*Sigh* Yet More Cleaning Up After the Cockroaches: Archive Entry From Brad DeLong's Webjournal
Author: Sigh Yet More Cleaning Up After the Cockroaches: Archive Entry From Brad DeLong's Webjournal: "A normal person, reading Jonathan Weisman in the Washington Post on June 8, would conclude (i) that Steven Moore is an economist, and (ii) that Kevin Hassett, Eric Engen, Glenn Hubbard, Greg Mankiw, and many other economists are 'reevaluating' the view that budget deficits are a significant minus for the economy, believe that 'the argument against deficits is more about self-righteous moralism than economics', and broadly agree with Richard Cheney's declaration that 'deficits don't matter'...
...Economic Legacy: Reagan Policies Gave Green Light to Red Ink: The line is not likely to make this week's eulogies to Ronald Reagan, but when Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.... It wasn't that Reagan's policies proved that government borrowing had no impact on the economy. But his administration's record -- particularly with some years of hindsight -- did give reason to question traditional thinking.... "The lesson we should have learned [from those years] is that deficits have little or no short-term economic impacts," said William A. Niskanen, a member of Reagan's Council of Economic Advisers....
[Deficits] appeared to have no impact politically, said Stephen Moore, a conservative economist at the Club for Growth who worked in Reagan's budget office. "Voters and politicians became anesthetized to big deficits," Moore recalled. "Reagan was running these big deficits, and liberals argued it was going to be Armageddon. We were going to ruin the economy. Interest rates were going to go through the roof. And none of these things happened."...
[A]fter the boom years of the 1990s, and the steady economic slides of those international rivals, some economists are reevaluating.... The argument against deficits is more about self-righteous moralism than economics, they say. The Reagan "experience changed the debate dramatically," said Kevin A. Hassett, an economist at the American Enterprise Institute. "Back then, it seems that everybody believed Reagan must be some kind of kook and the people who agreed with these views were flimflam artists. Not so anymore."...
For nearly a century, economic orthodoxy has held that federal borrowing harms the economy by driving up interest rates, diminishing investment and productivity, and placing an unfair burden on future generations, who will finance the spending and tax cuts of the present.... But the new argument holds that interest rates are set on a vastly larger global marketplace. With rising global prosperity, even a federal deficit as large as the United States' would present little competition for would-be investors. A soon-to-be-published paper by American Enterprise Institute economist Eric M. Engen and Columbia University economist R. Glenn Hubbard, the first chairman of Bush's Council of Economic Advisers, concluded that the record budget deficit of 2004 should raise interest rates by 0.12 percent.
"The world's capital markets are lot more sophisticated and flexible than they were then," said N. Gregory Mankiw, the current chairman of Bush's economic council. "That probably means that other things being equal, changes in domestic fiscal situations have less impact." Indeed, this school of thought is becoming something of a consensus, Engen said. Deficits equal to 1 percent of the size of the economy should raise interest rates by 0.3 percent, he said....
A normal person would be very wrong.
It is important to stress (i) that Steven Moore is not an economist, and (ii) that only Kevin Hassett is implicated in the claims that many economists no longer believe that the supporters of Reagan's fiscal policy were "flim-flam artists" and that "the argument against deficits is more about self-righteous moralism than economics."
But let's let Eric Engen and Glenn Hubbard speak for themselves, in the final paragraph of the paper that Weisman cites:
Our findings should not be construed as implying that “deficits don’t matter.” Substantially larger, persistent, and unsustainable levels of government debt can eventually put increasing strains on the available domestic and foreign sources of loanable funds, and can represent a large transfer of wealth to finance current generations’ consumption from future generations which much eventually pay down federal debt to a sustainable level. Holding the path of non-interest government outlays constant, deficits represent higher future tax burdens to cover both these outlays plus interest expenses associated with the debt, which have adverse consequences for economic growth...
Only one of the many economists quoted by Weisman would sign on to the claims that "deficits don't matter" and that "the argument against deficits is more about self-righteous moralism than economics": Kevin Hassett. Eric Engen wouldn't. Glenn Hubbard wouldn't. I certainly wouldn't. Ben Friedman wouldn't. Peter Orszag wouldn't. Bill Gale wouldn't. Bill Niskanen wouldn't. If Weisman had bothered to read the last paragraph of the Engen-Hubbard paper he cites, he would have noted that they explicitly reject the claim that "deficits don't matter" and put forward an economic--not a self-righteous moralistic--argument against deficits.
It is also worth noting that Weisman garbles his quote from Engen and gets the magnitude wrong by a factor of 10: Engen-Hubbard say that a deficit of 1% of GDP sustained for 1 year most likely raises interest rates not by 0.3% but by 0.03%. 0.3% for a 1-year 1%-deficit would be an amazingly strong effect indeed...
#shouldread
#journamalism
#hoistedfromthearchives
#mondaysmackdown
#fiscalpolicy
#economicsgonewrong
