Bill Gale and Peter Orszag write that budget deficits slow economic growth and raise interest rates. In truth, this is only something that needs to be done in Washington D.C. In a normal place, a normal economist would say:
It is certainly possible for a demand curve not to slope down. But that happens only one time in a thousand--and nobody has advanced any sound reason why bond prices and interest rates should be that one time in a thousand.
Given the strength of the case against, only analytically weak and excessively partisan economists will back the Bush administration on this one.
The Economic Effects of Long-Term Fiscal Discipline: ...Over the past two years, the long-term budget outlook has deteriorated markedly. Although many policy-makers and economists have expressed concern that this fiscal deterioration will reduce future national income and raise interest rates, Bush Administration officials and others have publicly denied the existence of such adverse effects. This paper examines the relationship between long-term fiscal discipline and economic performance, with two main results. First, as almost all economic research and standard textbooks suggest, declines in budget surpluses (or increases in budget deficits) reduce national saving and therefore reduce future national income, regardless of their effect on interest rates. Second, simple correlations, careful empirical research, macro-econometric models, and the views of leading economists and policymakers all indicate that increases in expected future deficits raise long-term interest rates. Based on the literature, a reasonable estimate is that a reduction in the projected budget surplus (or increase in the projected budget deficit) of one percent of GDP will raise long-term interest rates by between 50 and 100 basis points. These findings suggest that the costs of increased deficits are significant over the long run, and need to be compared carefully to the potential benefits of the tax and spending programs that result in larger long-term deficits.Posted by DeLong at December 18, 2002 02:12 PM | Trackback
Perhaps you ought to tell your less economically well-read readers that this is opening the door to a very complex set of issues. My reading is that most macroeconomists would agree that budget deficits raise interest rates, but you can get a lot of argument on the net effects on growth.
BTW, haven't we come a long way from the 'vulgar Keynesian' views of the 1960s on this? In those days, the tiny monetarist sect held that deficits were neutral for growth, while the mainstream held that, up to a point, they unequivocally raised it.
Posted by: derrida derider on December 18, 2002 04:20 PM>>"My reading is that most macroeconomists would agree that budget deficits raise interest rates, but you can get a lot of argument on the net effects on growth."
I guess that depends on things like (i) how close you are to full employment and (ii) what the government is actually spending the money on.
>>"BTW, haven't we come a long way from the 'vulgar Keynesian' views of the 1960s on this?"
Lordy, I hope so! :)
Posted by: Michael Harris on December 18, 2002 04:46 PM... and what horizon one is concerned about. I have never heard any argument by any serious economist that says that deficit helps with growth in the long- or even the mid-run, derrida derider
But don't worry, we're in good hands. Small government folks are in power... And whatever little money they spend from future taxpayers' income on, you can be sure it is things that matter a whole lot for productivity. Like star war programs that no serious scientist think of workable until they testify in Congress...
In any case, the government surely knows better than investors what technology to develop. One sure thing is: the future is not in Wi-Fi...
Posted by: Jean-Philippe Stijns on December 18, 2002 05:09 PMWell. I must say we've come a heckuva long way to reach the point where liberal economists are now arguing for balanced (or even SURPLUS !) federal budgets in order to ACCELERATE economic growth.
Am I the only one who finds this passing strange?
One of only several problems with this sort of analysis is that it holds about 5,000 variables absolutely constant whilst letting only one variable change. Is there anyone in this forum who really thinks that the world works like THAT?
There was even a time when Dr. DeLong was more even-handed and intellectually rigorous, but that was long ago.
Posted by: Anarchus on December 18, 2002 05:48 PMKeynes is bound and gagged when tax cuts are on the table.
He is trotted out as bearer of unswerving truth when domestic/social spending tops the agenda.
Arguably, with rates at super-low levels, if Uncle Sam were to choose a time to borrow-and-spend, it would be hard to pick a better moment.
Posted by: Bucky Dent on December 18, 2002 05:56 PMIt might be put that economists who were denial would advocate such a degree of fiscal irresponsibility as we see with the Bush administration at the present time. It surprises me that our economy is so robust that usually such an assault gets absorbed and we go on from there. Take the S&L Heist under the Regan administration; should not that have done more damage. Now we are going to have Star Wars Redux and an Iraq War and John Snow, I read was, forgiven a $25 million, loan to buy CSX stock so we can imagine Bush is going to get real tough with CEOs...no we will have to wait for St Peter to deny them entry. In short, I cant imagine how many more creative pro GOP contributor actions will occur in the next two years or how these actions will efffect the economy or whether the Dems are tough enough to act on the public's behalf. Any bets on how long Trent Lott will hang around?
Posted by: on December 18, 2002 06:50 PM>>Well. I must say we've come a heckuva long way to reach the point where liberal economists are now arguing for balanced (or even SURPLUS !) federal budgets in order to ACCELERATE economic growth. Am I the only one who finds this passing strange?<<
You might as well be Anarchus. In modern history, the two largest increases in debt : GDP ratio occured under Reagan and Bush I. Wars typically cost _a lot_ of money and have historically resulted in noticeable jumps in National Debt.
>>One of only several problems with this sort of analysis is that it holds about 5,000 variables absolutely constant whilst letting only one variable change. Is there anyone in this forum who really thinks that the world works like THAT?<<
It's called comparative static analysis. There is nothing wrong with analyzing the effect of the change in one variable on the equilibrium values of other key variables in the system.
Is it a simplication of an actually much more complex system? Well, yes of course. As one Berkeley professor is fond of saying, if you want a realistic model of the economy, well, stick your head out of your office window. Who cares about a 1:1 map?
Now, does it mean that by solely looking at budget deficits one can make useful predictions about the economy? Of course, not. But that's not the point. The point is to say something about the impact of one variable, everything else being equal.
At a deeper level, the only real criticism that can be made towards this approach is to say that budget deficits are an endogenous variable, meaning they don't arise out of the blue, but as a reflection of the state of the rest of the economy.
