Brad DeLong's Semi-Daily Journal (2004)

I personally agree that Stephen Moore is not an economist just by virtue of his political hackery. But I think a few people would say it's a gray area with him since he took the time to get an M.A. in econ and I think he has done "scholarly articles" (scholarly is used *very* loosely here) for various right-wing think-tanks, which, although likely works of hackery themselves, might bring him over the threshold in many people's opinions.

Maybe they should start giving out licenses . . .

when I say "by virtue of political hackery" I mean that he seems not to reach any of his conclusions scientifically or analytically but chooses them according to a political agenda and then finds tendentious and misleading data to support that agenda.

Is Stephen Moore's and Kevin Hassett's position that economics don't matter? Or don't matter politically? Or is it that economists don't matter?

what of Mankiw?

Deficits don't matter as much as people used to think they did?

Note also in the NYT editorials this weekend that it is a "silly" game to ascribe credit or blame to presidents for job gains or losses since it is all "cyclical" anyway. Not only do deficits not matter, but nothing a president does in terms of fiscal and tax policy matters either, since it is all "cyclical".

Well, beyond the old saw that "you could put all of the economists in the world end to end and they still would not reach a conclusion" and the fact that Steven Moore is a political hack and not an economist.............

What they all seem to overlook is the reason that "Reagan showed deficits don't matter..." During the Clinton years, serious attention was paid to reducing the deficit, which took us into an annual surplus.

It's sort of like getting yourself into credit trouble, getting a credit counselor to impose the discipline that gets you out of it, and then concluding from that that "it doesn't matter if I charge more than I can pay off."

If you guys want a good fisking of Stephen Moore, take a look at this: http://www.spinsanity.org/columns/20030922.html.

Why is that Democrats never bring up the tax increases of Reagan's latter years and during the term of Bush I?

Stephen Moore's analysis is not just bad economics, it's also bad history. The idea that Reagan proved deficits didn't matter is simply bizarre. Ross Perot made himself into one of the most credible third-party candidates ever by hammering Bush on deficits, and driving home the idea that America needed to be fiscally responsible. If deficits didn't matter to voters, Perot would have been written off as a crank.

"When someone owes a bank thousands of dollars, that person is in trouble. When someone owes a bank millions of dollars, the bank is in trouble."

I think these people are going after the second category.

Besides confusing deficits and debt - Weisman is wrong about the int'l link being new. But he also confuses little interest rate effect with little effect. The right version of this Mundell effect is that crowding-out becomes less domestic investment reduction and more net export reduction.

There should be some question as to whether Hassett is an economist. He did after all write "Dow 36,000" based IIRC on the notion that the equity risk premium was an outmoded concept.

Brad: as I asked in a comment on the "tax shift, not tax cut" thread, how do you reconcile your view that deficits matter with the claim that there is no such thing as a tax cut, given the dynamic government budget constraint?

There is no problem with reconciling the views. Just because people don´t perceive the intertemporal government budget constraint correctly, doesn´t mean they don´t have to pay higher taxes later on.

There may also be some other effects. The fiscal side can bully the monetary side into debt financing: http://ihaveablogandmustwrite.blogspot.com/2004/06/reagan-volcker-and-lots-of-inflation.html

There may also be some positive effects. People may prefer to consume more when they are young but can´t do so because of problems with missing markets. And so on.

I have problems with the way economists characterize the consequences of government deficits, that is that they "represent a large transfer of wealth to finance current generations’ consumption from future generations which much eventually pay down federal debt to a sustainable level" This is a really confusing analysis, at best, and just plain wrong on its face.

Bush's large deficits facilitate income redistribution from the poor and the middle classes to the rich and very, very wealthy. Since that is the immediate effect of the tax cuts, which have created the deficit, this is demonstrably true. In the future, the higher level of federal debt may make Social Security untenable, further redistributing income to the rich -- this future consequence is the hope of many on the Right, but is speculative.

What is *not* true, and cannot be true, is that deficits can redistribute income between generations, taken as a whole. They cannot! Only a change in real, productive investment spending today can affect future income; additional real, productive investment financed by a deficit would increase future potential consumption while reducing current consumption, while a reduction in current real, productive investment forced by deficit-related borrowing would reduce future consumption; deficits, per se, are indeterminate in this regard.

Again, one can argue that Bush policies, which have reduced public investment in education, policing corporate malfeasance, etc., will have the effect of reducing future consumption. I think that's true. But, the deficits have had no discernible effect on private investment financed from the capital markets.

