I struggled for quite a while before I came up with a title that really satisfied me for this post. My first idea was “In Theory There’s No Difference Between Practice and Theory”, a wisecrack of fellow St. Louisan Yogi Berra’s. The rest of it goes “in practice there is”. I went through a few other trial runs before I finally ended with the my present title which probably needs some explanation.
First, read Brad DeLong’s post on how to produce “equitable growth”, economic growth, presumably. It’s short but densely packed. Come back here when you’re done.
Who could deny the benefits of perfect stewardship of the economy by the Congress, running “large deficits–run up the national debt–in times of war, depression, or other national emergency calling for government action” but paying “down the debt in other times”? Who would oppose prudent investment or avoiding shifting “enormous resources into value-subtracting industries”? Why would anyone without a vicious or racist streak oppose millions of eager, healthy, well-educated immigrant workers, ready to take the jobs that are waiting for them?
If only there were some mechanism for directing investment swiftly and efficiently into the areas in which it’s needed rather than into areas that are likely to be “value-subtracting”!
There are some things in what Dr. DeLong has written that I’m confused about and I think I’ll put them in the form of questions.
What about our experience of the last 70 years leads Dr. DeLong to believe that such behavior by the Congress is likely?
Have we been in a continuous state of “war, depression, or other national emergency calling for government action” for the last 70 years? If not, have we paid down the debt during the times that we weren’t? If not, why not? What forces will cause that to change?
What forces are responsible for resources being shifted into “health-care administration, prisons, finance, carbon energy”? Did rent-seeking have anything to do with it?
Given the close relationship between poverty and immigrant status, is a high rate of immigration compatible with greater income equality?
The country with the highest percentage of its population having higher education is Canada at about 50%. We’re just slightly below that. Given that we’ve increased real spending on education about three-fold over the period of the last twenty years, how will we produce more education in the United States? Does spending more on education inherently produce more education?
Dave Schuler: have we paid down the debt during the times that we weren’t?
The U.S. significantly reduced its debt as a proportion of GDP after WWII.
The Clinton Administration had engineered structural surpluses, but Republicans convinced themselves that deficits pay for themselves, or deficits don’t matter, or whatever sounded good at the moment.
By growth rather than by paying it down. That’s not what Dr. DeLong is saying. He’s saying “pay down”. We’ve never done that other than for very short periods and certainly never completely paid down the amounts that were spent during downturns.
Dave Schuler: By growth rather than by paying it down.
That counts, of course. If you borrow to become a successful doctor, at some point the student debts become negligible, even as you assume other debts to buy a house in the suburbs to raise your kids. U.S. debt was $245 billion in 1945. The U.S. economy is now more than $15,000 billion per year. That debt has been effectively retired—a long time ago.
Dave Schuler: We’ve never done that other than for very short periods and certainly never completely paid down the amounts that were spent during downturns.
Paying down the debt completely is probably not prudent, as the world still relies on U.S. securities for trade. But certainly, there have been strong political forces that have driven up the U.S. debt unnecessarily.
Gee whiz, some in Congress are threatening to default on U.S. debt; and because of the way the House is currently structured, a minority of 27% can hold any bill hostage, including on the debt ceiling.
But that’s what Dr. DeLong is arguing for. He’s making a pretty conventional Keynesian argument. Unfortunately, there’s a bipartisan consensus that we won’t operate within a Keynesian framework.
Consider for a moment the experience from 2008 through 2012. Over that period we’ve run a deficit of about $6.5 trillion. How long will the recovery persist? According to the NBER, the longest post-war business cycle trough to peak was about ten years, so assume you’ve got 10 years to pay it down. That would be about $650 billion per year on average. That’s politically impossible.
Even using the benchmark you suggested, a target debt-to-GDP ratio it’s hard to imagine a level of sustained growth large enough to do that.
Under the circumstances I think there are only two coherent arguments that can be made. One is that made by the MMT folks: the national debt doesn’t matter. Think it’s too high? Just write a check for it.
The other is to think that freedom of action must be constrained by political realities and real growth. That’s what I think. Keynesian solutions are sound in theory but unworkable in practice for a host of reasons beyond the scope of a comment on a blog post.