The problem with this line is that it can only account for a limited part of the current swelling of the budget deficit. The bulk of the action is coming from tax cuts and military and pseudo-military expenditure rises (and we have seen nothing yet!)
>>There was even a time when Dr. DeLong was more even-handed and intellectually rigorous, but that was long ago.<<
Professor DeLong shoots regularly on both sides, even though he has a right to have a political affiliation. On the other hand, I rarely, if ever, hear a conservative critize one of his own, and even less Super-Dubya. How comes?
Do you believe he is fautless when he on the one hand argues that bin Laden attacked the US because it's a free country, and then goes on the curtail American civil libertie? Do you aggree with him when he gets elected on a pro-trade platform and then turns into a protectionist? Do you aggree with him when he dodges requests by the victims of 9-11 to have an investigation into government failures and goes on to choose a Kissinger whose first remark is to say he wants to look into terrorist networks instead? Aren't we going through all of this in the names of the victims of 9-11?
If consevatives and libertarians are shouting their true patriotic dessent, well we really can't hear them... So, give us a break with your "even handed" line and go back to your national unity rhetorics.
Posted by: Jean-Philippe Stijns on December 18, 2002 09:19 PM>>Well. I must say we've come a heckuva long way to reach the point where liberal economists are now arguing for balanced (or even SURPLUS !) federal budgets in order to ACCELERATE economic growth. Am I the only one who finds this passing strange?<<
I must add that:
A. budget surpluses cum low cost of liquity to boost investment was the punch line of Clintonian economics (at the very least during his second mandate). And it worked wonders. Did we just forget this piece of Ancient History during which we witnessed the longest peaceful period of economic expansion?
B. Republicans keep coming back with Laffer Curve line whereas there is simply zip evidence that there is actually any such cure. (Which is not the same as to say that if you push taxes way up in the sky you're not going to stiffle growth, but we're simply not on that side of the curve.) By the way, Laffer is not a doctoral program drop-out for no reason...
Posted by: Jean-Philippe Stijns on December 18, 2002 09:30 PMCareful, Brad, you'll get put on Ashcroft's list.
Posted by: on December 18, 2002 09:44 PMIn re: realism of economic models: as my professor says, if you make no assumptions, you get no results.
Posted by: on December 18, 2002 09:50 PMP.S. And if so-called moderate Republican voters just realized things like this, we'd have a different Republican Party, that could then hope to play a healthy role for the American economy.
Posted by: Jean-Philippe Stijns on December 18, 2002 10:01 PM'There was even a time when Dr. DeLong was more even-handed and intellectually rigorous, but that was long ago.'
Uh, so there's a case to be made for systematic deficits? The deficit may be helping demand a bit right now, but it's rather unlikely it'll be helpful in 2009.
Posted by: Jason McCullough on December 18, 2002 10:02 PM>>the mainstream held that, up to a point, [deficits] unequivocally raised it.<<
Up to a point, and for a while. If you look--say--at the 1962 Kennedy Economic Report of the President, the message that deficits are bad for growth comes through very clear...
Posted by: Brad DeLong on December 18, 2002 10:34 PM>>liberal economists are now arguing for balanced (or even SURPLUS !) federal budgets in order to ACCELERATE economic growth. Am I the only one who finds this passing strange?<<
Yes. You are the only one. Liberal economists--at least my sect of liberal economists--have been arguing for tight fiscal and easy monetary policy to boost growth since the early 1960s, if not before.
It's the abandonment of concern about the government's budget balance by "conservatives" that is really weird...
Posted by: Brad DeLong on December 18, 2002 10:35 PMOut of interest, Brad, does this mean that you unequivocally reject Krugman's tentatively advanced thesis that the USA is at or near a liquidity trap?
Posted by: dsquared on December 18, 2002 11:07 PMLiberal economists--at least my sect of liberal economists--have been arguing for tight fiscal and easy monetary policy to boost growth since the early 1960s, if not before.
Maybe for the U.S. today there are no magic bullets - fiscal or monetary - to boost real as opposed to nominal growth. Maybe the Fed's attempts to "do something" for the economy, by lowering short-term interest rates, has only made matters worse, by encouraging Americans to go further into debt, using their homes, vastly overappreciated, as their one major asset. Greenspan's strategy smacks of playing double or nothing with the nation's economy, like Nick Leeson selling more puts on the Nikkei and hoping desperately that things will turn out fine.
But ok maybe I'm wrong, and economists are right; I'll know in a couple of years if the economy is really doing better. But what I would like to know is, when do you admit you're wrong? If the economy doesn't pick up now, what next? Are you still going to be saying that monetary policy works, only now we need to target long-term interest rates? And if we do that and the economy still doesn't pick up? When do you give up and admit it's a mistake? When ????
Posted by: Andrew Boucher on December 19, 2002 02:16 AMThis is a joke:
"...only analytically weak and excessively
partisan economists will back the Bush
administration on this one."
Take a look at dead leaves sources like:
H. D. Kurz and Neri Salvadori, Theory of
Production: A Long-Period Analysis.
Cambridge, 1995.
Colin Rogers, Money, Interest and Capital:
A Study in the Foundations of Monetary
Theory. Cambridge, 1989.
More discursive essays drawing on this
rigorous analysis:
http://www.econ.usyd.edu.au/drawingboard/
journal/0111/white.pdf
http://www.econ-pol.unisi.it/ab215.html
Mainstream economists have no answer to the
vast literature these sources draw on. More
serious economists, like Paul Samuelson and
Frank Hahn, have acknowledged DeLong's
flag-waving has no analytical basis in
their supposedly rigorous theory.
Bucky Dent wrote: Keynes is bound and gagged when tax cuts are on the table.
He is trotted out as bearer of unswerving truth when domestic/social spending tops the agenda. --But tax cuts for the rich, the kind favored by Bush et al., are much less likely to have a stimulative Keynesian effect.