Focusing on the "crowding-out" thesis is just bull execresance. Private, market-driven investment is not the kind of investment, which is being quantitatively neglected. Real, productive private investment is not affected by the Bush deficit, though it may be affected in a profound way by Bush policies on, say, corporate governance, which appear to aim at avoiding future corporate crime by the simple expedient of firing all the police.

Really clever economists might note the relation of the federal budget deficit to the nation's trade deficit. I have noticed that right-wing "economists" lately have developed a Wal-Mart fetish, defending the giant's anti-union exploitation of low wage workers, while noting the company's contributions to increased productivity and lower prices. None of these "economists" are likely to mention that Wal-Mart's lower prices are in part the consequence of China maintaining its currency at a very low exchange rate, by accumulating huge quantities of U.S. debt.

A normal person, reading Jonathan Weisman in the Washington Post on June 8, would have forgotten completely about the story by July 5.

Michael: yes, I agree that there is no logical contradiction - I just wanted to smoke out what exactly Brad would point to as leading to rising real interest rates and/or foreign indebtedness: myopia on the part of the current generation; the absence of our children's utility on our own utility functions; borrowing constraints that put lots of us at corner solutions where we are consuming all of our present income and want to consume more, but are prevented from borrowing against future income - or something else. I agree that the potential monetization of the debt, by raising future inflation fears can raise nominal interest rates; will it raise real rates?

Use to be it was Democrats that promised things to voters and the Republicans were stuck with being the "responsible " party that had to take away the bunch bowl. Reagan reversed that and made the democrats the bad "responsible" guys.

So how long is it going to be until the democrats say, why thank you Reagan and Cheney for showing that deficits do not matter? Therefore we can go ahead and imlement major increases in social progams and new healthcare benefits without raing taxes to finance them. Afterall, Kerry is just proposing a somewhat smaller tax cut than Bush accompanied by big new programs. We will not let the republicans outbid us for the votes.

Isn't that where we are headed?
Sound like Argentina?

I'm not an economist, so, flamethrowers at the ready...

To me it seems obvious that the reason that Reagan's and Bush's deficits haven't pushed up real interest rates is that the effects on capital supply of financing the ever-increasing national debt have been far more than counteracted by the expansion of the proportion of the economy that's devoted to private sector capitalization. All of the indicators point in the same direction: redistribution of the tax burden, consumer debt load, executive pay versus workers' pay, right down the line.

It isn't that "deficits don't matter." It's that they don't matter as much as the vast redistribution of wealth within our society that's occurred over the last twenty five years or so.

The shift of wealth into private sector capitalization began as an option under Reagan, but I fear that at this point it's become mandatory as a means of avoiding the severe economic dislocations that would result from attempting to bring private sector capitalization back to a more reasonable proportion of the economy. IOW, we've gone to considerable effort and expense to create a capital glut, and now we're addicted to it.

It seems to me that what we are doing is eating our seed corn. Our ancestors created a valuable, and largely free, infrastructure with their taxes, from interstates to water and sewage systems to subways and airports.

They also built irreplaceable systems for control of the excesses of capitalism. We are throwing those out the window as well. Take a look at the revisions to Article 9 of the Uniform Commercial Code, which effectively screw the unsecured trade creditor for the benefit of large capital. See what happened when the guard dog mentality of the IRS and the SEC is replaced by kinder, gentler regulation. Nothing is too precious to sell to the highest bidder.

Baby boomers are consuming that infrastructure, and not replacing it. The effect of this misuse of tax revenue and governmental power is the real burden on future generations, which will wind up paying for our consumption as well as trying to pay for replacements.

Brad, I have to apologize to you, I took you to task some time ago for criticizing a straight front-page story by Weisman (on Bush’s budget) because I thought it was the usual rush-hour reporting of a straight news event, in the standard pyramidal style. But this WaPo analysis proves he is not intellectually competent, and is a mere conduit for received opinion.

It should be pointed out that the structure of his article is: (1) some “economists” now “believe” that deficits don’t matter in the way they used to “think” they did, (2) but still, deficits may make us vulnerable to a run on the dollar.

[Passing over the fact that the economics underlying #1 hasn’t changed much at all, and #2 was first adverted to, last autumn in threads on this site, and then showed up in a January AEA paper by Rubin-Orszag-Sinai.]

It’s another window into what the think-tank propagandists are willing to allow over cocktails, and how it is filtered out to We the dithering People. And it prepares the ground for, Next! : Social Security has to be amended, for reasons of National Security!...

Sounds to me like Prof. DeLong is just upset because he didn't get the longest quote in the article....

