The Rap on Keynes v. Hayek
Though I posted it, I didn’t comment on the Keynes v. Hayek rap video. I was first struck by the skew toward Hayek. He gets the final word as Keynes is hunched over a toilet paying for his excesses. That’s to be expected from Russ Roberts, one of the creators, who identifies himself as an Austrian economist, at least in part.
Mat Yglesias had a similar reaction and provides some details:
[I]t’s worth saying that this presents a somewhat oddly polarized view of the issue. The Hayek character presents what I think “real business cycle” types really think. But the Keynes character emphasizes as the sole alternative what are really the wackiest Keynesian suggestions (dig ditches, start wars) as remedies for the most severe possible problems. But the abstract idea that stabilization needs to emphasize creating stable nominal spending flows doesn’t normally involve any especially weird ideas. Nor does it normally involves any specific leftwing ideas.
The rappers have Keynes saying, for example, that he wants to “steer markets” whereas Hayek wants to “set them free.” Which is true to those two guys’ political perspectives. But Alan Greenspan is a serious free market guy and he, like Keynes, thinks the government should respond to economic downturns by boosting spending via lower interest rates. Milton Friedman thought the same thing. Ben Bernanke, conservative Republican, has the same view. And it’s perfectly coherent to both think that fiscal stimulus is useful and also that government spending is almost always wasteful—you just need stimulus that’s heavily weighted toward tax cuts.
Much of the hyped polarization of fiscal stimulus is due to a misunderstanding of the short- versus long-run views. It has been my impression that most economists believe that it is appropriate and wise to use debt-financed stimulus in the short-run and disagree over the role of debt in the long-run. Let’s ask Robert Frank:
The good news is that there is little disagreement among economists who have studied the issue. The consensus is that short-run deficits help end recessions, and that whether long-run deficits matter depends entirely on how government spends the borrowed money. If failure to borrow meant forgoing productive investments, bigger long-run deficits would actually be better than smaller ones.
Now maybe Roberts or Hayek would pick that apart and find some disagreement where Frank claims there is little. The rap video and most of the attention paid to the debt debate makes a muddle of things and fails to clarify where the point of contention really is. That’s not surprising, but it is a shame.
Personal Debt: McArdle on Ramsey, Etc.
Megan McArdle has intersected with my information sources twice in the last few weeks, this time on the topic of debt. Those of you who read this blog for its personal finance content might be interested in McArdle’s work on this issue.
Her piece in the December 2009 issue of The Atlantic, to which I subscribe, is a close look at Dave Ramsey, his debt reduction and avoidance approach, and McArdle’s own implementation of it.
She was also interviewed on the 7 December 2009 episode of EconTalk, which is among my favorite podcast-delivered programs. The interview begins with a discussion of debt, Ramsey, his system, McArdle’s experience with it, and then turns to other areas in which we struggle with self-restraint (dieting, time-management, organization, and the like). If you’ve never listened to EconTalk and are interested in finance and economics, McArdle’s interview is a good introduction to the program. Give it a try.
Public Debt and the Public Option
As health care reform goes down to the wire, one concern raised by opponents of the public option is the impact on the national debt. This concern seems strange, since according to the CBO, both the House and Senate bills including a public option would reduce future deficits.
Some have argued that notwithstanding the express provisions in the bills that a public plan must be funded entirely by premiums, once it is established, we won’t be able to help ourselves from expanding it with deficit spending. Perhaps this is a sad fact about Americans. But is it generally true?
If public financing of health care generally tends to produce public deficits, one might expect countries that fund a greater portion of their health care costs publicly to accumulate greater public debt. To examine this hypothesis, I ran a multiple regression analysis of public debt to GDP as a function of the publicly funded portion of overall health care spending for twenty-eight of thirty OECD member countries from 2000 to 2007, controlling also for overall health spending in proportion to GDP, and taxation as a proportion of GDP. I found no statistically significant correlation.
Now this result does not exclude the possibility that the effect of public financing of health care on public debt may be hidden by the effect of some omitted variable. But it does suggest that such an effect is not obvious. And those who assert that the effect exists have not done the careful work that would be required to substantiate their claim.
China’s Chin Music
This post originally appeared on The Finance Buff.
Lately there has been a lot of big economic news. That’s likely to continue. Since I can’t comment on all of it, each week (time permitting) I will select the economic story from the prior week that is most significant to me. It may not always be what everyone is talking about, but it is what I am thinking about.
Last week, my top story was Chinese Premier Wen Jiabao’s warning to the U.S. to honor its debts. In a press conference at the closing of China’s annual legislative session he said,
“We have loaned huge amounts of money to the United States, so of course, we have to be concerned. . . . We hope the United States honors its word and ensures the safety of Chinese assets.” (As quoted by the Los Angeles Times.)
“Huge amounts of money” in this case is $2 trillion in U.S. assets, much of it in the form of Treasury bonds.
There are few good reasons for Wen to suggest the U.S. may not make good on its obligations. And one can hardly think of a worse time to make just such a suggestion. It certainly is not good for the U.S., which will be taking on massive debt ($11 trillion and counting) to finance an economic recovery, as well as an ambitious Obama agenda. Thanks to a global demand for financial safety the interest rate offered on new Treasuries is at an historic low. But if China and the world demand higher interest rates in compensation for a perception of credit risk, servicing this massive debt will be considerably more costly.
Talking down the credit worthiness of the U.S. isn’t good for China either. A weakening demand for Treasuries could devalue the dollar, reducing the volume of Chinese goods we purchase. The Chinese Communist Party cannot afford for Chinese manufacturers to lose U.S. sales, particularly not now when the downward pressure is already so great. As reported by James Fallows, the party’s legitimacy relies on at least an 8 percent average GDP growth rate. Anything less could lead to widespread “discontent with Communist rule. And then anything could happen.” (China’s 2009 GDP is forecast to be well below 8 percent.)
To be sure, for several reasons it is generally agreed by Chinese and U.S. economists and officials that the dollar must depreciate relative to the Chinese yuan. However, it is also best that this adjustment be done gradually, as China has been attempting for several years.
If disrupting the American-Sino debt-for-growth codependency is not good for either nation right now, what might explain Wen’s overt expression of concern for the safety of Treasury bonds? One interpretation is that it was, in baseball terms, “chin music” or a “brush back,” a demonstration to the new Obama administration of China’s power. Obama is smart and surrounded by capable people so I doubt such a warning was necessary. It was certainly a dangerous way to go about it. After all, when the world is nervous and alert even a whisper can start a run.
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