Jean-Philippe Stijns wrote, Republicans keep coming back with Laffer Curve line whereas there is simply zip evidence that there is actually any such cure. --Well, there is a curve, but...Martin Gardner (former Sci. Am. columnist ("Mathematical Games")) had a hilarious graph of what the Laffer Curve looked like: a big tangle (definitely not a function). LOL!!
Posted by: Stephen J on December 19, 2002 04:15 AM>>Out of interest, Brad, does this mean that you unequivocally reject Krugman's tentatively advanced thesis that the USA is at or near a liquidity trap?
<<
We're not in a liquidity trap yet. Give us two more pieces of big bad news about investment demand, however, and we would be...
Brad DeLong
I understand that government borrowing crowds out private sector borrowing, but what is the link between this and slower growth? Is this a demand-stimulus argument about the multiplier effect being smaller when the money supply is expanded through fiscal rather than monetary means? Is it about the relative efficiency of the state and the market at productive resource allocation? Something else completely?
I'm curious because I would have imagined the most natural link between deficits and slower long-term growth would be a higher risk-premium on US borrowing.
Anyone feel comfortable hacking out an answer for a slightly confused non-specialist? My thanks in advance.
Posted by: david on December 19, 2002 06:49 AMDavid wrote, I understand that government borrowing crowds out private sector borrowing, but what is the link between this and slower growth?
I'm not a specialist either, but my casual reading of these debates is that it's supply side: excessive guvmint borrowing "crowds out" private investment, which leads to less economic growth in the future.
Apparently this is idea is not accepted by everyone.
Best,
Posted by: Stephen J Fromm on December 19, 2002 08:18 AMOne of my favorite web brousing activities is to see what sort of post draws the biggest response. (Climate change is a big recent winner.) This time, Anarchus, who seems most of the time to have a partisan point of view, wins the prize by letting his partisanship outrun his analysis. Many, if not most, visitors to this site seem literate in (positive) economics. One of the least noted truths about economists and economics is that lots of what goes on in the field is not partisan defensiveness, but objective efforts to make the data speak usefully. I think it is nonsense, much of the time, to try to determine whether an economist is a liberal or a conservative before reading his or her work. It's nice to know whether a neo-Keynsian, law-and-economics or whatever point of view is the starting point, but that is often quite a different issue from where said economist stands on national political issues. Interestingly, many of the most strident posters here and at other politically interested web sites don't seem to understand that most economists aren't as partisan as they are and are not bought and sold as easily as political handlers would like.
I'm a bit surprised at the form of Anarchus' argument, as well. One thing that is screamingly obvious about the economics profession is that economists become more aware of the impact of policy presciptions as time goes by. Keynes had a winner, in the circumstances for which he wrote, when contractionary monetary and fiscal policy were often prescribed to wring out excesses during contractions. Over time, it became apparent that there are costs associated with fiscal expansion, even though it was far superior to fiscal contraction in the 1920s and 1930s. Is there some reason that economists not associated with the Heritage Foundation/Cato/AEI should have missed that?
Posted by: K Harris on December 19, 2002 08:22 AM>> Anarchus, who seems most of the time to have a partisan point of view, wins the prize by letting his partisanship outrun his analysis. <<
I'd say the author of these lines deserves that honor:
<<---------quote----------
A government budget deficit increases the quantity supplied of bonds.
Because demand curves slope down, a rise in the quantity supplied of bonds reduces the price of bonds.
The interest rate is inversely related to the price of bonds.
End of story.
-----------endquote------>>
Pretty obviously that is not the end of the story. As McCloskey is fond of saying, "How Big"?
For a short explanation:
http://atlanticblog.blogspot.com/
tax cuts for the rich, the kind favored by Bush et al., are much less likely to have a stimulative Keynesian effect.
You can't give tax cuts to people who don't pay taxes. And our "progressive" tax structure sees to it that those awful "rich" people pay most of the taxes.
If you don't want to cut taxes, fine. Just don't expect the economy to grow faster without releasing more capital into innovative, adaptive private hands.
Posted by: Bucky Dent on December 19, 2002 08:56 AMK Harris wrote, One of the least noted truths about economists and economics is that lots of what goes on in the field is not partisan defensiveness, but objective efforts to make the data speak usefully.
That's perhaps true to some extent, but I think you exaggerate.
First, empirical evidence: You really think Marty Feldstein isn't influenced by his own partisan views?
Second, theoretical: results depend on what assumptions your model makes. Those assumptions are often guided by hidden biases.
Best,
Posted by: Stephen J Fromm on December 19, 2002 09:00 AMBrad is certainly showing himself to be a "normal economist" -- i.e., one whose nostrums are "analytically weak" and all to easily serve the political purposes of others. Please see my detailed comments on Brad's praise of Rubinomics at http://www.poorandstupid.com/2002_12_15_chronArchive.asp#90071567
Posted by: Don Luskin on December 19, 2002 09:10 AMBrad,
I've never seen a worse argument than the one on this post
Demand curves slope down.
A government budget deficit increases the quantity supplied of bonds.
Because demand curves slope down, a rise in the quantity supplied of bonds reduces the price of bonds.
The interest rate is inversely related to the price of bonds.
End of story.
Certainly it's an arugment, but it's hardly the 'End of story' you see it as. For a start it only says interest rates will be higher, growht never makes an appearance in the argument. At the very least it needs an 'and so growth will be higher', which is clearly only true ceteris paribus.
Indeed, what's the cross-country evidence for this bold assertion Brad? Certainly there are counter examples...Italy ran enormous budget deficits for years and grew very quickly, since 1997 its run very small ones and grown very, very slowly.
Posted by: Matthew on December 19, 2002 09:40 AMI think PLA should have a blogspot award For "Highest Tolerance Of Ankle-Biters In The Comments" and Professor DeLong would win hands down. I admit right up front that virtually every comment I've ever put here would be considered certainly counter to the associated post.