Dave Schuler: Consider for a moment the experience from 2008 through 2012. Over that period we’ve run a deficit of about $6.5 trillion. How long will the recovery persist? According to the NBER, the longest post-war business cycle trough to peak was about ten years, so assume you’ve got 10 years to pay it down. That would be about $650 billion per year on average. That’s politically impossible.
The 2008 debacle was not just a typical market downturn. It will take a very long time to pay off the debts incurred during that period, well more than one business cycle.
Dave Schuler: Keynesian solutions are sound in theory but unworkable in practice for a host of reasons beyond the scope of a comment on a blog post.
It does require a political maturity that seems to be lacking. Imagine if the U.S. had maintained the fiscal course set at the end of the Clinton Administration, and avoided an unnecessary war in response to 9-11. Alas!
Keynesian solutions are sound in theory but unworkable in practice for a host of reasons beyond the scope of a comment on a blog post.
Only one reason: human nature.
Tell you what, give me the power of the federal government and the unlimited resources of the FED and I promise to be as fair and reasonable as I can be before I die and pass this power on to the next best qualified person, my son. I’m as good a pick as any if that’s what you really want. Gray Shambler.
You know Dave, I would bet a case of good beer that DeLong understands that by paying down the debt he means reducing debt as a share of GDP. It gets kind of tedious having to put in that caveat. You hope that if you are having literate people read, they know what you mean. Might as well ignore those who don’t bother with basics.
Steve
It isn’t what he said and it isn’t what Keynes said. I think Dr. DeLong is quite capable of expressing himself clearly.
That having been said, I urge you to do the math. Assume 1% per year real GDP growth, a realistic assumption based on what we’ve seen lately. His preferred strategy is in conflict with his preferred outcome.
We all have our fantasies.
“The Clinton Administration had engineered structural surpluses, but Republicans convinced themselves that deficits pay for themselves, or deficits don’t matter, or whatever sounded good at the moment.”
In large measure it was Newt Gingrich (remember the end of Big Government – Clinton would say anything) and the Clinton Admin reducing cap gains tax rates. Sorry, just the facts.
Today, the pathetic deficit reduction Michael touts is largely driven by the sequester and regressive taxation, two policies he would vomit on.
We have a spending and growth problem, not a taxing problem.
We had a surplus in the late 90’s because credit was expanding at the totally unsustainable rate of 7% GDP per year. The private sector created that situation, just as it is largely in the driver’s seat for any fiscal outcome. The conservative mindset that the currency monopolist (which is government whether we like it or not) must restrict supply below household and business demand is way, way out there on planet Command Economy. Deficits are politically impossible? Says who? Sounds like the Glittering Eye Central Planning Committee has issued its diktat and us private citizens will just have to suck it up.
If I gave the impression that I thought that running deficits was politically impossible, let me correct it. I do not think that. I think it’s politically impossible to work within a Keynesian framework, ably described by Dr. DeLong.
As to deficit spending, I think we can run with small deficits, 2-3% of GDP, practically indefinitely, and larger deficits for short periods as long as they’re not institutionalized. I think that running large deficits indefinitely is riskier than most MMT-ers seem to.
Dave Schuler: Keynesian solutions are sound in theory but unworkable in practice for a host of reasons beyond the scope of a comment on a blog post.
«J’ai trouvé une merveilleuse démonstration de cette proposition. Mais la marge est trop étroite pour la contenir.»
Dave Schuler: Assume 1% per year real GDP growth, a realistic assumption based on what we’ve seen lately.
Debt is denominated in nominal dollars. Growth in nominal U.S. GDP has been over 3% per year since the end of the recession.
http://www.multpl.com/us-gdp-growth-rate/table/by-year
Andy: We all have our fantasies.
Sure, but it shows that it is possible. Not to mention the post-WWII expansion, which was largely Keynesian.
Red Barchetta: In large measure it was Newt Gingrich (remember the end of Big Government – Clinton would say anything) and the Clinton Admin reducing cap gains tax rates.
The 1993 omnibus budget bill was passed without a single Republican vote in the Senate or the House, and Gore had to pass the deciding vote in the Senate. Republicans claimed it would lead to a disastrous economic recession. They were, well, wrong.
Ben Wolf: We had a surplus in the late 90′s because credit was expanding at the totally unsustainable rate of 7% GDP per year.
Credit expanded exactly as the Clinton Administration said it would, as the government reduced its borrowing, and even started to pay down the debt.
