The Economic Idiocy of Economists

The American Economic Association's annual meetings are a scary sight, with thousands of economists all gathered in the same place – a veritable weapon of mass destruction. Chicago was the lucky city for 2012 this past weekend, and I had just finished participating in an interesting panel on "the economics of regime change", when I stumbled over to see what the big budget experts had to say about "the political economy of the US debt and deficits".

The session was introduced by UC Berkeley economist Alan Auerbach, who put up a graph of the United States' rising debt-to-GDP ratio, and warned of dire consequences if Congress didn't do something about it. Yawn.

But the panelists got off to a good start, with Alan Blinder of Princeton, former vice-chairman of the US Federal Reserve, describing the public discussion of the US national debt as generally ranging from "ludicrous to horrific". True, that. He asked and answered four questions.

First, is there any urgency (to reduce the deficit or debt)? No. The government can borrow short term at negative real interest rates, and long-term at about zero. The world is paying us to hold their money. That is anything but a debt crisis. The Fed is out of bullets, he said – referring to the fact that the US Federal Reserve had lowered short-term rates to zero and had used quantitative easing to help keep long-term rates low. So we need more fiscal stimulus, preferably spending that focuses on actually creating jobs. Amen.

Second, should we focus on the next decade? No, he said, and noted that the Congressional Budget Office's (CBO's) budget deficit projections over the next decade are about 3.6% of GDP, which is not much to get agitated about. Also true.

Third, is government spending the problem? No, he said, it's healthcare costs, and mainly the rising price of healthcare (that is, not the ageing of the population). Most important truth yet! (More on this below.)

Fourth, is the public really up in arms about the deficit? No, actually, theycare more about the economy and jobs. As they should.

Blinder concluded that since this is an election year, we can forget about having any fact-based discussion of these issues in 2012. Happy New Year, he said, and the audience laughed. Well, that was refreshing, I thought – an economist telling the unvarnished truth to hundreds of his people at the annual meetings.

But a rapid descent into hell was imminent. Former CBO director Douglas Holtz-Eakin was next, talking about the need to "repair" social security and Medicare. The United States has all the characteristics of countries that run into trouble, he said. Then he warned that the US is going to end up like Greece. This is one of the dumbest things that anyone with an economics degree can say.

Hello, Mr Holtz-Eakin! Have you ever heard of the US dollar, the world's key reserve currency?

The United States is not going to end up like Greece, any sooner than it will end up like Haiti or Burkina Faso. A country that can pay its foreign public debt in its own currency and runs its own central bank does not end up like Greece.

In fact, even Japan is not going to end up like Greece, and Japan has a gross public debt of about 220% of its GDP, more than twice the size of ours and vastly larger – again, relative to its economy – than that of Greece. And the yen is nowhere near the dollar in its importance as an international reserve currency. But the Japanese government is still borrowing at just 1% interest rates for its ten-year bonds.

At this point, it was clear that this panel, other than Blinder, was living in a dystopian fantasy world. Next up was Rudy Penner of the Urban Institute, another former CBO director. His perspective was not much different from that of Auerbach or Holtz-Eakin. He complained about the polarisation of the political process, which prevents the two major parties from reaching an agreement. It's not partisanship, he said: House speaker Tip O'Neill and President Ronald Reagan knew how to be partisan, but they were able to reach agreement on the 1983 social security package and the 1986 tax reforms. And yada yada.