Wednesday, December 29, 2010

No Solution

Over at MacroMania, David Andolfatto takes a look at Robert Shiller's droll article on the balanced budget multiplier.

"Here is a Christmas gift," Andolfatto writes, those of us who have been primed since youth to be receptive to this sort of message: Stimulus, Without More Debt.

I point out David's remark because I'm just a little too old and anti-social to have got the message regarding the urgent need to avoid government debt.[1]

I took a course in macro back in 1977, using the 1975 edition of a textbook first published in 1963. There was a world of difference between the economy of the early 1960s and that of the latter 1970s. The Economics 101 I learned was from a time before the solutions arising since the mid-1970s had worked their way into the curriculum.

Our final for the course was to look at the economic problems of the time and write up an analysis and some policy recommendations. I've been doing that ever since.

While economists and policymakers started inventing new stories about rational behavior, and reinterpreting the words of David Ricardo and such, I was in the library, searching through Statistical Abstracts, photocopying data tables at 25 cents a page, calculating ratios with a slide rule, and creating graphs with pencil and paper.

When I read, I read Maynard Keynes and Adam Smith. I was pretty well isolated from the new ideas of the developing horde of new thinkers.

Andolfatto quotes Shiller on the idea of increasing taxes enough to cover enhanced stimulus spending, an idea Shiller supports in his article.

Then Andolfatto rejects a specific part of Shiller's idea, and offers an alternative:

What I have a problem with is in using some silly theory to support the notion, for example, that taxes should be raised to finance a large public capital expenditure...

Now, I'm no expert in finance... But it seems to me that a large capital expenditure should be financed with debt. The debt service could be supported by toll revenue (on bridges and roads) and user fees in general...

Taxes are distortionary and to the extent that they are needed to support public spending, they should be spread out over time.

Shiller defends the idea of using increased government spending as a stimulus, to be paid by increasing taxes enough to keep the budget continuously in balance.

Andolfatto defends the idea of using increased government spending as a stimulus, to be paid by increasing taxes (or "fees") at a more leisurely rate, to bring the budget into balance, but not immediately.

All very nice. However, only six times in the past 50 years have we been able to bring the federal budget into balance, now or later. Both Shiller's idea and Andolfatto's are unrealistic and unattainable, at least to the mind of this isolated thinker.

As it appears to me, the whole notion of solving our economic problems by balancing the federal budget is unrealistic and unattainable. As it appears to me, the whole line of reasoning that first emerged in the 1970s is just bad economics.

To be blunt, I don't think you can develop an economic argument piecemeal, with tiny contributions from dozens or hundreds of individual economists. I think what you get is a piecemeal, patchwork argument held together largely by constant repetition.

What you get is a different argument for every little piece of the problem. There is no overview, no overall coherence, and no viable solution.


1. It's not that I favor expanding government debt, not at all. Rather, I do not let public debt cloud my judgment the way almost everyone else does. [Return]

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