Economic Hypocrisy

It takes a particular type of gall for someone hiding behind the comfort of a cozy tenured professorship to yelp about the way in which unions distort the otherwise – presumably – smooth operation of a mainstream style economy. Apparently one person’s guarantee is another’s structural impediment.

This really stinks. It reeks of hypocrisy. It is devoid of ethical self-understanding. It is just rotten.

But it happens all the time. Far too often.

Today’s Financial Times has another in its series focusing on America’s so-called debt problem. This one is decidedly on the side of the austerity seekers. It is written by Ken Rogoff who seems determined to tarnish the good name he earned when he co-authored a book called “This Time is Different” in which he correctly highlighted that recoveries subsequent to a financial melt down are more difficult and prolonged. Unfortunately he drew  some conclusions from his data that have a somewhat tenuous cause and effect connection.

Indeed he may have it all backwards.

At any rate his article acts as a rallying point for anyone.like myself, who sees us as having not a debt problem but a demand problem.

He sets his argument up by noting the intractable partisan conflict in Washington between those who advocate small government and unfettered private enterprise, and those – like me – who see room for a larger government to mitigate the risks of laissez faire.

He then declares his colors: government is just a bad thing. Unless it’s spending on a massive military operation.

As he goes through what he suggests are our budgetary problems to resolve he begins with defense spending. After noting that such spending is a huge strain on our finances, and that we outspend anyone else by a ratio of 2:1, he simply says that we probably can’t cut it down much because we would lose influence. We wouldn’t be able to boss things like we used to. And that might make people less likely to buy our debt.

This is an interesting theory. It sounds as if Rogoff is suggesting we hold a gun to people’s heads as they decide which bonds to buy. Quite how this fits into mainstream theory I am not sure, but we can duly note it and move on.

Next up is the perennial “what should government do” argument. Here Rogoff doesn’t give us much to chew on other than his observation that our schools are antiquated. He hints rather heavily that this is the government’s fault. He presumably tosses in a good dollop of criticism for that evil teacher’s union as well, because as we all know our falling school standards are entirely the result of rotten teachers protecting themselves from market forces, competition, and the good old magic that those things bring. Private educational establishments do not suffer from a decline in standards at all of course. Harvard, where Rogoff teaches, has positively zoomed ahead in recent years. Notwithstanding its quaint attachment to the anti-market institution of tenure. Presumably market restrictions stop magic from working in primary schools, whereas they help hugely at universities.

But let’s give him his due: he does say that the future belongs to online classes and other IT enabled productivity improvements. I imagine he is hoping he has retired before the competition for students intrudes into his own cozy corner. After all his attitude towards the distribution of the gains from productivity appear biased towards capital and away from labor. He has forgotten that he is on the labor side of the equation at Harvard.

Then there’s spending on infrastructure. Here he thinks that we all agree. More spending would be nice. Our third world rail network, collapsing bridges, congested airports, rotting electrical grid, and gridlocked roads could all do with help. But, according to Rogoff, we won’t make progress because some folks think that the unions will scarf up too much of the investment as wages. Rather than pay a decent wage to construction workers, these people, and Rogoff appears to agree with them, would rather our infrastructure decays even more. They would prefer we use private investment, which, of course, means non-union and cheap labor. If cheap labor built the first railways and the Vanderbilt fortune, it can re-build the railways and be the basis for someone else’s fortune. The intervening emergence of our middle class and democracy can be overlooked. Who needs them anyway?

Next up: immigration. This gets a nod because the big businesses that pay for much of Harvard’s research are pressing for immigration liberalization in lieu of investing in our schools. It’s another form of outsourcing. We outsource the cost of education to, say, Europe, and then entice the cream of their educated class to come here and make profits for our businesses. I suppose this is better than holding a gun to Europe’s head and demanding a supply of engineers, but only a little better. What’s really cool about this trick is that we can laugh at the European tax rates needed to pay for those schools while benefitting from the product we didn’t have to pay for.