But I am a heavily involved in product design and manufacturing, and I have concrete problems with the current trend in economic theory where textile workers can become airplane mechanics and the production of one type of widget is only different from another in the sense of profit margin. And I believe the comment section here is for people like me to help him, well, "stick his head out of the window," while his posts themselves help people like me understand somewhat where this stuff comes from.
But this comment section cannot possibly be so we can teach him economics. If he wanted that he could simply correspond with other professors thru e-mail, at conferences, etc. And for you guys to criticize his knowledge, in fact go as far as accusing him of putting politics over his professionalism, is just despicable beyond words. And I am totally embarassed for you all.
So, Brad, if I could apologize for these cretins I would. Don't ever interpret my often intemperate posts as me thinking I know sh*t about economics compared to you. My opinion that a bag of flour circa 1500 is not a bag of flour circa 2000, or whatever oddities I've been guilty of, is something the ivory towers need to hear, maybe, and that's why I post it. But please don't ever think my comments are coming from that dank, dark place that some of these guys seem to inhabit.
Oh, and Happy Holidays! ;>
> End of story. <
I would think it would be more like the beginning.
As an "end" it's remindful of Samuelson's similarly irrefutable logic demonstrating that the private sector can't provide lighthouses, which lasted until Coase bothered to look at all the lighthouses actually provided by the private sector. Which was the start of a very interesting story of facts mediating theory.
Now here the irrefutable logic of the five bullet points culminating in "end of story" isn't even bought by Gale and Orszag themselves -- at least regarding the short term. They themselves quite fairly summarize the empirical research on deficits and interest rates...
~~
".. Barth et. al (1991) summarizes the literature through 1989. Of the 42 studies it examined, 17 found a “predominately significant, positive” effect of deficits on interest rates (that is, larger deficits increased interest rates); 6 found mixed effects; and 19 found “predominately insignificant or negative” effects ..." [Hey, 19 is *more* than 17! and so is 25.] Reflecting the variation in results, Elmendorf and Mankiw (1999) conclude that “Our view is that this literature...is not very informative.” Bernheim (1989) writes that “it is easy to cite a large number of studies that support any conceivable position.”
~~
But if the logic is *so* irrefutable, why isn't it seen in the facts shown in these studies?
Gale and Orszag go on to say it's because it is changes in *expected future*, not current, deficits that affect interest rates. They cull out those studies that measure changes in expected future deficits -- as distinct from those measuring the current deficit situation -- as the ones indicating an effect on interest rates. But that is interesting in three ways...
[] It flies in the face of the iron logic of the five bullet points. Those points aren't about expectations of future bond supply and demand having an effect today -- they are about *today's* supply/demand relation driving up bond prices today. But again, if the logic there is so irrefutable, why don't the factual studies clearly confirm it? Why do so many of them go the other way? So that Gale and Orszag shift their ground away from here?
[] If short-term supply/demand for bonds doesn't raise interest rates in the near term, in spite of the five bullet points -- and as per the plurality of the 42 studies -- then we've been reading op-eds in the Times for the last year that may not have been quite right when they claimed current fiscal policy has increased long rates to slow the recovery.
[] The claim that changes in *expected* deficits cause rates to rise itself faces some stark anomalies -- such as the fact that the day after the attack on Pearl Harbor signaled the largest sudden expected increase in the US deficit in history, the Treasury long forward bond rate fell, and kept on falling. As long rates also fell or failed to rise during the two other biggest build-ups of debt in US history, WWI and the Civil War.
Now, I'm not one to argue with irrefutable logic -- and in fact, I agree with the logic of the five bullet points as far as it goes. But maybe the logic is only getting us to the beginning of the interesting part of the story.
And, for the record, I don't like running up deficits today either, for several reasons. But the interest rate effect is the least of them.
"Well. I must say we've come a heckuva long way to reach the point where liberal economists are now arguing for balanced (or even SURPLUS !) federal budgets in order to ACCELERATE economic growth."
That's crap. "Liberal" Keynesian say you're supposed to stop the stimulative deficits after the recession, and use the good times to pay off the debt. These "liberals" have been complaining since Reagan's massive deficits - 20 years now. And look at the result - we're paying over $300 billion per year in debt interest thanks to Reagan! How is that supposed to be helping the economy?
Posted by: IssuesGuy on December 19, 2002 02:31 PMAnyone feel comfortable hacking out an answer for a slightly confused non-specialist? My thanks in advance.
Total investment is (government taxes - government spending) + private investment. If taxes go down, creating a deficit, unless the *entire* tax cut gets spent on investment (did you invest all of your tax cut?) total investment drops.
There's the multiplier effect for cutting taxes on national income, of course, but it's nowhere near big enough to make up for the part of the tax cut spent on consumption.
Of course, I just wrote an explanation of why a deficit decreases investment, not why it increases interest rates. Something I haven't seen an answer too is:
Interest rates should vary linearly with expected return.
A deficit decreases total investment, which results in less growth.
Less growth lowers the rate of return.
Therefore, a deficit should reduce interest rates.
I'm sure there's something I'm missing in the above, but I can't find it. Anyway, it seems kind of obvious that a deficit has to do *something*. You can't very well get money for nothing, can you? Otherwise, just get rid of taxes completely, leave spending unchanged, and we'll be rich!
As long rates also fell or failed to rise during the two other biggest build-ups of debt in US history, WWI and the Civil War.
True, but those wars also involved lots of economic growth and inflation; too many variables?
on Brad's praise of Rubinomics
Can we get a klaxon installed and set it to go off whenever a new WSJ spin phrase makes its appearence?
Posted by: Jason McCullough on December 19, 2002 03:00 PM"And look at the result - we're paying over $300 billion per year in debt interest thanks to Reagan! How is that supposed to be helping the economy?"
To be fair, Reagan didn't do that all by his lonesome. Reagan insisted on large amounts of defense spending. Congress insisted on large amounts of non-defense spending. The two sides compromised by passing budgets loaded with high levels of both kinds of spending.
I don't see why we should take high levels of non-defense spending as a law of nature and limit the accusation of fiscal irresponsibility for those who advocate high defense spending.
