Besides Climate Science, Has Anyone Been As Wrong As Economists?
The predictive powers of my magic 8-ball are terrible, but it could be worse: I could be a global warmer or an economist.
And I could be worst still: I could be a global warmer or an economist and it could be raining.
The warmers deserve their own post (many, actually), but the economists have missed the boat so badly and for so long that they no longer seem to know whether they’re coming or going, and none more so than Brad DeLong.
In fact, DeLong’s latest column is to clarity as the Unabomber’s Manifesto was to coherency. Where to start? How about from the beginning?
Across the Euro-Atlantic world, recovery from the recession of 2008-2009 remains sluggish and halting, turning what was readily curable cyclical unemployment into structural unemployment. And what was a brief hiccup in the process of capital accumulation has turned into a prolonged investment shortfall, which means a lower capital stock and a lower level of real GDP not just today, while the recovery is incomplete, but possibly for decades.
“A brief hiccup”?! Is that what that was? With that kick off, DeLong has attempted to set the stage for his solution to the “sluggish and halting” recovery from the recession. And by golly, we’d better deal with it right now or else this might last… decades.
I’m sure you’re way ahead of me if you’ve guessed DeLong thinks this crisis can be cured if (wait for it)… if only governments will
add more spending and more debt reverse declining investment.
One legacy of Western Europe’s experience in the 1980’s is a rule of thumb: each year that lower labor-force attachment and reduced capital stock as a result of declining investment depresses production $100 billion below normal implies that productive potential at full employment in future years will be $10 billion below what would otherwise have been forecast.
Jargon and gibberish lack explanatory power. This means there are definitional questions about what DeLong means by “lower” labor-force attachment, “reduced” capital stock, which “depresses” production at $100 billion below “normal.” What I can take from the above is that depressed production equals normal minus $100B (as a result of lower labor force attachment and reduced capital stock). That DeLong offering is not really an epiphany of mathematical precision.
The fiscal implications of this are striking. Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion. Suppose further that their central banks, while unwilling to extend themselves further in unconventional monetary policy, are also unwilling to stymie elected governments’ policies by offsetting their efforts to stimulate their economies. In that case, a simple constant-monetary-conditions multiplier indicates that we can expect roughly $150 billion of extra GDP. That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion.
So Brad, how does a “core economy” purchase anything from the government? Are you trying to say they (and not the Fed) purchase the government’s debt?
If so, your offering is still lacking the beautiful lucidness of a Terrence Malick flick, but I think what you’re trying to say this: just increase government spending (that is, borrowing) by $100B and reap the benefit of $150B of GDP; since $50B of it comes back to the government in taxes, only $50B of debt has “really” been added.
Yes, we all know and appreciate the legacy “rule of thumb” from Econ 101 and its associated property, “assume government borrowing creates a GDP multiplier effect.”
However, a skeptic might say “Come on Brad, does the borrowed money ever have do get repaid? If so, is there then a ‘de-multiplier’ effect?”
Is it any wonder no one pays any attention to economists, except perhaps to mock them? As the Black Swan guy has said, get rid of the Nobel Prize for economics for one simple reason: having such a prize implies there is some science to the field.
Do our profound economists ever ponder what happens when the music (better, Ponzi scheme) stops? Traditionally, those holding government notes (nation-states, citizens, businesses, corporations) expect to be repaid and without the value of that note being destroyed by inflation. In this case, just be sure you can find a seat (or better, buy a seat) when the music stops, otherwise you might end up like a Chrysler bondholder.
And it would seem by DeLong’s implied definition that the US and Western “core economies” are in fact their governments, which is said more clearly towards the end:
Today the global economy is, as Ricardo Cabellero of MIT stresses, still desperately short of safe assets. Investors worldwide are willing to pay extraordinarily high prices for, and accept extraordinarily low interest rates on, core-economy debt…
Let’s back DeLong’s sophisticated example into the President’s stimulus package. Using the DeLong rule of thumb, the stimulus has generated an extra $1.2T in GDP. And of that extra $1.2T, $600B came back to Uncle Sugar via taxes. This is, of course, laughable.
The real lesson of DeLong and his ilk is that government borrowing is really a form of alchemy: it can turn two dollars into three by the simple power of the economic
Finally, DeLong needs something to get off the stage with:
Given the need to mobilize idle resources in the short run in order to maintain productive potential in the long run, a larger national debt would be, as Alexander Hamilton, the first US treasury secretary, put it, a national blessing.
Mobilize idle resources to do… what? Make things people aren’t interested in buying or provide services that add little or no value? Maybe build a shovel-ready government building, a venture socialist solar panel plant, or a rent-seeking e-car factory? Start a college (after all, knowledge is good), as long as it isn’t for-profit?
So DeLong closes by trying to assign a ridiculous position to a long-dead guy who would likely find our current circumstance inconceivable: that the fair-share of the federal debt for a child born today will be over $1.5 million.
The economists of the left are making Ted Kaczynski, Terrence Malick, and even the Soviet Central Planners of old look brilliant by comparison.