Tuesday, July 24, 2012

Can someone explain this comment from Peter Boettke for me???

In response to some great points from LK on the macroeconomic record of the third quarter of the 20th century, Peter writes: "It is called the economics of illusion ... Albert Hahn got this right years ago. Our current problems are not a decade old, but six decades old -- see Kotlikoff on intergenerational accounting, and Buchanan and Wagner on why this "fiscal child abuse" is the political legacy of Lord Keynes."

Can someone explain what Peter could possibly be thinking of? Looking at the actual course of public debt over the last six decades is helpful here:

The first thing to note is that the debt load of the post-Depression period has never, ever, ever been in a danger zone. We are getting into uncomfortable zone, and we were in an uncomfortable zone in WWII, but we have a sense of the debt limits of fiscally responsible states and we're not courting that at all.

The next thing to note is that for the first three deades of Peter's six decade period - when Keynesianism was actually guiding fiscal policy to a large extent - we had a declining debt burden. To Keynesians this isn't surprising, of course, because Keynesianism is all about responsible fiscal policy, maintaining leg room for action when it's necessary, extracting demand through smaller deficits when appropriate, etc.. And if things are going smoothly there's no reason to run up public debts anyway, so you'd expect the burden to decline.

Democracy in Deficit was published in 1977, at the very low point of this trend. What could they have possibly been thinking? After years and years of more or less responsible policy and growth Keynes is somehow leaving a legacy of fiscal irresponsibility? Generally speaking I would give a blanket endorsement of James Buchanan's work, but what he's done on Keynes is a notable exception. I encourage people to read the critical responses to Democracy in Deficit.

So how can one argue this?

After 1977 the story changes somewhat. Writ broadly, fiscal policy still seems to be under control of course. There were arguably geopolitical issues in the 80s that needed to be dealt with. I think one can say that the fiscal accomodation of the period was highly unnecessary, but there seems to be no reckless build-up here that is introducing problems now. Anyway, this has little to do with Keynes or Keynesianism. The debt problem - to the extent that there was one in the 1980s - was a very Classical effort to improve the productive capacity of the economy, coupled with a political unwillingness to make spending cuts. There's a lot to criticize there, but of course none of it has anything to do with Keynes - as Peter seems to suggest it does.

The spike in the debt in recent years is of course at least partially attributable to Keynesianism, but:

1. The Keynesian argument is that this is precisely the time to shoot any fiscal ammunition you've got, so there's a real challenge to the idea that this is even a problem.

2. No reasonable person thinks the deficits we've been running the past couple years have anything to do with our long-term debt problem. Let me rephrase that for emphasis: if you think the deficits of the past couple years are our long-term debt problem you either don't understand the federal budget or you're not a reasonable person, or both.

3. A lot of this is due to low tax receipts and has nothing to do with policy decisions anyway.

The real debt problem - to the extent we have one - is an entitlement problem, particularly a problem with Medicare. We probably need to do another fix of the tax system too - which seems daunting with the current Congress. But my point is, both of these can be done within the confines of what has become normative American post-war political economy. You don't need to wreck or abandon anything about post-war political economy to make the fix. But it's equally important to recognize that neither of these problems - entitlements or taxes - has anything at all to do with Keynesianism or Keynes's legacy.
So why do I see Peter arguing this in a variety of fora - often just accusing people he disagrees with of partaking in the "economics of illusion" without ever actually explaining himself? The logic, to me, seems circular:

Keynes is not one of those responsible "mainline" economists, ergo any irresponsibility among politicians (much of which is misdiagnosed, as I've noted, but we can leave that aside for a second) must have it's origin in Keynes's legacy because Keynes dominates post-war economics. But on what grounds are you calling Keynes an irresponsible, non-mainline economist?, I would ask Peter. It seems to me he is very much in the well grounded tradition of Smith, Mill, and the rest of the mainline? Well look at the impact he's had on the way we think about political economy in the post-war period!, I imagine Peter would respond (and he is welcome to correct me if I'm wrong).

The claims are circular. Keynes is non-mainline and therefore has lead us down this terrible path. How can you claim he's not mainline? Well he's lead us down this terrible path so clearly he's not mainline!


And it's tough to argue the point because anyone that thinks Keynes is an important figure is defined out of the mainline themselves.

I, for one, am getting a lot less out of Coordination Problem than I used to. Hopefully these things are cyclical.


  1. Regarding Democracy in Deficit...I remember you copy and pasting Dr. Michael Emmett Brady's Amazon.com review of that book. Do you still agree with Dr. Brady's view of that book? If you want to see it again, here it is.


  2. I would assume the reason they dislike the early period was it was achieved through inflation which I guess would be stealing from their elders and only subsequently through adding debt which I guess would be stealing from their children. While intergenerational transfers are not totally without meaning, there is a lot less there than imagined. Precious few investments last even as long as a career much less than a life and nearly all require substantial reinvestment even to maintain their value much less increase it. People create the economy they live on for the most part.

  3. I have recently posted on this very question

    And that creating lots of safe assets (aka public debt issued by never-defaulting state) might actually promote prosperity and technological progress

  4. Why do you hold up the chart as "doing things right" in the post-war era, when (as you recognize in the post!) an accurate accounting would include entitlement obligation? And that including them would make the chart look very, very different?

    1. What precisely do you mean by "entitlement obligation" that you say should be included, and where do I say that?

    2. I mean: medicare, and social security.

      You said it here: "The real debt problem - to the extent we have one - is an entitlement problem, particularly a problem with Medicare."

      It's funny (though I guess not too surprising) that I can refer to the same things you did with almost the same words, and you'll still act like I just made something up!

      *smacks forehead repeatedly*

    3. No Silas - I know what the word "entitlement" means. I'm asking what entitlement obligation you think I'm not including.

