January 21, 2003
A (Very Short) Guide for the Perplexed

A correspondent asks:

Jumping the track just a bit, is there any way for a layman to evaluate the majority consensus among economists on some of these issues? I've got someone citing a Washington Times editorial that there is no consensus that deficits cause higher interest rates, and I don't have any good way to refute it.

Well, there are three questions that you can ask that will usually give you a good idea:

  • Were these people advocating this same position two, four, eight years ago, or have they just all of a sudden seen a blinding light? In this case, three years ago the Bush campaign was arguing that it was important to maintain a surplus--important, in fact to maintain a really big surplus, a surplus larger than the excess of Social Security taxes over Social Security expenditures. However, the Bush campaign said, we could afford a big tax cut and still have a really big surplus. The sudden, surprise emergence of the doctrine that it wasn't important to have a surplus because there is no downside to a deficit should make you suspicious.
  • Are these people assuming that supply curves don't slope upward (i.e., that increases in demand don't raise the price and that decreases in demand don't lower the price), or that demand curves don't slope downward (i.e., that increases in supply don't lower and that decreases in supply don't raise the price)? In this case, the market is the financial market--the market in which those who wish to borrow (firms that wish to invest and the government to pay its bills) pay (in the form of promising interest) those who wish to lend for the temporary use of their purchasing power. A government deficit increases the demand for loanable funds. If the supply-of-funds curve slopes upward, this should increase the price, and the price of loanable funds is the interest rate. (Oh, one time in a hundred you will find a market in which things are different, and in which simple supply-and-demand goes wrong. But be very suspicious of someone who says that he has found such a market and who cannot explain why it is an exception to supply and demand.
  • Is there a paper trail telling you that this bunch of people are playing fast and loose with the truth? For example, chief Bush Administration economist and Chair of the Council of Economic Advisers R. Glenn Hubbard--he of the "no evidence" that budget deficits raise interest rates--wrote in the fourth edition of his textbook Money, the Financial System, and the Economy that "by the late 1990s, an emerging federal budget surplus put downward pressure on interest rates." The quote is not out of context. The textbook was published in 2002. If the Bush Administration's chief economist believed only last year the opposite of what the administration is now saying, what are the odds that you should believe them today?

These three principles--is this a newly-invented or -resurrected argument? is this consistent with supply-and-demand? is there a paper trail showing that this was believed before it became politically advantageous to do so--will generally serve you in very good stead.

Posted by DeLong at January 21, 2003 07:38 PM | Trackback

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Comments

To summarize - does it stink of hypocrisy? Moreover the record of the Bush administration on economic issues is so egregious that anything they say should be assumed to be a lie or misleading in some way. Nothing they say should be accepted without cross-checking.

Heck, forget just economic issues. If they told me the sky was blue, I'd want to check on it.

Posted by: Ian Welsh on January 21, 2003 07:59 PM

As the correspondent in question, I think I asked slightly the wrong question. That the Bush administration has changed it's story I have no doubt. (I'm still working on my debate partner on this one; he's currently insisting that the passage of Glenn Hubbard's textbook showing support for the idea that deficits raise interest rates is probably taken out of context, and that he was talking about someone else's theories rather than his own.)

What I'm asking is if there is some way to track down what most economists outside the administration think on a given subject. Beyond just googling on a subject and seeing what hits appear, I haven't really come up with a way for someone on the outside to get a sense of what those in the profession, by and large, agree on.

Posted by: J. Michael Neal on January 21, 2003 08:09 PM

Sorry for responding to myself, but I'm still not asking this right; hopefully none of my writing profs are watching this fiasco. Specifically, my antagonist is claiming the following:

1) That most economists think that Bush has put forward a plan that will effectively stimulate the economy.

2) That most economists aren't convinced that larger deficits cause higher interest rates.

The first I'm pretty sure is complete bull, and the second I'm not sure about. Is there any easy way to know what most economists think about these and other questions? In the future, I'd prefer to just search on my own rather than post a comment.

