Economists tend to present themselves as impartial arbiters of truth, as people who are reporting only how the market works, rather than making judgments as to why it works, or how it should work. This view is, at best, self-delusion. At worst, it’s a lie that kills people.
What prompted this post was giving a thorough read to Brad DeLong’s The Public Square and Economists. It’s an excellent paper that offers a solid overview of what economists, at their best, have to tell us:
- the deep roots of markets in human psychology and society,
- the extraordinary power of markets as decentralized mechanisms for getting large groups of humans to work broadly together rather than at cross-purposes,
- the ways in which markets can powerfully reinforce and amplify the harm done by domination and oppression,
- the manifold other ways in which the market can go wrong because it is somewhat paradoxically so effective,
- how the market needs the state to underpin and manage it on the “micro” level,
- how the market needs the state to underpin and manage it on the “macro” level.
The last point is revealed later, as DeLong avoids mentioning it at first. But it’s really where economists tend to go wrong, and where what should be the public good gets overridden by what is essentially technocratic policymaking. The lie of technocracy is that it’s neutral–that it’s objective. In fact, it is deeply informed by one’s priors. Making decisions about the economy is making decisions about who eats and who doesn’t, who has a home and who doesn’t–who lives, and who doesn’t. It is easy to dismiss these concerns as unavoidable consequences of natural phenomena if we cling to the “objectivity disease.” The economy works how it works, and we dare not disturb it, lest we face even more dire consequences. Sure, it’s unfortunate that people suffer due to the whims of the economic cycle, but to do something about it would be much more dangerous.
But is this really true? Austrian school economists tell us that cycle of boom and bust is the result of overinvestment. Booms occur when too much money is chasing too few goods, and a feedback cycle continually increases the quantity of both until we reach a massive oversupply–a “general glut”–and then the whole thing comes crashing down. This is the “bust,” in which you now have too many goods and not enough money. Or, as happens in a recession, people decide to value holding onto their money more than spending it.
The Austrian school warns that trying to soften the blow of a bust only encourages ever more dangerous booms which cause even worse busts. The economic cycle, then, becomes a morality play: those who overspend will come to suffer for it, and blessed shall be the savers.
If you’re familiar with this blog at all, you know how I feel about economic morality plays.
Austrian economics are a complete sham. Their most recent incarnation has been in the form of austerity economics, which have been a complete failure by any measure one would like to use. Governments tightening their belts during turbulent economic times does not shorten recessions, nor does it prevent future ones. Instead, it deepens and prolongs them. Most recently, economists Carmen Reinhart and Kenneth Rogoff identified a correlation–not necessarily a causation–between government debt and economic growth. According to their data, a tipping point was seen at around the 90% mark. That is, at a 90% debt-to-GDP (gross domestic product) ratio, GDP growth would be impacted negatively.
Reinhart and Rogoff pushed this view aggressively, encouraging Western governments to swiftly curb their deficit spending as the Great Recession toppled much of the world’s economy. It was the absolute worst time to implement such policies. DeLong offers his own explanation for why such austerity politics are a terrible idea:
The argument [for fiscal contraction and against fiscal expansion in the short run] is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow. This is the most live argument today. So let me nibble away at it. And let me start by presenting the RRR case in the form of Owen Zidar’s graph.
First: note well: no cliff at 90%.
Second, RRR present a correlation – not a causal mechanism, and not a properly-instrumented regression. Their argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question.
The third thing to note is how small the correlation is. Suppose that we consider two cases: a multiplier of 1.5 and a multiplier of 2.5, both with a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. Suppose that all of the correlation is causation running from high debt to slower future growth. And suppose that we boost government spending by 2% of GDP this year in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by… wait for it… 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?
We are supposed to be scared of a government-spending program of between 2% and 6% of a year’s GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP? That does not seem to me to compute.
You read that right: at the worst case, a debt-to-GDP ratio that’s out of control (by R&R’s benchmarks) would lower a country’s GDP in a span of a decade by a hundredth of a percent. What a crisis.
Contrast that with what austerity got the West: dramatic slashes to government programs, massive unemployment, civil disorder, political upheaval and–it must be noted–terrible economic growth. Curiously, one thing austerity economists can’t seem to get right is that, while policies may not be neutral, money always is. That is, money can be used to buy anything that’s buyable. That’s kind of the point, isn’t it? So why would it matter whether the money a person uses to buy their food comes from a paycheck they earned under an employer or was provided by the government to help them get by? Whether it is right to do so isn’t really an economic question. If the market is contracting, only one thing is known to bring it up: increased investment. That investment can come from either the private sector or the government. The main danger in having the government do it is that it’s big enough to pick winners and losers, and can thus distort markets with are otherwise capable of being efficient. This is a legitimate concern, but then the answer becomes obvious: don’t pick winners and loser, but hand that money to the people and let them decide what to spend it on. Some will no doubt choose to squander it by saving, but most will spend it on what they need (or want).
When economists publicly demand that governments cut back spending, it is irresponsible of them to apply such pressures without concern for what ultimately gets cut. As DeLong notes, markets are keen on magnifying existing oppressions–government policies have a way of doing that, too, unless proactive steps are taken to account for it. Economists have a responsibility both to be aware of the obvious and subtle moral components of the information they present, and to use their influence over policy wisely and with awareness that technocratic approaches are in no way “neutral.”
Economists have two choices: either exercise much greater when attempting to influence public debate and government policy, or stay out of the dialogue entirely and confine their work purely to observation and analysis with no recommendations for action.
Those who behave otherwise have reason to be ashamed, even if they feel none.
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