For that matter, we are told that Mr. Bush is "fiscally irresponsible" for championing modest tax relief, while no such accusation is leveled at those who push for higher spending on all sorts of things. Why the double standard? Why is ever-increasing spending not to be questioned, while tax relief, however slight, is an extravagance we cannot afford?
Posted by: Kenneth Uildriks on December 19, 2002 03:51 PMThe godawful "Reagan deficits", all of which cleared two Democrat-controlled legislative chambers, coincided with falling bond yields.
At the time, there was a great deal of hysteria about the "twin deficits" of the govt and trade balance.
Instead, the "long boom" followed.
Again, the choice between borrowing at historically low interest rates in time of war, as opposed to raising taxes and impeding an already sluggish private sector, seems pretty straight-forward.
I would find the new-found budget balancing religion of the Left more convincing if they ever saw a domestic/social spending program they favored cutting.
Posted by: Bucky Dent on December 19, 2002 04:06 PM'For that matter, we are told that Mr. Bush is "fiscally irresponsible" for championing modest tax relief, while no such accusation is leveled at those who push for higher spending on all sorts of things. Why the double standard? Why is ever-increasing spending not to be questioned, while tax relief, however slight, is an extravagance we cannot afford?'
Higher spending advocates want to pay for their spending, last time I checked. I haven't seen much advocacy of deficit-funded spending on the left lately, have you?
Instead, the "long boom" followed.
That would be the 1973-1991 slowdown in productivity growth, right? Quite a boom. Not that the deficit put *that* much of a drag on growth, but it's still there.
Again, the choice between borrowing at historically low interest rates in time of war, as opposed to raising taxes and impeding an already sluggish private sector, seems pretty straight-forward.
Why not junk taxes completely and shift entirely to bond funding for a few years, then?
Posted by: Jason McCullough on December 19, 2002 05:11 PMInstead, the "long boom" followed.
That would be the 1973-1991 slowdown in productivity growth, right?
Reagan didn't enter office until 1981. How can he be blamed for economic outcomes pre-dating his presidency?
Why not junk taxes completely and shift entirely to bond funding for a few years, then?
What? And put all those CPAs and tax attorneys out of work? Have you no mercy? :)
Posted by: Bucky Dent on December 19, 2002 05:17 PM>>We're not in a liquidity trap yet. Give us two more pieces of big bad news about investment demand, however, and we would be...<<
In which case, and I am extremely uncomfortable about the company that this view puts me in, I have to say that "demand curves slope down" strikes me as a simplification too far here. I suppose that what I really ought to do would be to write a full post-Keynesian perspective on this issue, but I have about three or four pieces in the pipeline ...
Posted by: dsquared on December 19, 2002 11:31 PMReagan didn't enter office until 1981. How can he be blamed for economic outcomes pre-dating his presidency?
Ah, good old dating tricks. I point you to Krugman's Peddling Prosperity, where he clearly demonstrates that presidential politics has had little or no effect on economic growth.
I suppose that what I really ought to do would be to write a full post-Keynesian perspective on this issue, but I have about three or four pieces in the pipeline.
Please do. Perhaps you should quit your job and adopt the Andrew Sullivan begging model? :D
Posted by: Jason McCullough on December 19, 2002 11:40 PMIf you bother to read the thread before posting, kind of like reading books before you critique them, you will see "Reagan's deficits" and their consequences, are a relevant example, cited in context, and not some "dating trick".
I refer you again to "the first rule of holes".
Posted by: Bucky Dent on December 20, 2002 04:19 AMBucky actually has a point here; crowding out is quite a rare phenomenon and I am personally unconvinced by the evidence Brad has compiled with respect to the long-term effect of the Reagan deficits. And bond yields *did* fall during that period.
On the other hand, I can only say that I am confused and flabbergasted by this statement.
>>I would find the new-found budget balancing religion of the Left more convincing if they ever saw a domestic/social spending program they favored cutting.<<
The only explanation I can think of for this is that Bucky was overseas or in a coma during Clinton's vicious attack on "welfare as we know it". In which case, I feel compelled to recommend the film "Glengarry Glen Ross", which was released during your unfortunate period of unconsciousness; it's a belter.
>>Perhaps you should quit your job and adopt the Andrew Sullivan begging model? <<
You assume that the constraint on my weblog output is time, rather than laziness and writers' block :).
Posted by: dsquared on December 20, 2002 06:30 AM>> Clinton's vicious attack on "welfare as we know it" <<
The welfare reform bill he vetoed twice?
Posted by: Patrick R. Sullivan on December 20, 2002 06:56 AMA clarification: Kenneth Uildriks states
Reagan insisted on large amounts of defense spending. Congress insisted on large amounts of non-defense spending. The two sides compromised by passing budgets loaded with high levels of both kinds of spending.
This is refuted by the Cato Institute, whose analysis found that real domestic spending was nearly flat during Reagan's term, growing only 5.8% over the entire 8 years.
http://www.cato.org/pubs/pas/pa-261.html
Also, Bucky Dent sets up the straw man argument of raising taxes now--who is arguing that? The discussion is the effect of annual deficits over the next decade. What is odd is someone who refuses to deal with the future, and instead advocates continuous borrowing, considers himself conservative.
Posted by: Rich Phillips on December 20, 2002 07:31 AMThe only explanation I can think of for this is that Bucky was overseas or in a coma during Clinton's vicious attack on "welfare as we know it". In which case, I feel compelled to recommend the film "Glengarry Glen Ross", which was released during your unfortunate period of unconsciousness; it's a belter.
I don't understand how exactly the Clinton/welfare thing relates to my points. But I saw Glengarry on Broadway, and it's our generation's answer "What Makes Sammy Run".
Posted by: Bucky Dent on December 20, 2002 11:03 AMAlso, Bucky Dent sets up the straw man argument of raising taxes now--who is arguing that?
Frankly, I thought I was transparently tongue-in-cheek.