Parenthetically, this same sort of outsourcing goes here in the US. Our higher tax states tend to be net suppliers of educated labor to our lower tax states. The latter pretend they are cost effective and small government, but, in fact, are living off someone else’s taxes.

This brings us to the healthcare debate. Amazingly Rogofff contributes nothing and prefers to zoom by the issue. He simply says it’s a big deal and leaves it at that. Maybe this is because his preferred solution – market magic – had manifestly failed, and so he would like to defer the discussion to another time.

Now comes the good bit.

The preceding list of hoary right wing opinions is supposed to provide support to his attack on Keynesian spending. Here’s the relevant paragraph from the FT article:

The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much. The US debt level is a constraint. A growing number of empirical studies, including my own joint work with Carmen Reinhart, suggest that the US has already reached a debt level that has been associated with slower growth in advanced countries. The fact interest rates are low today does not necessarily mean the US is an exception to this rule – take one look at stagnant Japan’s rates. The dollar’s reserve currency status buys America more room, but how much and for how long? A high debt burden is a problem precisely because it reduces a country’s capacity to deal with future shocks.

Read that and weep.

Yes it matters how government spends it’s money, and how much it taxes its citizens. good.

The debt level is a constraint? How? Where? When?

His book suggests that the US has ‘already reached a debt level that has been associated with slower growth..’. Hmmm. ‘Associated with’ doesn’t sound like a strong cause and effect. I guess he means that they kind of go together. Kind of. This is so weak that no one can argue with it. It has no content. We could just as easily say that poor demand growth means that debt ratios are likely to pile up. Duh. The debt is a manifestation of a deeper problem, not its cause.

Then there’s the now classic austerity crowd plea to the credit markets: just because rates are low after years of crisis, doesn’t mean that they will stay that way. I hope not! I would hope that once we get demand buoyant rates will rise once more and reflect a return to more normal economic conditions. But that isn’t Rogoff’s point. Not at all. He, being a fully fledged austerity anti-government mainstream guy, needs to repeat that interest rates do not reflect reality. And only the austerity crowd has a handle on reality. Everyone else, including bond investors don’t.

Now this really annoys me.

Rogoff is trying to have it both ways. Presumably he would argue that when rates are high the market is reflecting the ‘reality’ that government debt is too large and making investors nervous. When they are low? That’s because the market is dumb and doesn’t see what Rogoff and his ilk see. So them market is smart when it does what Rogoff thinks it ought. And stupid when it doesn’t.

The truth is that Rogoff’s core economic theory fails to describe market conditions as they are today, so he has to make up stuff to fill in the gaps. Thus the dire warnings.

Frankly this is tired rubbish. But the Ft prints it anyway.

Last, but not least, Rogoff ends with a flourish. He demonstrates his understanding of contemporary business thinking by referring to the US as a ‘great franchise’. Franchise? Let me see: MacDonalds … US … I get it. Meaningless marketing jargon is fun to play with especially when compared with the stuffy and incomprehensible jargon that infests economics. Quite what he means to gain from this I don’t know. All it shows to me is that he is deeply committed to the privatization of America and to the destruction of any role for government in most aspects of the economy. But that may just be me.

One last thing, his last sentence is portentous, gloomy, and contains no little threat:

With more than $5tn of US Treasury debt, and memories of the huge inflation of the 1970s and default on gold clauses in the 1930s, foreigners would be right to worry a little.

How many ghosts can we pack into one sentence? Let me see.

The US has lots of debt. Gasp! [No clue as how significant this is, but it sure sounds awful]. There was high inflation in the 1970’s. Gasp again! [No hint whether that’s a threat now or just a little historical tidbit]. There was a default on gold clauses in the 1930’s too. Oh the Horror! [More history. Less analysis] And Foreigners would be right to worry a little.

That last bit makes sense to me.

Hypocritical professors are, indeed, something to worry about. Especially if they deny that their ideas have just been proven wrong. Big time. Hypocritical professors who refuse to learn are even more dangerous.

Beware!

Addendum:

The Reinhart/Rogoff book is worth reading. I am shocked you haven’t already!