Posted by: J. Michael Neal on January 21, 2003 08:16 PM

If I may play devil's advocate (or devil's analyst), some economists will claim "there's no empirical proof", meaning "you can't drag the presumed relationship kicking and screaming out of a time series analysis on available historical data, to within acceptable confidence limits".

Well, it's true you usually can't prove true things this way ... not enough data points, too many variables and shocks, imprecise measurements, evolving relationships, reflexive behavior (sensitive to policy expectations), etc., so it might be true anyway.

On the other hand, there's usually enough methodological wiggle room that a determined analyst should be able to prove what he wants, whether it's true or not ... or prove the next best thing: "the data fail to support the alternative hypothesis to the exclusion of my hypothesis, within acceptable confidence limits, so I'll go on believing my hypothesis".

So I'm skeptical of anything that hasn't been proven at least once, and likewise skeptical if the negation hasn't been proven at least once. Anyway, that's probably the hole your "no proven relation" friends are fishing in.

But on general principles: what Brad said.

Posted by: RonK, Seattle on January 21, 2003 09:22 PM

J. Michael Neal: figuring out what the consensus in among economists on any poltically sensitive (macro-)issue is more of an art than a science, and is perhaps the most precious skill experienced Macroeconomics professors try to develop. Try posting a request on the sci.econ.research newsgroup and see what you get in terms of range of opionions. (Duck the political implications of your questions if you want a more academic answer to your question.)

An other useful resource is EconLit but you have to be somehow subscribed and be able to interpret the results of your search (not to mention know how to formulate your query). If I were to make up my own mind about this I would grab the 5-10 most popular macroeconomic texbooks and compare what they say about your question.

My expectation? What Professor DeLong said. Personally, I would add that higher budget deficits will translate into higher current account deficits. I can hardly see how foreign investors wouldn't be asking for a higher return as the supply of American assets rise beyong their prefered portfolio shares.

Foreign investors are well aware of the unsustainability of current US budget policies and of the level of indebtement the private sector in the US. Sure, American assets are enjoyed for their higher returns, but if the deficit to be financed rises above what foreign investors think of as sensible to hold under the form of $US denominated American assets, they're going to ask for a little extra return to be convinced to buy even more American assets every year, especially if they start to worry about long-term solvency etc.

Posted by: Jean-Philippe Stijns on January 21, 2003 10:09 PM

Sounds like you should direct your question to your antagonist, thus placing the burden of proof on him. Since your antagonist is the one talking about what "most economists" think, shouldn't he be able to support his claim?

Alas, you won't experience the thrill of direct factual refutation, but at least you'll find small joy in listening to your friend dissemble.

Posted by: Rick Masters on January 21, 2003 10:27 PM

JMN

Another imperfect but comparatively simple approach -- investigate some (mainstream) introductory and intermediate textbooks.

These will tend to reflect some degree of mainstream consensus on what is widely believed and what is still fairly contentious.

I'm sure if you look at a few major intermediate macro texts, there will be discussions of interest rates and deficits. Like the one Brad talks about from Hubbard's book. :-)

Posted by: Michael Harris on January 22, 2003 12:19 AM

Attempting to refute someone who uses a Washington Times editorial as a source is probably a waste of time. Your antagonist probably does not care about the facts of the matter but is simply using the editorial to butress his reflexive support of Bush policy.

Posted by: Jim Nickens on January 22, 2003 03:38 AM

Attempting to refute someone who uses a Washington Times editorial as a source is probably a waste of time. Your antagonist probably does not care about the facts of the matter but is simply using the editorial to butress his reflexive support of Bush policy.

Posted by: Jim Nickens on January 22, 2003 03:43 AM

I don't think Bush has any interest in proposing a
stimulus package. I don't trust the Moonie Times.

Is there a consensus that supply and demand is the right
framework to analyze interest rates? There are some
important arguments on the negative side.

Keynes argued not in 1936. (Keynesianism is not at
all the same as the economics of Keynes.)

Sraffians have showed some time ago that interest rates
are not determined by the(?) intersection of well-behaved
supply and demand curves for capital. Mainstream
economists, such as Paul Samuelson, Edwin Burmeister,
and Frank Hahn accept this.