But aren't many Democrats calling for this? They want to undo the latest tax legislation which scales down the national tax burden in the coming years.
Altering the existing tax law to leave current rates in place would be a tax hike basis the current regimen embodied in current business plans and current prices.
Posted by: Bucky Dent on December 20, 2002 11:12 AM"Higher spending advocates want to pay for their spending, last time I checked. I haven't seen much advocacy of deficit-funded spending on the left lately, have you?"
No, I've seen advocacy of spending period. I guess they just assume that they can keep raising taxes forever, since they certainly don't seem to be anywhere close to deciding that our spending is high enough.
I sometimes wonder if they will ever be appeased, or if their hunger for government spending is completely insatiable.
Of course Bush himself has been a disappointment in this area. Even before 9/11, he was proposing all sorts of spending increases.
"This is refuted by the Cato Institute, whose analysis found that real domestic spending was nearly flat during Reagan's term, growing only 5.8% over the entire 8 years."
After large increases in the '60s and '70s. Under Reagan, the high levels of nondefense spending continued, while new defense spending was added.
If you think that all that non-defense spending was sacrosanct while defense spending was optional, then you will tend to conclude that Reagan squandered a lot of money. If, on the other hand, you think that the non-defense spending was mostly optional, you will (like me) reach a different conclusion.
Posted by: Kenneth Uildriks on December 20, 2002 12:17 PMOn the "Krugmanization of DeLong":
"But DeLong does not say the evidence supports his view..."
According to atlanticblog, that is why he cannot be right on target on this issue.
Consider this statement by Hans Blix about "evidence": "If the UK and the US are convinced [that Iraq has WMD] and they say they have evidence, then one would expect that they would be able to tell us where this stuff is."
Actually, it should be easy to recognize that historically demand for government securities always sloped downward when there was no convincing evidence that they would ultimately be redeemed. The most crucial factor constituting such lack of evidence is the attempt to issue bonds without being able to pay positive real interest on them. Would the deficit advocates please demonstrate that there will be a positive real rate of interest next year? They definitely should "be able to tell us"...
The financial markets could care less about government suffering from self-inflicted cognitive dissonance between what is evident and what it proclaims.
Probably Prof. DeLong would be an asset in the next administration - even without saying so himself.
Posted by: Joerg Wenck on December 20, 2002 02:17 PMTo summarize: whether the things the government spends money on are worth it is completely independent of the funding mechanism used. Bush's tax cuts have almost no short-term Keynesian benefit; therefore, they are not a good idea, and should either be replaced with one of the many alternatives.
not some "dating trick".
I was referring to moving the dates around to get a "long boom" in economic growth under Reagan. Poo pet.
It's pretty funny that Cato splits out "defense" and "domestic" spending in that table. Is defense a foreign country now?
Posted by: Jason McCullough on December 20, 2002 04:19 PMJason, I regret to say I have concluded that you are a troll.
It is pretty clear you often don't read what you're commenting on, as you've admitted in the past, and it is equally clear that you consistently and deliberately miscast others' arguments so that they appear foolish, bigoted, misinformed, dishonest, or whatever.
Time spent correcting your willful misrepresentations is rewarded with non sequitor snarkiness, or more BS.
My only regret is that I spent time responding to you in the past.
Posted by: Bucky Dent on December 20, 2002 04:38 PM"The godawful "Reagan deficits", all of which cleared two Democrat-controlled legislative chambers..."
This is also crap. Only a few Democrats voted for Reaganomics - and many of those so-called Democrats later changed party, like Phil Gramm of Texas. The Democrats didn't control the Senate.
Posted by: IssuesGuy on December 20, 2002 08:06 PM"The welfare reform bill he vetoed twice?"
Why do Republicans just lie?
Clinton vetoed two Republican welfare packages that did not provide for health care or child care. When they passed a bill that did, he signed it.
Posted by: IssuesGuy on December 20, 2002 08:10 PMJason, I regret to say I have concluded that you are a troll.
*I'm* the troll? Well.
Posted by: Jason McCullough on December 20, 2002 11:06 PMJim: I've just noticed this, and it's rather tangential, but your anecdote on the subject of Samuelson, Coase and lighthouses is something of an urban myth. The corporations responsible for erecting lighthouses (such as Trinity House, which has provided me with a couple of thumping good breakfasts in the past), predated the modern joint stock corporation and really can't be unambiguously characterised as "free enterprise". Coase certainly didn't try to use this as a debating point against Samuelson, who in turn never made the argument you attribute to him. It's all rather more ambiguous and complicated than that ...
Posted by: DD on December 22, 2002 08:21 AM>>> Jim: I've just noticed this, and it's rather tangential, but your anecdote on the subject of Samuelson, Coase and lighthouses is something of an urban myth... Coase certainly didn't try to use this as a debating point against Samuelson ... <<<
Tell that to Coase and Samuelson:
"Q: What reaction have you had over the years when Paul Samuelson or other economists would use this example of the lighthouse as a necessary government function?
"Coase: Samuelson says I was wrong and he was right, and he froths at the mouth..."
http://reason.com/9701/int.coase.shtml
Coase also addresses your particular argument:
"My usual practice is to look into what actually happens, and if you look into what actually happens you discover that there's a long period in which lighthouses were provided by private enterprise. They were financed by private people, they were built by private people, they were operated by the people who had the rights to the lighthouses, which they could bequeath to others and sell.
"Some have said what happened in lighthouses wasn't really private enterprise. The government was involved in some way in setting the rights and so on.
"I think that's humbug because you could say that there's no private property in houses by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government...
"Samuelson says that no one would build a lighthouse with the idea of making a fortune. Actually, people did build lighthouses and did make a fortune."
Posted by: Jim Glass on December 22, 2002 01:14 PMyou could say that there's no private property in houses by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government...
Actually, I've had "liberal" friends make exactly that argument.
Posted by: Bucky Dent on December 22, 2002 03:40 PMWell I'll be. Coase was apparently more of a horse's ass than I thought he was.
