Lynx, and a comment about the political non-costs of fiscal recklessness.

February 16th, 2018 at 11:59 am

I’m not exactly sure which links I’ve put here already, but I’ve been busy (there is the possibility that if you can’t remember what you’ve been writing, you’re either writing too much or getting too old; I know the latter is true; not sure re former).

WaPo PostEverything Posts:

There’s a leaked proposed rule from team Trump that expands the definition of “public charge cases,” wherein immigration status is threatened by use or expected use of public benefits. Here’s why the daft draft rule is destructive and counterproductive. My intuition is that it won’t block people from coming here; it will lead to disinvestment in them and their kids once they’re here.

Yes, inflation and interest rates are definitely picking themselves up off the mat. That’s a good and expected development at this point in the cycle. Do not confuse heating with overheating.

One profound challenge we face in gauging economic capacity is that economists cannot identify the lowest unemployment rate consistent with stable inflation or the level of GDP at full potential.

Unless we’re willing to put new revenues on the table, deficits and debt will only continue to grow.

Here’s a fun episode of The Indicator, one of my favorite, new podcasts, wherein I explain how I ambivalently welcome that the current slug of stimulus. Yesterday, I listened to about five of these episodes in a row–they’re short–and I gotta tell you: huge bang-for-buck in terms of engaging and even entertaining info/minute.

Sticking with fiscal policy, Paul K has a column up today wherein he appropriately excoriates the hypocrisy of Republicans on their transparently phony fiscal rectitude, along with self-identified “centrists” who have, in their play to appear balanced, long refused to recognize the truth that these alleged fiscal hawks are and have always been chicken hawks. The deficit matters to them if and only if it can referenced to a) block Democratic spending initiatives, and b) leverage cuts to any government program that doesn’t redistribute income toward their donors.

If I may add an editorial comment outside my econ zone, consider conservatives’ indifference to debt (tax cuts), the safety net (Trump budget), and gun control. These policymakers should never be allowed to say another word about their concerns for children or future generations. Their actions completely belie any such claims.

But the point I wanted to add to Paul’s piece is a political economy one. Politicians have never paid a price for adding to the debt. To the contrary, George HW Bush paid a price for raising taxes to try to do something about red ink. One reason for this political non-cost is that all that deficit spending has not had the negative impacts economists’ typically claim.

A voter might vote against a politician who raised taxes or opposed abortion rights or was hostile to immigration. These are all very clear positions. But, based on the empirical record, our voter can be wholly forgiven for discounting arguments about the impact of public debt on interest rates, growth, and jobs.

I’ve argued that, in fact, deficits do matter. In weak economies, we often need them to be larger than they are, but as we close in on full employment, we generally want fiscal gaps to close (though listen to my Indicator interview above for some nuance re the current moment).

I’ve got four reasons:

Political reasons: it’s a lot harder to sustain support for programs that are deficit funded;

Fiscal reasons: any spike in interest rates is more expensive at high public debt levels than low ones;

Recessionary reasons: though there’s not much of an economic rationale for it, it’s clear that policymakers will apply less fiscal policy to offset recessions at low vs. high fiscal space;

Economic reasons: though we haven’t seen it for decades, if the economy is already at capacity, it’s likely that deficit spending will generate not jobs or growth, but just higher inflation and interest rates.

When you consider the politics, it may only be the first and last reasons that catch voters attention. If higher deficits can clearly be linked to economic hardship voters are experiencing or the loss of programs they value, those voters may discipline fiscally reckless policy makers.

But that’s just a conjecture on my part. There must be someone out there who has cast a vote against a politician based on their fiscal recklessness, but I’ve never met them.

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9 comments in reply to "Lynx, and a comment about the political non-costs of fiscal recklessness."

  1. Horvendile says:

    How about the effects on the balance of trade? Am i wrong that our persistent budget deficits contribute to our persistent trade deficit?

  2. Person33224 says:

    Looking up the correlation between debt and homelessness.

    Can’t find it!…

  3. dwb says:

    “Unless we’re willing to put new revenues on the table, deficits and debt will only continue to grow.”