(It is not the case that Sraffians are arguing about a
special case. On assumptions that are shared by neoclassical
and Sraffian economists, one can construct numerical
examples of, roughly, upward-sloping factor demand
curves. If one wants to argue that this doesn't happen
in one's theory, one needs to add special-case assumptions
that rule these examples out. Since the Neoclassical
economists could not find any such assumptions of
sufficient generality and interest, they abandoned the
attempt [1]. I do NOT claim that Brad DeLong's
misunderstandings are not widely shared among
those mainstream economists who are aware of
the existence of this argument.)

The economists that follow the above arguments probably
are mostly to the left of the Bush administration.

And there have been interesting trends in the last decade
among so-called New Keynesian economists. These
macroeconomists have considerably moderated
conventional supply and demand arguments with theories
about why wage rigidities are "rational" and with theories
of assymmetric information. I don't know much about
such trends in macroeconomics, but I have read some
economists speculating on whether such trends are
superficial fluff on top of supply and demand. Or
whether such theorists will find themselves having
travelled through a wormhole and unable to return
to the comfortable home of supply and demand.

P.S. There was an article within the last 5 years in the
Cambridge Journal of Economics surveying the
self-contradictory balderdash in many introductory
textbooks on what determines the rate of interest
or profit.

[1] See especially footnote 5 in
Graham White, "The Poverty of Conventional Economic Wisdom and the Search for Alternative Economic and Social Policies"

Posted by: Robert Vienneau on January 22, 2003 04:16 AM

I understand the situation as being that supply and demand obviously play their usual role in interest rates but that under some circumstances the action taken by a government to increase supply may lead to a similarly sized increase in demand.
The difficulty faced by the Japanese in attempts to stimulate their economy might be an example of this (surely not a comforting one).
This may be accepted widely enough to allow someone to maintain that there is no consensus that running a deficit leads to higher nominal interest rates.

However to make that claim honest in the context you cite they would also have to show
--that the situation applied to the current US economy,
--that the increased demand for savings didn't reflect a damaging increase in risk aversion dampen the stimulating effects of the increase of supply which I guess is asking whether the effect on real interest rates is also positive.
--Perhaps most important they would have to say what a government could do wrong with its budgets.

A decade of deficits must be a different beast than a cyclical trough. If it is OK to have a surplus forever, why not have a bigger one?

Posted by: Jack on January 22, 2003 05:43 AM

I understand the situation as being that supply and demand obviously play their usual role in interest rates but that under some circumstances the action taken by a government to increase supply may lead to a similarly sized increase in demand.
The difficulty faced by the Japanese in attempts to stimulate their economy might be an example of this (surely not a comforting one).
This may be accepted widely enough to allow someone to maintain that there is no consensus that running a deficit leads to higher nominal interest rates.

However to make that claim honest in the context you cite they would also have to show
--that the situation applied to the current US economy,
--that the increased demand for savings didn't reflect a damaging increase in risk aversion dampen the stimulating effects of the increase of supply which I guess is asking whether the effect on real interest rates is also positive.
--Perhaps most important they would have to say what a government could do wrong with its budgets.

A decade of deficits must be a different beast than a cyclical trough. If it is OK to have a surplus forever, why not have a bigger one?

Posted by: Jack on January 22, 2003 05:45 AM

Robert said:
Sraffians have showed some time ago that interest rates are not determined by the(?) intersection of well-behavedsupply and demand curves for capital. Mainstream economists, such as Paul Samuelson, Edwin Burmeister, and Frank Hahn accept this.

this is true as far as it goes. i don't see how it contradicts Brad's (and Glenn Hubbard's) assertion that deficits / surpluses exert pressure on interest rates

the difference is not a nit. the fact that deficits (absent other actions) will push rates upwards cannot be disputed. so what if interest rates are not determined by deficits? clearly other action is required to counteract the upward pressure.

the administration dissembles when it claims that deficits have no effect on interest rates because deficits clearly pressure the rate up.

