If you read this blog very much, you know by now that one of my primary reasons for writing it is to discover what it is I am actually thinking. The mental discipline required of putting thoughts in writing helps me organize and clarify what I am thinking. If I write something that doesn’t make sense to me, I know that my thinking on the subject needs more work. Besides all that, I enjoy the process of writing. Publishing what I write aids in the discipline required of writing–my goal is that my writing makes sense not only to me, but to others. I know I don’t always succeed, but failure is not for lack of effort.
I often write about economics. I majored in economics as an undergraduate because, from what I could tell at the time, it was the only of the social sciences (the hard ones, as there is never a discretely provable answer) that tried to see things (i.e., human behavior) as they are, not as people wish them to be. History might also have offered the same perspective, but at the time I thought it rather boring, at least in the manner with which it was taught. Besides, as I later learned, a foundation in economics is almost a prerequisite to capably understanding and analyzing historical events. Man can be a giddy animal, but he is ever and always an economic one, constantly making choices affecting his life on a cost/benefit basis.
One of the best writers on economics (which is to say, one of the clearest thinkers capable of communicating economic ideas for the consumption of laymen) I have found is Caroline Baum of Bloomberg. She specializes in analyzing Federal Reserve actions as they might affect the economic system, but often ranges far afield, which is anyway necessary to her core specialty, as Federal Reserve actions can have a variety of economic effects.
Ms. Baum wrote a short opinion essay, “Only Fools Find Proof in Reinhart-Rogoff Uproar”, published today (May 2, 2013) on Bloomberg. It is a perfect example of how to think and write on economics, even when propounding a particular point of view, or perhaps, especially when doing so. A bit of background is in order. Carmen Reinhart and Kenneth Rogoff are Harvard economists who recently (2010) published a study showing a correlation between government debt levels and growth in the economic systems they govern. The correlation was significant, in that economic growth of a certain level was significantly correlated to government debt levels (as a percent of gross domestic product, i.e., all the goods and services produced in an economic system in a year). They found that at a certain level of government debt–90%–economic growth was impaired–from an average of 3.5% per year below 90%, to about 2.5% above it.
Their study did not make the fallacious claim that correlation implied the direction of causation. They pointed out that it could be either way–that low growth might cause high government debt (a colorable argument could be made that such is the case in the US since the start of the Great Recession), or it might be high government debt causing low growth. But it should be pointed out that causation might not flow either way. Correlation is not causation, and there is simply no way to ever conclusively know, in economic systems with millions of independent actors making in aggregate trillions of economic decisions each day, what causes what. Which is why the social sciences are the hard sciences. Were it a physics problem where the dependent variable could be isolated and evaluated, the task would be easy. In macroeconomics, i.e., in the study of political economy and how political decisions affect economic outcomes, it is never the case that ceteris paribus obtains. All other things can never be held constant.
Unfortunately for Reinhart-Rogoff, even the variables of which they knew the values proved tricky to keep organized. In their calculations, they were shown to have skipped a line or two from an Excel spreadsheet, leaving out a few countries whose government debt exceeded 90%, but that saw economic growth exceeding 2.5%. Had the countries been included, the correlation between government debt and economic growth would still have obtained, but less robustly so. But their mistake was catnip to people like Paul Krugman, an economics columnist for the New York Times who represents exactly the opposite of Ms. Baum in how to think and write on economics, who went so far as to claim that Reinhart-Rogoff’s mistake caused untold misery for millions in Europe for having followed an austere path (i.e., government spending not as robustly increased as Krugman, et. al., would like) in dealing with their economic troubles. Ms. Baum points out that this is ridiculous:
Second, the idea that European budget policies relied on
Reinhart and Rogoff’s 2010 findings is nonsense. The 1992
Maastricht Treaty outlined four criteria for joining the
European monetary union, including specific thresholds for debt
(60 percent) and deficits (3 percent) as a share of gross
domestic product. The International Monetary Fund often makes
its loans conditional on achieving fiscal targets.
Third, claims that the data errors exposed a serious flaw
in the research are preposterous. The paper by UMass’s Thomas
Herndon, Michael Ash and Robert Pollin does more to confirm
Reinhart and Rogoff’s findings on the relationship between high
debt and slow growth than to upend it. In a subsequent 2012
paper, Reinhart and Rogoff found that the average growth rate
during sustained high-debt periods was 2.3 percent — the UMass
study’s average was 2.2 percent — compared with 3.5 percent
There has been, since the very start of economic theorizing (roughly about the same time as the Industrial Revolution got underway), near constant bickering among economic thinkers over the proper role of government in economic systems. Adam Smith’s Wealth of Nations, published in 1776, forms the foundation for the laissez-faire view of economics, which basically adheres to the idea that, excepting a few necessary functions (e.g., contract enforcement, common defense), the government should let markets work things out for themselves through the price mechanism. Karl Marx observed that left to their own devices, capitalist systems will so concentrate wealth that they will become inherently unstable. Marx was mostly ignored by the laissez-faire classicists, but his successor, John Maynard Keynes, was not. Now, it seems, we are all Keynesians, to varying degrees. Keynes believed, somewhat like Marx, that capitalist systems were socially unstable because they could reach equilibrium at high levels of unemployment. The Keynes solution was to prime the economic pump with cheap and plentiful money while simultaneously increasing government spending to a level where it substantially exceeded government revenues.
