result in the ability to purchase tomorrow at a lower price are leading to constricted consumer spending.

Americans will not spend until they have paid down debt and than saved enough to feel secure about their future.

Posted by: E. Avedisian on July 16, 2003 08:43 AM

Stephen Roach has noted over and over that America will show zero or negative saving in the coming year. Public and private saving combined is astonishingly low and will be lower. This will put more pressure on our rapidly growing balance of payments deficit.

Posted by: anne on July 16, 2003 08:52 AM

http://www.morganstanley.com/GEFdata/digests/20030707-mon.html

Stephen Roach -

The United States is rapidly approaching an ominous threshold -- a net national saving rate that is about to go negative. Could that be the flashpoint that sends a wake-up call to world financial markets?

Posted by: anne on July 16, 2003 08:55 AM

The United States is rapidly approaching an ominous threshold -- a net national saving rate that is about to go negative. Could that be the flashpoint that sends a wake-up call to world financial markets?

Thanks Anne. You said it better than I did in my pre-coffee stupor. Good link!

At this point, further lowering of interest rates may only prolong the housing, stock market and other bubbles and make the collapse even more painful when it comes; and come it will.

The knee jerk reaction to continue lowering interest rates is something like a junky reaching for the syringe when faced by fundemental life problems. It'll make him feel better temporarily, but, in the long run, his real problems get worse and worse.

Posted by: E. Avedisian on July 16, 2003 09:09 AM

Anne

Agreed! The National Review reflects perfectly in all deceptiveness the economic policies of the radical right.

Posted by: lise on July 16, 2003 09:09 AM

Individuals don't want to save for retirement and corporations don't want to invest in retirement. Samuelson thinks this problem needs attention. Maybe the NRO could hire Samuelson.

http://www.washingtonpost.com/wp-dyn/articles/A62124-2003Jul15.html

Posted by: bakho on July 16, 2003 09:25 AM

>>But would you say that a rise in planned saving has no effect on investment? Particularly in a world in which central banks are trying to target their beliefs about the full-employment level of real GDP, and so respond to rises in planned saving by cutting back on interest rates?

Clearly, an increase in planned saving will involve some provision of capital to companies, who will invest some of what they get. I must confess I don't understand how the author of the linked article manages to argue otherwise.

Posted by: dsquared on July 16, 2003 10:22 AM

I think some of the points of view here about savings are wishful thinking. Sure it would be great if our needs for the future were being met by other areas of the globe which would rather spend now and accumulate debt loaned by us at high interest rates. I don't argue that would be ideal. But that's just not how it works, because there are limits to how much we can usefully invest, and saving for the future is normally competitive and currently very competitive.

So, we're being underbid. How concerned should we really be about foreigners lending to us at low rates (as long as too much is not short term)? With this worldwide mass retirement coming or just barely underway, and with such a large concentration of wealth in the hands of people who can already buy whatever they wish, investing is not going to be something rewarded much on average. How surprising is it really to see expensive stocks, bonds, and housing given this situation?

Is it such a disaster that we will need higher taxes and shorter, less comfortable retirements? It might qualify as a personal disaster for some folks, but here we have the freedom to think ahead or not.

Posted by: snsterling on July 16, 2003 10:44 AM

"When the government runs a budget deficit it creates private sector savings. Or, when the government runs a surplus (another term for government saving) then the non-government or private sector runs a deficit, i.e. less saving. So if the politicians want greater savings, they will have to run a bigger deficit."

If you want more money, move it between your pockets!

Posted by: Jason McCullough on July 16, 2003 10:45 AM

Besides still not being to accept the civil rights movement, National Review has always beena magazine for non-readers. William Buckley always wrote for non-readers, which was the point of the pretense.

Posted by: jd on July 16, 2003 11:00 AM

We really need to wonder whether corporate balance sheets and income statements have been improving as much as stock prices might indicate.

Merrill Lynch has raised serious questions about corporate balance sheets, while UBS questions income statements.

....

http://www.nytimes.com/2003/07/13/business/yourmoney/13WATC.html

...The quality of earnings has declined so significantly among the nation's largest companies ó those in the Standard & Poor's 500-stock index ó it is not hyperbolic to advise investors to view every profit report with suspicion.

Posted by: anne on July 16, 2003 11:17 AM

Do the funders of the National Review really want the advancement of sound conservative ideas enough to be disappointed in stuff like this? I'd always assumed that they read the thing enough to be sure they were getting exactly the propaganda they were paying for...