      Here's what I thought you might have meant: some people argue that future entitlement obligations - the trillions of dollars we will pay out one day far in the future - should be discussed as the same as the debt. I think that's wrong, but I wanted you to clarify if that's what you were referring to before I mentioned it.

    4. You must be thinking about the people who use standard accounting practices.

      The fact that payments will happen "one day in the far future" is no reason not to count them (with time discount) as part of the present debt. After all, you could say the same thing about a corporation's long-term bonds (or pension obligations!): "Hey, we're not putting those 20-30 year bonds on our balance sheet ... I mean, the payments are just so *far in the future* and all, it's just not something we really need to think about right now."

      Of course, what's funny is that your mentality *has* been used by corporations to justify woefully underfunding pension in anticipation of "don't worry man, we'll be profitable later, don't worry about the so called 'present value' of the debt, even though we'll be getting competition from companies that aren't so shackled with debt but have the same productive capability. GM is too big to fail and so we shall remain!"

      What exactly were *you* thinking about when you brought up entitlement spending? That we have a general "financial problem", but that we shouldn't *call* those obligations "debt"? Or were you making some kind of bizarre distinction between payments due in the "far" future, but not the the near or "sorta-kinda-far" future? Either way, the distinction would be spurious.

      It would be far more honest, actuarially speaking, if the government issued new (standard) debt and used the money to buy annuities and health insurance plans for the people it will be covering. Then the raw federal debt would be truly representative

    5. What are you talking about Silas? Of course long-term bonds should be on balance sheets. That's a debt we've actually contracted.

      It's probably good to keep track of the future Social Security obligations - that's what the OASDI trust fund does with Social Security and it's what every good pension fund should do. But you don't add that into your debt.

      If you really think it makes senses to add all the future entitlement payments on the entitlement side, what about adding all future tax collection to the revenue side? They're in the same boat, Silas. Unless subsequent legislation changes things, people are going to be obligated to continue to pay taxes just like the government is going to be obligated to pay out Social Security.

      But you seem oddly silent on that one...

      Same with corporations. Fine, you want to put all future pension obligations on the balance sheet? Are you also going to put all future revenue on that balance sheet? If not, why not?

      When you do what you're proposing it's not a balance sheet anymore - it's just an earnings projection. Those things are good to have and good to be aware of, but it's not the right measure of your current debt burden.

    6. re: "What exactly were *you* thinking about when you brought up entitlement spending?"

      Sorry, I thought I was pretty clear. I meant the real debt problem is a problem in the future that's going to come about because of entitlement projections. That suggests we need serious entitlement reform. But that's a future debt problem, it has nothing to do with Keynesianism (which was the subject of the post), and it doesn't say about fiscal management in the post-war period.

    7. I meant the real debt problem is a problem in the future that's going to come about because of entitlement projections. That suggests we need serious entitlement reform. But that's a future debt problem

      Money we know now that we'll have to spend is functionally equivalent to debt, so any problems stemming from inability to pay it apply, such as the point you made in your post (but will probably "forget" just the same) that higher debt gives less headroom to respond to emergencies (like wars) or to apply Keynesian deficit-financed stimulus.

      Long story short, regardless of whether you call this or that "debt", the postwar period has in fact been a time of increasing inability to take on more debt, given all the promises the government has made. If something had come up in the 70s -- say, a new Hitler -- we would probably be past the breaking point now (if we had otherwise kept the SS/M/M obligation path).

      Also, re: your point about counting future revenues as well as payments: the debt crises numbers are *net* of expected revenues, and future revenues are much less certain than future debt payments and so are asymmetric.

    8. How are future revenues less certain than future payments? SS is fairly easy to project, but can you tell me what Medicare spending is going to do in the future? 20% times projected GDP gives you a pretty good revenue figure - better than anything I'd be willing to project on Medicare.

      re: "Money we know now that we'll have to spend is functionally equivalent to debt"

      In the same way that money we know we're going to earn is functionally equivalent to revenue. All of that is good to keep in mind. What's wrong is only counting one of them and using it to scaremonger about the debt, which is what a lot of people do with that figure.

      re: "(but will probably "forget" just the same)"

      What the hell are you talking about? You completely made up the fact that I said some entitlement obligation needed to be included.

    9. Daniel_Kuehn, I didn't "make up" that you recognized the relevance of entitlement obligations to the (true) fiscal situation of the federal government, which was all my point needed. You're just being difficult.

    10. I'm being difficult?!? Ever since Gary Gunnels left you've been the biggest troll on this blog. Thankfully you only take interest occasionally.

      This: http://factsandotherstubbornthings.blogspot.com/2012/07/can-someone-explain-this-comment-from.html?showComment=1343197499884#c2244290164079488548

      And all that followed is you being difficult. Yes, of course entitlements are relevant. You were talking about including them in the debt figure. Those are two quite different propositions.

  5. It is the trajectory of household debt over the last six decades that looks troubling:


    Even more troubling is the trajectory of the income share of finance:


    Perhaps they are related?

  6. DK wrote:

    The first thing to note is that the debt load of the post-Depression period has never, ever, ever been in a danger zone. We are getting into uncomfortable zone, and we were in an uncomfortable zone in WWII, but we have a sense of the debt limits of fiscally responsible states and we're not courting that at all.

    Where are the boundaries of discomfort and danger? The only quasi-official thing I've ever seen on this is the Rogoff/co-author stuff, and obviously you are not taking their results to apply to a "fiscally responsible state" like the U.S.

    1. I was thinking of Reinhart-Rogoff as an uncomfortable zone and a "danger zone" as something that we haven't seen countries like the UK or Japan get into.

      We are well within historical norms and just now only kissing the Reinhart-Rogoff uncomfortable zone.

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