>>I think that's humbug because you could say that there's no private property in houses by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government... <<
Utterly disingenuous. The "Private people" involved were the Trinity Houses, who exercised government sponsored control over the ports. The lighthouse keepers did not operate under a free market (they could not, for exactly the reasons Samuelson suggests) but under a regime of "light duties" whcih it was compulsory to pay. A few choice excerpts from the British Lighthouse Society's excellent online history:
http://www.btinternet.com/~k.trethewey/genindex.html
>>It is natural that people should have spotted a way to make money from lighthouses. The idea soon caught on that if a service could be provided to people engaged in commercial activity, then they would be prepared to pay for that service. Lighthouses were big business and entrepreneurs with both good and bad motives moved in for the kill.<<
... looks good for Coase so far, but ...
>> Payments, such as the prime gilt being charged in Leith, could be demanded from ship owners and Masters for 'upkeep of the light' from which they drew benefit, but profits could also be made. To make any charges at all, it was necessary to obtain Royal approval. Authority for private individuals to collect a levy from shipping for a lighthouse dates back to the 13th century when Henry III (1216-1272) issued the first Royal Patent in 1261 which allowed the imposition of light duties on shipping to pay for the upkeep of a light. These Patents were the ultimate permission of the monarch and given under the 'Divine Right of Kings'. To fail to acknowledge this authority was considered treasonable. The Patent was given to the Barons of the Cinque Port of Winchelsea who were entitled to collect two pence from every ship that entered their port. This is the origin of the entire principle by which lighthouses have been operated for centuries right up to the present: a system of taxation known as 'light dues' based on the rule that the user pays. <<
So, was this a purchase and sale of a service, or a hypothecated tax? Let's read on ...
>>The first recorded petition for a lighthouse to a private individual was made in 1580 by Gawen Smith. His proposal to Elizabeth I requested a Patent for erection of a light on the treacherous Goodwin Sands. The Queen rejected the petition because she considered the application was solely for financial gain and not for the well-being of the mariner. It would appear from contemporary House of Lords documents that the Master of Trinity House, Henry Church, objected to the Smith proposal because of the applicant's involvement with wrecking.
In 1612, Sir Edward Howard exploited his position in the court of James I and sponsored a petition for a lighthouse at Dungeness. A share of the profits from the proposed business venture was offered as an incentive to Sir Edward Howard by Hugh Bullock and his partner. The Elders of Trinity House objected to the petition, but this time James I ignored the opposition and issued a Patent. Trinity House complained to Sir Henry Yelverton, the Attorney General, arguing that the Patent was in breach of their Charter of Elizabeth I.
[...]
When Hugh Bullock received his Dungeness Patent, the area of land around the lighthouse was rent-free for 50 years. He was also given the right to collect a compulsory levy of one penny per ton from English ships for the upkeep of his light. In 1623, James I reduced the levy to a halfpenny per ton after numerous ship owners complained that the light was badly maintained. However during the period that Hugh Bullock exhibited his Dungeness light, the number of ships being wrecked this part of the coast was greatly reduced. <<
and by 1771, the process had become more or less formalised:
>>On the 30th December 1771, John Quayle, for the Corporation of Trinity House of Deptford wrote to the Duke of Atholl, the Lord Governor of the Isle of Man, to inform him that a Mr. Ludwidge had taken up a lease for part of Langness on the peninnsula island of St. Michael's. This Island's location placed it at the most south easterly end on the Isle of Man, which prompted Mr. Ludwidge to make proposals to shipowners and merchants at Whitehaven and Workington for the erection of a much needed lighthouse. His intentions also indicated that the Langness lighthouse would be built and managed by him, as a private venture, but only if the Trade agreed to a levy of 'one penny per ton' from shipping for its upkeep, when passing his light.<<
In other words, on the crucial issue of whether a perfectly competitive market system, or one with purely voluntary exchange, could build lighthouses, Coase was wrong and Samuelson was right. If Samuelson had ever claimed that lighthouses "could only be built by the government", he was wrong, but it is clear from the evidence that the actual historical building of lighthouses was carried out only in those cases in which the builders had something very like the power to compel payment through "light duties".
Coase's analogy to housebuilding is clearly silly; there is no comparable power of a housebuilder to force anyone to buy his houses. The analogy is much more clear to the question of patents on inventions, or copyright on a novel; a private individual creates something, in the context of a compulsory government-provided framework which allows him to get paid for it.
Furthermore, the fact that Coase says in that same article "Yes, that's right. From 1838 or some such date, I can't remember it, the lighthouse people were bought out and compensation was given." gives very good reason to doubt the quality of his lighthouse scholarship.
He is referring to the purchase of the private lighthouses by the Trinity House Corporation (the date was actually 1894, I think), but this was the end of the process of government involvement in lighthouses, not the beginning. For one thing, as I've suggested above, lighthouses were being built under Royal Patent for at least three hundred years previously. For another, the lighthouses being bought out at this point were collecting levies under Letters of Patent dating back many years; in fact, one of the points of contention was the 20% commission charged by HM Commissioners of Customs & Excise for collecting the cash on behalf of the lighthouse-owners.
I seem to remember you, Jim, having some pretty harsh words for that gun bloke, in what would appear to be no less serious a case of sloppy historical scholarship ...
Posted by: dsquared on December 23, 2002 12:03 AMIndeed, a perusal of that excellent website operated by the lighthouse anoraks suggests that Coase could have made excellent use of the private lighthouses to illustrate a different libertarian point. It appears that a number of lighthouses built around the British coast were of dubious navigational value; the history of lighthouses is full of shipowners complaining about their location and maintenance, and their failure to illuminate dangerous stretches. This appears to have happened because some lighthouses were built as a shakedown on the shipping industry; politically well-connected entrepreneurs managed to engineer letters of patent for themselves, which allowed them to collect (or to get the customs to collect for them) a compulsory toll on passing shipping!