Posted by: Charles Dodgson on July 16, 2003 11:36 AM

I stopped reading Nugent as he never said anything so I'm pleasantly surprised that he ventured into a real discusssion. That he got this so terribly wrong would make me sad - except I have seen this line of 'reasoning' so many times, which really makes me sad. Yes - the National Review has terrible economics, but the truth is that so many folks make the same mistake. Try reading the op-ed pieces in the Wall Street Journal for example.

Posted by: Hal McClure on July 16, 2003 11:44 AM

Just read Mankiw's oped. Really weak. His 2nd and 3rd points can be rolled up in terms of projected deficit to GDP ratio over the longer term. He claims without basis, this will shrink but his own colleagues suggest otherwise. Maybe he should talk to Peter Fisher about that forecast of the debt/GDP ratio rising to 250% by 2050. That seems large to me.

His first point goes to aggregate demand issues. Yes - policy should be encouraging more aggregate demand in the short-run. This policy does not do much good and in fact might be harming investment demand as it tells Wall Street that national savings will stay low.

Speaking of national savings, I read that Mosler and Nugent paper too. Do these two fellows have a clue? Yes there is a macro-accounting identity but they really don't understand it. The sum of public savings and private savings (national savings) is the amount we invest (actually it's total investment plus the current account but I don't want to confuse these 2 even more). It would seem they make the absurd assumption that there is a fixed pool of investment. So if the government surplus is less then private savings must go up. Not true but even if it were - why is this a good thing?

Posted by: Hal McClure on July 16, 2003 12:27 PM

Nightly Business Report on PBS -

Glen Hubbard is at Columbia again, and worrying up a storm about Medicare. Medicare has become too expensive since we would rather have our dividends lower taxed. The answer: Privatize Medicare. Forget the drug benefit for Medicare households, we can all commute now and again to Canada. Thanks, Glen.

Posted by: dahl on July 16, 2003 12:42 PM

07/14/03: Commentary: The Prescription Drug Benefit In Medicare May Sicken The Economy

I'm Glen Hubbard.

And, I am not impressed.

Posted by: dahl on July 16, 2003 12:47 PM

What does privatization really do? It's sort of like taking a $10 bill out of your left pocket and putting in your right pocket and pretending it's a $20 bill. Since there is no free lunch, I bet that right pocket has only $10 in it. But then Stephen Moore claimed privatization could make citizens better off and reduce the deficit. That's like having two $5 bills in your left pocket, taking one out to put in the right pocket, and saying there's $20 bill in the right pocket. Simply put - if I take $10 out of a public plan and give all the money back to private citizens (cut taxes by the same amount), I have not reduced the deficit. And outside possible incentive effects - the direct impact of reducing a public benefit and the associated tax is to have no increase in the wellbeing of the private citizen. Yet - this White House pretends one can take only $5 out of the left pocket and have $20 in the right pocket. How an economist as bright as Glenn Hubbard could sign onto such nonsense is beyond me.

Posted by: Hal McClure on July 16, 2003 01:38 PM

What does privatization really do? It's sort of like taking a $10 bill out of your left pocket and putting in your right pocket and pretending it's a $20 bill. Since there is no free lunch, I bet that right pocket has only $10 in it. But then Stephen Moore claimed privatization could make citizens better off and reduce the deficit. That's like having two $5 bills in your left pocket, taking one out to put in the right pocket, and saying there's $20 bill in the right pocket. Simply put - if I take $10 out of a public plan and give all the money back to private citizens (cut taxes by the same amount), I have not reduced the deficit. And outside possible incentive effects - the direct impact of reducing a public benefit and the associated tax is to have no increase in the wellbeing of the private citizen. Yet - this White House pretends one can take only $5 out of the left pocket and have $20 in the right pocket. How an economist as bright as Glenn Hubbard could sign onto such nonsense is beyond me.

Posted by: Hal McClure on July 16, 2003 01:41 PM

Brad

Are you sure this NRO article was written by Tom Nugent and not Ted Nugent?

Posted by: P O'Neill on July 16, 2003 01:46 PM

Hal, I couldn't disagree with you more. Giving somebody a personal incentive to save money is one of the surest ways of doing just that.

Posted by: Stan on July 16, 2003 02:32 PM

Stan: I agree that incentives matter. My point was different. The Administration and friends are playing fast and loose with the accounting. Yes changing an incentive structure might have beneficial effects. But if you read much of what they are saying - they are pretending there are benefits beyond the incentive effects. Which simply put - is 'fuzzy' accounting leading to some seriously misleading 'analysis'.