Drawing together what Hal McClure said and what Tom Marney said, aren't the real effects/costs of cumulative deficits displaced abroad, insofar as we are effectively increasingly consuming foreign capital/domestically dissaving, which has the future consequences of sending profit streams abroad, decreasing the leverage of domestic employment, and drawing off domestic investment in our future trading partners? The real costs might not show up in the short-run in interest rates, but in deflationary pressures and international imbalances. I've never understood per se why one of the wealthiest and most technologically advanced countries in the world should prove incapable of sustaining its own domestic savings/investment requirements.

John,

I think that's part of what's happening. The problem we on the center-left have is in explaining to Joe & Jane Sixpack why that (among other things) is a problem.

The thing that bothers me about the "deficits will push up interest rates" argument is that in the current economic environment, it hasn't happened, at least not in ways that voters can easily understand. Meanwhile, most of our pundits are left still fighting the last war-- the one that ended in the early '80's. and the other side barely needs to fight at all.

IMO, we need a better critique of why the economy is the way it is. By better I mean more rigorous, but straightforward enough to base sound bites upon.

Tom Marney,

You sound like a candidate for MaxSpeak.com. Check it out if you haven't already.

Sensible folk have been arguing for many years that controlled, but growing deficits in the context of a growning economy are not in and of themselves "harmful". That Republicans have now come around to this view is just another demonstration of the fact that current Republican positions on just about any topic are ipso facto self-serving and more than likely incorrect.

For some reason, the Republican Party adopted this lamentable tendency shortly after running the abolitionist radicals out of the party (shortly after the Civil War). Check it out. Take any Republican historical position....Leap ahead twenty to thirty years. What do you find? They were incorrect or wrong on the issue.

brian, just for the record, many democrats point out that reagan and bush raised taxes; i do it all the time to conservative friends who are caught up with reagan hagiography.

And then i send them off to read bruce bartlett on the subject....

Tom Marney: the answer is in the difference between the short run and the long run. In the short run, deficits can provide spending to help pump an economy out of a recession. This should be okay as long as you pay off that deficit in the course of that business cycle. If not, in the long run, deficits will raise interest rates, in competition for funds. That will slow down GDP growth.

It also depends in part on what investors think other investors will do. Like: waiting, to get their man back in the White House in the next election.

Well... gee... I don't think this article is as bad as previous examples. Just almost as bad. So, some improvement.

It makes a clean break from stenography (which is good!) attempts to be balanced, and lands right back into the "he-said-she-said" brand of economic reporting.

OK, the assertion of a new "consensus" is supported only by proximity to some names that can not be considered a balanced sampling of macro opinion. And the article doesn't seem to understand the difference between and short countercyclical and long run structural deficits. And Weisman does seem to have skipped the conclusion of the Engen and Hubbard paper. And then there is the problem of misinterpreting the math and time units in the report. And Benjamin Friedman's and Niskanen's concern about the implications for long term foreign borrowing are left hanging and will mean nothing to the average reader.

But still, I think the Prof should be more constructive in his comments re this kind of reporter (and article). Otherwise Prof D will be ignored, and not only by the Washingon Post writer, but anyone other than people who willingly read economics and statistics (that leaves a real big audience, huh?). Even admitted econ-reader me would be more interested in the Prof's opinion of what the article should have said (besides the obvious about the poorly supported new consensus assertion).

You were too shrill.

jml
But he (our host) DID say what the article should have said. [Near the bottom -before the .03%-not .3% stuff comes up --a correction that was handled with a minimum of "foaming-at-the-mouth and rage".]

Don't be misled by the #@%&*, this is just a typing exercise.
[OK maybe not, but it is merely 1st gear in shrillity. second gear is f---ed up...f---ing...etc (Brad never goes here){OK once he did but 'that is all'). And third gear is pretty new and so far virginal to Brad ( He Cheneyed-it up but good.) [royalties to Zizka]

So this is piss-poor shrill, no?
Zizka thinks so and I defer to his superior shrill detection skills.
And his horse's.

Tom Marney:

I had to go to work, so my comment was hurried, but I meant to draw the connection between the export-reduction effect of recurrent deficits and the increased leverage of capital over labor, the wage reducing effect, with an eye to the aggregate demand situation. It is puzzling what the Bushies actually intend by their policies, rationally speaking, given their incoherence. But the rule-of-thumb is that they intend to please their "base", i.e. their corporate donors. So the question becomes what do their corporate donors want. Without supposing any simple identity of interests among the various corporate interests, let alone any conspiracy, the sorts of pressures generated by the composition of these deficits, leaving aside the direct benefits, do, indeed, conduce to broadly corporate interests, given that it is not a particularly good environment for corporate operations and that corporations do not get to choose the environment that they operate under. But it would be exceedingly hard to explain all that to Joe Six-Pack,- (though I might dub myself John Six-Pack),- since he too has been drawn in to debt and the deflationary displacement of debt. An irrational reaction is to be expected, though I'd be willing to place my bets on just the right sort of irrational reaction.

