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.
He might have added that we have had 25 years of lying about social security since then, and even Reagan didn't dare try to privatise social security. And, of course, social security can currently pay all promised benefits for the next 24 years without any changes.
These arguments about polarisation really pose the key issue: from the viewpoint of the 99%, it's not polarisation, but weakness in defending our interests that is the problem. President Obama compromised much more than he should have last year, offering cuts to social security and Medicare, in exchange for a long-term budget deal. The 99% are just lucky that the Republicans were too extremist to make this kind of a "grand bargain" with Obama.
The last panelist was Alice Rivlin of the Brookings Institution, another former CBO budget director and Fed vice-chair, as well as a member of the president's (2010) National Commission on Fiscal Responsibility and Reform. She agreed with Blinder that we need more stimulus. But we can only get this if we agree to long-run spending cuts – including social security, of course. Yuck. This is a political strategy that is sure to end in disaster, given the prevailing state of misinformation and disinformation.
During the discussion, Blinder – who identified himself as a Democrat – expressed his frustration in not being able to convince fellow Democrats to cut social security. Double yuck. The average social security check is about $1,177 a month, and a majority of senior citizens are getting most of their meager income from social security. Why these people insist on creating more poverty among the elderly, especially when the program is solvent for decades to come, is beyond me.
I got to ask the first question for the panel. I called attention to Blinder's presentation of the long-term budget problem as almost completely a problem of the rising price of healthcare. I pointed out that you could take any country with a life expectancy greater than ours – including the other high-income countries – and put their per capita healthcare costs into our budget, and the long-term budget deficit would turn into a surplus.
My question was simple: are Americans so inherently different from other nationalities that we can't have similar healthcare costs? And if not, then why are we talking about long-term budget problems – instead of how to fix our healthcare system?
None of the panelists offered a serious answer to this question. Auerbach, the moderator, said that other countries have rising healthcare costs, too. And some of the others said or implied that healthcare costs were rising at an unsustainable pace worldwide.
But this is nonsense. The United States pays about twice as much per person for healthcare as other high-income countries – and still leaves 50 million people uninsured. This is a result of a dysfunctional healthcare system that has had healthcare prices rising much faster than those of other high-income countries for decades.
What the budget hawks are basically telling us is that we must assume that insurance and pharmaceutical companies will have a veto over the provisions of healthcare reform for decades to come. And that, therefore, we must find other ways to make up for these excessive costs, including cutting social security and other government spending, and pushing us into higher rates of poverty and inequality than we already have.
And even worse in the short run, all this crap about the deficit and the debt will be used to block the necessary stimulus measures – "stimulus" has already become a dirty word that Democratic politicians are afraid to utter. This means high unemployment and a lot of unnecessary misery in the world's richest country for the foreseeable future.
A dismal performance for the dismal science, on some of the most important issues of the day. Of course, there are other economists, including Nobel Prize winners such as Paul Krugman, Joe Stiglitz and Robert Solow (full disclosure: the latter two are members of CEPR's advisory board), who would offer more sensible views. But this panel was, sadly, representative of economists with the most influence on public policy.
With a brain trust like this, a lost decade for America looks likely – unless the citizenry can steer a different course.