Posted by: Suresh Krishnamoorthy on January 22, 2003 08:49 AM

We have moved from "the tax cuts won't cause deficits" to "deficits won't push up interest rates". Any bets on how long before we start hearing that "higher interest rates don't stifle growth"?

Posted by: alkali on January 22, 2003 09:15 AM

The three-step evasion described by alkali is an example of what I've always called the Little Brother Defense: "I didn't hit my little brother and if I did it didn't hurt him and if it hurt him he deserved it!"

It's remarkable to see how often this kind of "logic" is employed by those who know they have no case on the facts. The administration position on global warming is very similar.

Posted by: demosthenes on January 22, 2003 10:28 AM

The three-step evasion described by alkali is an example of what I've always called the Little Brother Defense: "I didn't hit my little brother and if I did it didn't hurt him and if it hurt him he deserved it!"

It's remarkable to see how often this kind of "logic" is employed by those who know they have no case on the facts. The administration position on global warming is very similar.

Posted by: demosthenes on January 22, 2003 10:30 AM

Remember folks - There are no classes, there is no class warfare, other than in the imaginings of Democrats.

January 22, 2003

Then There Are the Poor
NYTimes

It may not be class warfare, but it's breathtakingly provocative. One week after President Bush proposed billions in tax breaks for fretful stock owners, he revived a plan to wring an additional 10 hours of work each week from women with small children who are managing to hold a job under the federal welfare reform program. The program was hailed as an early success in reducing the welfare rolls. But it is now being threatened with ideological wrenching under the Bush proposal.

Not only would the marginal working mother on welfare face a 40-hour week — six hours more than the national average for all women with young children — but funding would be frozen for child care, transportation and all the other things she needs to make it possible for her to work in the first place. Inflation of about 11 percent has already eaten away at these benefits, meaning less for job training and other important support programs. But the president proposes to freeze funding at the 1996 ceiling of $17 billion....

Well, at least they can clip tax free stock dividends. Duh.

Posted by: anne on January 22, 2003 11:07 AM

Fine post, demosthenes. Deja vu about other issues, I must say...

It is worth asking at this point whether this Administration thinks growth and/or unemployment are important things to care for at all. I recall reading comments by O'Neill about this that left me very confused about the Administration's commitment to seeing America grow. I wonder if they think worries about the economy are a Democratic ploy and a distraction from Higher Objectives.

Posted by: Jean-Philippe Stijns on January 22, 2003 11:14 AM

Paul Krugman -

The administration's top economist certainly changed his mind about deficits very late in the game. Glenn Hubbard, chairman of the Council of Economic Advisers, recently denied that deficits raise interest rates and depress private investments. Yet Mr. Hubbard is also the author of an economics textbook; as Berkeley's J. Bradford DeLong points out on his influential Web site, the 2002 edition of that textbook explains how, yes, deficits raise interest rates and depress private investment.

There's a reason Mr. Hubbard used to worry about deficits. When the government sells bonds it competes with private borrowers. By the usual rules of economics, this competition should, other things equal, drive interest rates higher and investment lower. There are exceptions to economic rules, but someone who suddenly discovers such an exception at the precise moment his political masters need a cover story isn't credible.

Posted by: anne on January 22, 2003 12:54 PM

Suresh,

You use phrases like "cannot be disputed" and
"clearly". But what you say "cannot be
disputed" is disputed by some some economists.
What you say is "clear" is obscure to me.

Some economists have rejected the "Treasury
view" in both the short and the long run.

I do not intend to defend either Hubbard
or the Bush administration.

A survey of intro textbooks can be found
in:

Michele I. Naples and Nahid Aslanbeigui,
"What DOES Determine the Profit Rate? The
Neoclassical Theories Presented In
Introductory Textbooks". Cambridge Journal
of Economics, V. 20, pp. 53-71, 1996.

Posted by: Robert Vienneau on January 23, 2003 01:03 AM

“The administration's top economist (Glenn Hubbard) certainly changed his mind about deficits very late in the game...”