I heard exactly the sort of question from somebody or other on NPR this weekend that the Weisman's of the world seem unable to ask. The interviewer had a pro-privatization and an anti-privatization guests, both making claims for their position. The discussion came around to -- is there any research not sponsored by interested parties like you two, showing strong results either way on questions of efficiency gains from privatization? Weisman doesn't seem to understand whom he is quoting. When discussing issues of public finance, do we want to quote mostly those with a strong partisan connection to the issue?

Masacio,

Can you tell us more about:

"Take a look at the revisions to Article 9 of the Uniform Commercial Code, which effectively screw the unsecured trade creditor for the benefit of large capital."?

I haven't heard anything about this, but if this is the case, the impact could be immense. Besides directly impacting my job, of course.

The problem is that foreign investment is making our borrowing artificially cheap by increasing demand for our debt products. However this breeds a complacency. Now it is not always true that our debt will be necessarily an attractive financial product. As a matter of fact as our balance sheet deteriorates, the continued structural bleeding of jobs and assets through capital flight overseas, etc. and future liabilities increasing from higher debt service (our debt is short term notes mostly, so higher interest rates equals higher debt service) and ongoing unresolved social entitlement liabilities - well with that huge mess it seems unlikely that our debt and currency is going to permanently remain attractive as an investment option.

When that happens, not only will interest rates go up "to what they should" without the excessive foreign demand but they will overshoot because everyone will want to get out of holding positions in our debt. At that time the huge amount of debt piled on when times were good and prices were cheap, will seem enormous and very expensive indeed.

Thus does living beyond one's means lead to a sudden and abrupt crisis forcing extreme contraction or negation of promises.

Spencer asks "So how long is it going to be until the democrats say, why thank you Reagan and Cheney for showing that deficits do not matter? Therefore we can go ahead and imlement major increases in social progams and new healthcare benefits without raing taxes to finance them. Afterall, Kerry is just proposing a somewhat smaller tax cut than Bush accompanied by big new programs. We will not let the republicans outbid us for the votes.

Isn't that where we are headed?
Sound like Argentina?"

I am afraid this is exactly where we are headed. After all, this is a democratic society. If voters cannot figure out the math, then this is what they deserve. And just looking at how deeply many consumers/voters are in debt in their personal finance, I worry that the scenario you described has better than even odds.

oldman
Your forecasts of our debt and currency losing some of their lustre in attracting foreign investors confirm (sorta) my views.

The private investors have long left this attraction to no more than 6 foreign central banks, no? [Asian banks]

So these guys,
" everyone will want to get out of holding positions in our debt.",
all 6 of them, will be screaming for the exit doors?

These institutions will negotiate a resolution with the Fed, no?

I find your last choice, 'negation of promises' to be the likely one.

It's like after John Berry left, the editors of the Post said: "To hell with this competency shit, we need a real MORON to cover economics for us - someone the supply siders can relate to."

OK, DeLong wasn't that shrill. OK, no, he wasn't shrill at all. I take it back. I've been cranky lately. He was just not constructive enough.

I should be constructive in my request for more constructivity: how about Prof D rewriting the article which would include the following from the post below

"How adverse are the Engen-Hubbard consequences for economic growth? In their simplest model (which produces results that are, I think, in the ballpark but likely to be too large), pushing up the debt-to-GDP ratio by 40%--the result of the ten-year four-percent-of-GDP-deficit scenario--pushes down the county's capital stock by 14.4%, and makes the country 4.8% poorer."

And then explaining, in terms that Weisman could emulate, what this would mean for living standards (eg. this would wipe out X% of the 90s boom, or something over same period).

And some one should try their hand at explaining the foreign account/deficit connection in way that most people would understand.

Rather than bash Weisman, I would prefer kindly unclely advise on what he should have said... so he has no excuse for acting out in print (which was what some of his article brought to my mind)

John Halasz,

I'd reply in greater detail if this thread were fresher. As it is, I'll be brief:

"It is puzzling what the Bushies actually intend by their policies, rationally speaking, given their incoherence."

No, it isn't. What they intend is to use the power of the state to give the rich more money and power as quickly as possible. Theyre incoherent because what they're doing is impossible to defend coherently. As for "rationally speaking," you're kidding, right?

Unfortunately, it's extremely difficult to tell the truth about these bozos without sounding radical and thereby alienating Joe and Jane Sixpack.