    Either put new revenues on the table, *OR* we must be willing to cut spending on entitlements: Raise the retirement age, and impose a means test for Social Security benefits.

    The political problem with deficits has always been one party is willing to balloon the deficit for stuff they like, and unwilling to shave it if it means cutting their favorite programs or raising taxes. The political dynamics have never favored either cutting entitlements or raising taxes. Democrats have, as long as I can remember, scare mongered about Republicans cutting Social Security, while Republicans have labeled Dems as tax tax tax and spend.

    The political economy problem of deficits is a simple agency problem: Agents are always a little more freewheeling and risk taking when it comes to other peoples money. People will not be thrown out of office until the inflation (or in the case of municipalities, bankruptcy) appears. By then, its too late.

    Yes, politicians are hypocrites, especially if their lips are moving. Is that really news? Are we just discovering that now? I think that has been true for over 225 years. This is not going to stop.

    I am a not interested in blame shifting and name calling. I would be interested in real ideas for how to fix the agency / incentive problem in politics. I doubt term limits would fix this, it may even exacerbate it. A balanced budget amendment may partly address this, by forcing politicians to set priorities.

  4. Smith says:

    A balanced budget amendment is a horrible idea that would endanger efforts to combat Recession and Depression, and probably embolden a minority party due to their required acquiescence to any exceptions. It’s bad enough that the Democrats allow 40 Republicans to block all legislation they oppose in the Senate, and contributed to the loss of a Supreme Court majority, because they won’t give up that power for themselves. The balanced budget amendment exists for states, but they had the federal government to bail them out.
    Balanced budget = Great Depression, it’s that simple.

    • Smith says:

      Ask Roosevelt how that worked out in 1937.

    • dwb says:

      No it wouldn’t: it depends how it is worded. For example Mile’s Kimball’s suggestion caps government spending at 50% of GDP and as I recall demands that spending be deficit neutral based on an average over an extended period like 7 years. The key is to actually run surpluses during boom times.

      A corollary issue is that right now is that government budgets are entirely based on dollars, not productivity. There is no mechanism that forces government programs to be more efficient. Government needs to be doing more, with the same or fewer resources.

  5. Smith says:

    In light of recent events, I would like to again call to readers attention to take care in what you read. In late December of last year, this blog was subjected to the spreading of false Russian propaganda. Specifically, posts appeared claiming millions starved to death in the Great Depression. I took it upon myself to refute the story and trace it back to Russian sources. This was very easy with a quick google because someone else, on Redit I think, had already brought to fore whence it came.

  6. Smith says:

    Could someone please tell me why raising interest rates are the preferred method of fighting inflation? Please don’t tell me that’s the way it is and always has been (which would not be true anyway), or this is the consensus opinion of expert economists (who also missed the housing bubble, the need for more stimulus, and the effect of Bush tax cuts, from left and right, including Krugman for starters, who predicted very high inflation.
    Pray tell, why do we want to fight inflation on the backs of working men and women? Explain the reasoning behind this when labor costs are only 10 to 20 percent of costs making up prices? This is true even in our service economy.
    Are we really anticipating 0% productivity increases? Because my calculations say a 1% productivity increase could give everyone a 5% raise without raising prices, because 5% increased wages of that 20% cost of labor in relation to prices means .05 raise *.20 share = .01 which would get covered by productivity gain. Tell me how I’m wrong. Where is the math error? What didn’t I define correctly? How are the statistics off?
    Furthermore, wages for many groups have declined. Unemployment for many groups is much lower than 4% without concomitant or proportional increases in wage rates.
    Look at college educated unemployment. Look at white unemployment. Where’s the evidence low employment is unsustainable? Most of the white college educated with low unemployment are still not enjoying healthy wage gains. The only group that does is high incomes.
    Think of all the ways inflation can be fought without raising interest rates. Stop following Milton Friedman’s formula for success. Look where it got us.

  7. Alan Luchetti says:

    Fiscal recklessness at the federal level is breeding private debt by indulging in “sound finance”.