It may be the fault of Bill Clinton! Don’t take my word whether this could be true. Chris Suellentrop of Slate.com even favorably cites Brad DeLong’s efforts to find Hubbard’s original thoughts on deficits:

“But Clinton economist Brad DeLong dug into Hubbard's textbook Money, the Financial System, and the Economy to find this quote, among others: "By the late 1990s, an emerging federal budget surplus put downward pressure on interest rates." Hubbard's textbook even has a handy-dandy formula explaining the relationship, which DeLong posted on his Web site.”

Suellentrop charges Hubbard with indulging in “Clintonian parsing about the deficit and interest rates, insisting that they do not move "in lockstep" with one another.”

Posted by: David Thomson on January 23, 2003 08:30 AM

Please correct me if I'm wrong but are we to take it that the Bush administration is a belated convert to Sraffarian economics then? Joan Robinson would likely have been amused. Perhaps other surprises are in store. Some of Chairman Mao's aphorisms seem to have a certain contemporary resonance. Will we be seeing little Blue Books in 2004?

Posted by: Bob Briant on January 23, 2003 09:11 AM

Back to the original question:

Is there any easy way to know what most economists think about these and other questions? In the future, I'd prefer to just search on my own rather than post a comment.

Hmm. It's hard to do a poll of most economists, but I usually find that checking what Paul Krugman and Brad DeLong have to say about the topic is a good place to start, since they're well-respected by other economists. They'll also cite economists with opposing or differing views who have reasonable arguments, so you can look up their arguments as well. (Krugman's Peddling Prosperity identifies a number of such economists.)

(I came across Krugman in the first place by asking an economist friend for book recommendations; and I came across DeLong by a link from Krugman's website, IIRC.)

More generally, to check the reliability of what author A says about X -- assuming that X isn't a subject I know much about -- I find a number of techniques to be useful:

From the alt.politics.international FAQ.

Posted by: Russil Wvong on January 23, 2003 10:40 AM

There must be umpteen econometric models of the American economy. Presumably, the tax cuts will have been run through some of them. One such exercise for the 2001 tax cuts I have come across concludes:

"Simple economic intuition about the effects of tax cuts suggests that, by creating wealth effects for current households, they stimulate current consumption and reduce national saving. There is much more to consider, though, in tracing through the effects of a particular tax cut such as EGTRRA, including changes in behavioral incentives due to marginal tax rate changes, general equilibrium effects, and the specification of how fiscal policy will adjust in the future. At the end of the day, though, the simple intuition holds, at least in this case. It is difficult to put together a combination of reasonable assumptions regarding household and government behavior under which this tax cut will increase national saving and capital formation."
Alan Auerbach: The Bush Tax Cut and National Saving at: http://emlab.berkeley.edu/users/auerbach/bushtaxcut.pdf

The backdrop to the tax cuts is this gloomy take on global economic prospects just presented at the World Economic Forum at Davos, reported by the BBC at: http://news.bbc.co.uk/1/hi/business/2685963.stm

Posted by: Bob Briant on January 23, 2003 12:29 PM

Jeff Madrick - NYTimes

Corporate income is taxed when it is earned. If it is paid in dividends, it is taxed again as income for investors. A cut in dividend taxes should spur corporate investment and long-term growth. But many who believe that such double taxation of dividends results in an inefficient use of capital and encourages too much debt, including this writer, do not believe that the current proposals are an optimal way to encourage growth.

One of the most intriguing questions is raised by an influential group of economists who cut across the political spectrum. This "new view," best represented in the United States by Alan J. Auerbach of the University of California at Berkeley, maintains that when companies invest out of retained earnings, they are in effect deferring the tax that would have been paid by investors had they paid out the money in dividends. It is as if investors simply had the money in a tax-sheltered 401(k) plan. So a reduction in dividend taxes has no stimulative effect on business investment for these companies....

Posted by: anne on January 23, 2003 01:28 PM

alkali said:
We have moved from "the tax cuts won't cause deficits" to "deficits won't push up interest rates". Any bets on how long before we start hearing that "higher interest rates don't stifle growth"?

I will cheer when I hear them spit out the final corollary:

"Oh, slower growth won't hurt Bush's reelection chances."

Posted by: TJAllen on January 23, 2003 05:45 PM
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