Dave Schuler: As to deficit spending, I think we can run with small deficits, 2-3% of GDP, practically indefinitely
If deficits are less than growth, then it is generally considered contractionary.
Perhaps I should have written “1-2% or the rate of growth” which was what I was trying to suggest.
zachriel,
The government deficit fell because the private sector pushed it into surplus. The Clinton Administration’s deregulation policies to increase availability of credit were terribly irresponsible and were the primary cause of our current predicament. I’m glad you’ve acknowledged the Administration’s culpability in creating a vast credit bubble.
Also your link is in nominal GDP not adjusted. Real growth has been below 2% just as Dave has said and average real growth over the last three quarters has been 1.3%
Ben Wolf: your link is in nominal GDP not adjusted.
As we said, debt is denominated in nominal dollars.
Ben Wolf: The government deficit fell because the private sector pushed it into surplus.
Clinton Administration economists predicted that if they reduced the deficit, it would increase the availability of credit in the private sector, leading to strong growth. And that’s what happened.
Everything is possible given the right circumstances but most circumstances are rare and can’t be “engineered” by the executive branch or the rest of the government. The Clinton “success” was the result of a confluence of factors, most of which were beyond their control or subject to approval by Congress. It simply was not possible to have “maintained the fiscal course set at the end of the Clinton Administration” and there was no practical way to avoid an “unnecessary war in response to 9-11” unless one believes a President Gore would not have invaded Afghanistan.
The factors that allowed the 1990’s boom and post-war expansion are not around today and no amount of Keynsian-based government action will change that.
This is a subject along with whether President Gore would have invaded Iraq that I’ve gone around and ’round on with IR scholar Dan Nexon of The Duck of Minerva. I think it’s very likely that not only would President Gore have invaded Afghanistan (with similar results) he would have invaded Iraq, too (also with similar results).
I’m skeptical he would have invaded Iraq, at least using the timing and reasoning (and deception) Bush did. But then I always thought war with Iraq was probably just a matter of time.
Zachriel,
1) You keep confusing deficits with national debt.
2). You aren’t getting your causality straight. So far you’ve argued credit expansion paid down debt and that paying down debt enabled credit expansion. Both are untrue but you are arguing each simultaneously. Furthermore you can’t seem to understand credit expansion was a very bad idea that wreaked global havoc.
Andy: Everything is possible given the right circumstances but most circumstances are rare and can’t be “engineered†by the executive branch or the rest of the government.
While much is out of the control of government, regulating tax and spending is largely within their control, which is the subject under discussion. It seems the question presupposes that countercyclical policy works in general terms, as most economists agree, but whether democracies are capable of the necessary restraint.
Andy: It simply was not possible to have “maintained the fiscal course set at the end of the Clinton Administrationâ€
Of course it was possible. Instead, the Bush Administration made long term tax cuts and increased spending during an expansion, exacerbating the looming economic bubble.
Andy: and there was no practical way to avoid an “unnecessary war in response to 9-11″ unless one believes a President Gore would not have invaded Afghanistan.
The unnecessary war was the debacle in Iraq.
Andy: The factors that allowed the 1990′s boom and post-war expansion are not around today and no amount of Keynsian-based government action will change that.
Again, that’s not the issue being discussed. When the government represents a third or more of the economy of a country, then countercyclical policy can help regulate the market cycle, within limitations.
Andy: I think it’s very likely that not only would President Gore have invaded Afghanistan (with similar results) he would have invaded Iraq, too (also with similar results).
No, it was ideology that made the Bush Administration stumble into Iraq. It was very apparent at the time, and even more apparent in retrospect.
Ben Wolf: 1) You keep confusing deficits with national debt.
We’re quite aware of the distinction.
Ben Wolf: 2). You aren’t getting your causality straight. So far you’ve argued credit expansion paid down debt and that paying down debt enabled credit expansion.
Reduced government borrowing resulted in more credit available to the private sector.
Ben Wolf: Both are untrue but you are arguing each simultaneously.
Effect can be cause, such as in feedback. We haven’t made that argument, but there clearly were feedbacks involved.
Should have been attributed thus:
Dave Schuler: I think it’s very likely that not only would President Gore have invaded Afghanistan (with similar results) he would have invaded Iraq, too (also with similar results).
No, it was ideology that made the Bush Administration stumble into Iraq. It was very apparent at the time, and even more apparent in retrospect.