Posted by: Hal McClure on July 16, 2003 03:26 PM

The final paragraph echoes a thought I've had a lot: it's not like there are no decent conservative economists, but the people who write conservative economic journalism usually aren't among them. The reason, I think, is that hard-core supply side thinking so dominates conservative political circles that reputable free market economists generally don't want to be associated with it. Conservatives treat academic economics as if it were women's studies or something, when in fact it's friendlier to their overall views than to those of the hard left. A silly waste (if you're on the right, which I am...).

Posted by: AGB on July 16, 2003 09:13 PM

The final paragraph echoes a thought I've had a lot: it's not like there are no decent conservative economists, but the people who write conservative economic journalism usually aren't among them. The reason, I think, is that hard-core supply side thinking so dominates conservative political circles that reputable free market economists generally don't want to be associated with it. Conservatives treat academic economics as if it were women's studies or something, when in fact it's friendlier to their overall views than to those of the hard left. A silly waste (if you're on the right, which I am...).

Posted by: AGB on July 16, 2003 09:14 PM

The final paragraph echoes a thought I've had a lot: it's not like there are no decent conservative economists, but the people who write conservative economic journalism usually aren't among them. The reason, I think, is that hard-core supply side thinking so dominates conservative political circles that reputable free market economists generally don't want to be associated with it. Conservatives treat academic economics as if it were women's studies or something, when in fact it's friendlier to their overall views than to those of the hard left. A silly waste (if you're on the right, which I am...).

Posted by: AGB on July 16, 2003 09:15 PM

A reading of David Brock's latest book "Blinded by the Right" might be instructive. The book is an autobiographical account of how a UC student and campus newspaper editor was thrust into the spotlight of writing multimillion dollar best sellers in a matter of a few years.

David Brock had no more talent than most, but he was connected to monied special interests. Mr. Brock advanced his career by writing what they wanted to hear. It didn't matter if what he wrote about Anita Hill was not true. Penning juicy lines like "a little bit nutty, a little bit slutty" that Rush could feed to his dittoheads made Brock a hit.

It is not a stretch to think that writers at NRO have the same incentives as writers for American Spectator or numerous right wing funded magazines have. Magazines like NRO are funded by very wealthy special interests. These special interests will make huge financial gains from current tax cut legislation. They don't want scholarly economic analysis. They want cover for their self-serving political agenda. For these special interests, buying a few journalistic hacks is a good investment when billions in tax dollars are at stake.

As David Brock discovered, defending Clarence Thomas and trashing Anita Hill made him the darling of the right and a wealthy best selling author. In his subsequent book, failing to trash Hillary Clinton enough to suit his right wing sugar daddies torpedoed his career and left him outside looking in.

Posted by: bakho on July 17, 2003 07:39 AM

Directly answering your question why they can't get competence. I think it is fairly simple supply/demand. There is a huge supply of $ for conservative thinkers (demand). This outstrips the available supply of intelligent /competent conservative thinkers. If Morgan Stanley will pay you millions (Roache, Brenner, Greenlaw etc.), why work for the National Review?

Posted by: JM on July 17, 2003 08:30 AM

Not to defend Nugent's drivel, but I do think that the quote:

"How silly is that! In aggregate, one person?s savings is another person?s income. If I decide to spend less and save more, then someone else won?t have that income."

is a misprint. I conjecture that he meant to say:

"one person's SPENDING is another person's income."

This based on the next sentence.

This does nothing to save the whole silly thing, of course.

Posted by: Jonathan Goldberg on July 17, 2003 08:54 AM

1. You don't read NRO for the economics. You read it for Jonah Goldberg's columns.

2. Nugent's column reminds me of the Bevis and Butthead episode where the two heroes get hired to sell candy bars. Bevis manages to sell one for a dollar. Then he says "Hey Butthead, I'll buy a candy bar from you, hehe". Gives dollar to Butthead, gets candy bar, eats it. Then Butthead says "Hey Bevis, I'll buy a candy bar from you, hehe". Gives dollar back to Bevis, gets candy bar, eats it. They proceed to pass the dollar back and forth and eat all the candy bars they were given to sell.
Oh wait. Maybe that was about the Keynesian multiplier.

3. From what I understand, the Nation has never made a profit in all the years of its existance. You know there's some wealthy groups funding them. Anyway some wealthy people fund left wing mags, some fund right wing mags, so what?

Rdk

Posted by: Rdk on July 17, 2003 06:02 PM
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