God this is interesting.
Posted by: dsquared on December 23, 2002 12:29 AMIs "dsquared", British for Bellesilles?
Try reading your own sources:
http://www.btinternet.com/~k.trethewey/owner.html
<<---------quote--------------
The costly end to private lighthouse ownership
In England and Wales private ownership of lighthouses was allowed until 1836....
In 1834 a Parliamentary Select Commission was set up to inquire into the management of private lighthouses and the levies that their owners were authorised to collect. The Commission's chairman, Joseph Hume MP, became the main proposer of lighthouse management reform and the abolition of private or leased lights. By 1836, Acts of Parliament made all lighthouses the responsibility of Trinity House. The Corporation was given the power under these Acts to use a compulsory purchase order on all privately owned lights.
---------endquote--------->>
dsquared writes;
>>...on the crucial issue of whether a perfectly competitive market system, or one with purely voluntary exchange, could build lighthouses, Coase was wrong....<<
I'm unfamiliar with Coase claiming the lighthouses operated under perfect competition. Could dsquare point me to where he says that?
Posted by: Patrick R. Sullivan on December 23, 2002 08:04 AM>>I'm unfamiliar with Coase claiming the lighthouses operated under perfect competition. <<
And with much else about Coase, obviously. Coase only has a point to make against Samuelson if he can show that lighthouses would be supplied [1] without government intervention. To do this, he would have to show _either_ that lighthouses would be built under a competitive equilibrium (without any need for explicit contracting), _or_ that independent parties would voluntarily enter into contracts to build lighthouses without government intervention (Coasian negotiations). Neither of these are true.
You, for your part, appear to have completely misunderstood my statement in two ways; first, you have failed to spot that it is a disjunction (either ... or), second, you have mistaken it for a sentence about what Coase _actually_said_ about _what_did_happen_ ,when it is a sentence about what Coase _would_appear_to_be_logically_committed_ to saying about _what_could_happen_.
To put it another way, Coase is (or at the very least, strongly appears to be) in the interview claiming that the historical evidence provides a counterexample to the generalisation "lighthouses cannot be constructed in a free market economy without government intervention". On this point, he is wrong.
In related news, 1836 is not 1838, nor is it 1894. Nor for that matter is it 1841, the actual date on which private ownership of lighthouses in the UK ended. Perhaps the more polite approach, Patrick, would have been to assume that Coase and I both misremembered, rather than slinging around the accusations of dishonesty.
Posted by: dsquared on December 23, 2002 08:41 AMThe relevant point is that Coase said, or at least implied, that private entities operating in a system of voluntary exchange could provide lighthouses. They can't. They didn't. Regardless of whether the government runs the lighthouses itself or grants patents to private individuals who are then empowered to collect (on pain of death or imprisonment) payment for the service, the fact is that government coercion is necessary to solve the free rider problem. As the big eared psycho might say, "It's jest that simple."
Posted by: jimbo on December 23, 2002 08:51 AMPaul Samuelson, in his textbook wrote:
>> "[in the] case of a lighthouse to warn against rocks. Its beam helps everyone is sight. A business firm would not build it for a profit, since it cannot claim a price from each user without great difficulty. This certainly is the kind of activity that government would naturally undertake."
dsquare's source:
http://www.btinternet.com/~k.trethewey/dues.html
>> It is natural that people should have spotted a way to make money from lighthouses. The idea soon caught on that if a service could be provided to people engaged in commercial activity, then they would be prepared to pay for that service. Lighthouses were big business and entrepreneurs with both good and bad motives moved in for the kill.<<
Posted by: Patrick R. Sullivan on December 23, 2002 08:51 AMd square is offended:
>>...1836 is not 1838, nor is it 1894. Nor for that matter is it 1841, the actual date on which private ownership of lighthouses in the UK ended. Perhaps the more polite approach, Patrick, would have been to assume that Coase and I both misremembered, rather than slinging around the accusations of dishonesty.<<
Oh yes, we must remember the "politeness policy". For instance, this is surely beyond the pale:
>> Well I'll be. Coase was apparently more of a horse's ass than I thought he was. <<
or,
>> I seem to remember you, Jim, having some pretty harsh words for that gun bloke, in what would appear to be no less serious a case of sloppy historical scholarship ...<<
>>...the fact that Coase says in that same article "Yes, that's right. From 1838 or some such date, I can't remember it, the lighthouse people were bought out and compensation was given." gives very good reason to doubt the quality of his lighthouse scholarship.
>> He is referring to the purchase of the private lighthouses by the Trinity House Corporation (the date was actually 1894, I think)<<
That Coase is off by two years, and dsquared off by 58 years, is "very good reason to doubt" Coase???
I have always drawn a line between forceful language (for example "Patrick Sullivan is a horse's ass") and accusations of dishonesty (for example "Patrick Sullivan has taken at least one paragraph from the source completely out of context, as anyone reading this thread, let alone the source, can see, and has also failed to distinguish between lighthouses to warn against rocks and lighthouses to guide ships to port, what a crock.").
In context, you might note that while I am 58 years out on the date of the Trinity House buyback, Coase is referring to that date as the only date on which he was sure that there were private lighthouses in Britain. Since the first such letter patent on record was granted in 1261, I count Coase as being out by more than five hundred years.
Ball in your court, Paddy me boy. Hope it stays there.
Posted by: DD on December 23, 2002 11:32 AM>> Coase is referring to that date as the only date on which he was sure that there were private lighthouses in Britain. <<
Are you serious! First, Coase tells Reason:
"...if you look into what actually happens you discover that there's a long period in which lighthouses were provided by private enterprise."
Is the year 1838 a, "long period"?
Later he tells us when the "long period", ENDED:
"From 1838 or some such date, I can't remember it, the lighthouse people were bought out...."
BOUGHT OUT. ENDING the private lighthouse era. What could be clearer?
But of course, d squared hasn't bothered to pick up the Journal of Law and Economics article from 1974 and inform himself.