No one much argues anymore about whether the Keynesian monetary pump priming is appropriate. People expect the Fed to decrease interest rates (prime the monetary pump) when unemployment increases and that’s what the Fed does. What effects doing so might otherwise have is rarely questioned.
But the latter facility of running fiscal deficits, and at what level, is the subject of great debate (which is actually not much different than monetary stimulus, a subject for another day). Neo-classicists believe fiscal deficits don’t do much, and often represent dangerous expansions in government influence over economic affairs, capable of usurping the allocative principles of the free market price mechanism. Neo-Keynsians like Paul Krugman believe that more fiscal “stimulus” is always appropriate whenever employment levels indicate unused economic capacity, no matter the aggregate level of existing debt. As every fiscal deficit adds to the total national debt level, which the Reinhart-Rogoff study seems to indicate impairs rather than enhances the potential for economic growth at some ratio of debt to GDP, the neo-Keynesians seeking less austerity and more deficit spending did not like the implications of Reinhart-Rogoff in the least. The idea that there might be a level of national debt where adding to it with Keynesian fiscal stimulus might cause the exact opposite of stimulus was excoriated by neo-Keynesians even before the missed calculations came to light. When they did, the neo-Keynesians declared victory. But as Ms. Baum points out, surely there is some level of debt that is too much:
Forget the data for a minute. Imagine asking the average
person on the street, Is too much debt a problem? Do you think
you would get any negative responses? That’s the essence of
Reinhart and Rogoff’s research. You don’t need a doctorate in
economics to understand that you can’t spend beyond your means
forever, or that piling on debt because it’s cheap to borrow
isn’t sound policy.
The quarrel over more debt or less is an argument over more government or less, which is an argument the United States has been having since even before its inception. It is the argument debated in the Federalist Papers. It is Jefferson versus Hamilton (as Secretary of State and Treasury, respectively, during the Washington Administration). It is in some respects, the Confederacy versus the Union.
The argument has a visceral tenor, political to the point of religiosity, turning on how an individual views man in nature and among his fellows. In short, it is a philosophical argument. Is man an individual creature, endowed with all the attributes necessary for survival? If so, then the less the impairment of his liberty by government the better. Man gives up more in lost liberty than he gains in collective action. If instead man is viewed as a social animal, who could not exist outside the company of his fellows, then the more government, i.e., the more cooperative and collective action there is among men, the better. For those of an individualist bent, the other side is often depicted as cravenly socialist, turning men into nothing more than Hegelian ants who have no purpose outside the context of society. For those of a more collectivist bent, the other side seeks a Hobbesian economic system with every man at war with his fellows, yielding lives that are nasty, brutish and short.
Whatever is the truth, it surely lies somewhere between the extremes. The dialectic has not served much in this instance to advance its cause. Which is why Baum’s essay was so powerful. She shredded the claim of the neo-Keynesians that because a study was proved to be imperfect, it should be ignored, but without becoming a shrill proponent for the opposite cause. It is very easy to see that if more government debt were always the answer, then providing an economic system that most enhanced the welfare of its participants would be a simple matter of ceaselessly, relentlessly spending more, in aggregate, than is produced (or on the monetary ledger, of ceaselessly, relentlessly increasing the money supply). As doing so is obviously impossible, it can’t be the case that more government debt is always better, and it does not take an economics Ph.D to figure it out.
A capitalist economic system could not function without government. But neither could it function with a government grown so powerful and overweening until the price mechanism of allocating resources fails. The proper level of government to ensure that the economic fortunes of the governed are most enhanced is not a political question. It is not a moral question, except that what is morally good has its foundation in the economic question of what enhances survivability and propagation imperatives. It is an economic question. What level of government works best to enhance welfare the most, and the most equitably?
You won’t find the answer, except perhaps by accident, in reading anything Paul Krugman writes. His role in life is to provide an economic rationale for his political impulses. Krugman’s economics serve his political masters, and his political masters always seek to expand the government writ. Ms. Baum’s article didn’t explain what the proper level of government should be, but pointed out, in an exceedingly well-reasoned manner, the absurdity of Krugman and the neo-Keynesian catechism. Krugman is dogma dressed up as economic analysis. Baum is economic analysis dressed up as, well, economic analysis. If you want to better understand economics, read Baum and ignore Krugman.