"An irrational reaction is to be expected, though I'd be willing to place my bets on just the right sort of irrational reaction."

Surely that's the best quote of the day! Now, how to bring such a reaction about...

I have never claimed to be a normal person, but I was particularly amazed by "[A]fter the boom years of the 1990s, and the steady economic slides of those international rivals, some economists are reevaluating that version of history." What could that mean ? Well let's see in 1993 some economist said what the country needed was a big tax increase. They convinced the press and enough Dems on congress (and 0 Republicans) that Reaganomics was revearsed by a huge tax increase. After the boom years of the 90's they might have argued that "the deficits slowed economic growth in the 1980s enormously," one of them (Brad) stubbornly sticks to "significantly"

Nooooo the success that followed Clinton's anti-Reaganomics is evidence that Reaganomics is OK.
Does not compute.

I assume the 0.3% was a typographical error.
Well actually the first of 3 consecutive identical typographical errors
"Indeed, this school of thought is becoming something of a consensus, Engen said. Deficits equal to 1 percent of the size of the economy should raise interest rates by 0.3 percent, he said. That is the low end of the 0.3 to 0.6 percent range postulated by Brookings Institution economists William G. Gale and Peter R. Orszag when they argued deficits are economically significant. "

Even the hypothetical journalist who don't understand that 0.3% is a large increase in interest rates must notice that it is larger than 0.12% and surely must know that a "record" budget deficit is of more than 1% of GNP. I mean people can read numbers can't they ? Can't they ???

I think that Mr Weisman and the Washington Post typographical staff just shouldn't work together anymore. I hope they have a much better typographical staff at the club for growth or AEI or wherever people go if they lost their jobs working for the team.

Dear Calmo,

I would agree. If you think about, there has never been a more independent and popular Central Banker in the USA than Greenspan. So the question becomes, if Greenspan doesn't feel as if he's able to put the crunch on the economy to restore market efficiency then what Central Banker in the USA is EVER going to feel politically independent in order to do that?

The answer is never. Independence is a fiction. If we understand central bank independence (in the USA) to be a fiction, then we can understand Greenspan's actions as an accomodating bureaucrat issuing whatever debt is necessary to fix the market in favor of the expedients of his political masters.

In that perspective, the catastrophe is obvious because clearly a politically dependent bureaucratic lackey of a central banker is going to do whatever necessary to enable his political masters to do whatever they want. In this case I don't accuse Greenspan of being beholden to the Republicans, but simply being too deferential to the Establishment priorities. A truly independent central banker would have refused to do what Greenspan has done.

Dear Calmo,

I would agree. If you think about, there has never been a more independent and popular Central Banker in the USA than Greenspan. So the question becomes, if Greenspan doesn't feel as if he's able to put the crunch on the economy to restore market efficiency then what Central Banker in the USA is EVER going to feel politically independent in order to do that?

The answer is never. Independence is a fiction. If we understand central bank independence (in the USA) to be a fiction, then we can understand Greenspan's actions as an accomodating bureaucrat issuing whatever debt is necessary to fix the market in favor of the expedients of his political masters.

In that perspective, the catastrophe is obvious because clearly a politically dependent bureaucratic lackey of a central banker is going to do whatever necessary to enable his political masters to do whatever they want. In this case I don't accuse Greenspan of being beholden to the Republicans, but simply being too deferential to the Establishment priorities. A truly independent central banker would have refused to do what Greenspan has done.

BurritoBoy: prior to the revisions to Article 9, the range of things that a lender could take as collateral was somewhat limited.

And, there were several complex requirements, failure to meet any of which would be destroy the security interest. These rules would not help, except in the case of a bankrutpcy, where the failure to comply would open the door for a bankruptcy trustee to set the security interest aside, for the benefit of unsecured creditors.

Between these two major matters, and a number of minor matters, it was not at all uncommon for a Chapter 7 trustee to find some assets for unsecured creditors.

The revisions were designed to undo the restrictions on collateral, and to make sure that the big lender could get an easily perfected secuity interest in any item which conceivably could have value.

In their meetings, the people doing the drafting would make jokes about how they were screwing the Chapter 7 Trustee, never thinking that they were in effect screwing the unsecured trade creditors for the benefit of their own clients, all of whom are large lenders.

In effect, under prior law, security interests were treated as the exception, not the norm, so that compliance with complex regulations to obtain a favored position was deemed proper. Under the new rules, the position of the secured creditor is favored.

Nemo hic adest illius nominis - There is no one here by that name

Mea culpa - My fault

Nullo metro compositum est - It doesn't rhyme

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