Thursday, August 11, 2011
More drivel from Kenneth Rogoff.
I pointed to some nonsense emanating from Rogoff here a few days ago. It never rains, but it pours. There is more Rogoff nonsense in the Financial Times a few days ago.
Along with many of the economic illiterates in high places he thinks that more deficit means more debt. See para starting “Everyone agrees that….” The reality is, as both Keynes and Milton Friedman pointed out, that a deficit can perfectly well accumulate as more monetary base rather than more debt.
For Keynes, see 2nd half of 5th para. And for Friedman, see p.250 para starting “Under the proposal…”
Then in the same paragraph Rogoff trots out the old nonsense that higher debt requires higher future tax in order to pay back the debt, which induces households to spend less.
This is a bizarre idea. That is, the idea that the average household pays careful attention to deficit and taylors its weekly spending accordingly is on the face of it pure lunacy. But it might just conceivably be right – however decent empirical evidence is needed to back bizarre ideas, and no evidence has ever been produced to back this idea, as far as I know.
But academics are not too interested in reality: their main concern, all too often, is to keep themselves employed at your expense dreaming up and discussing totally unrealistic ideas. It’s counting angels on pinheads all over again.
Such empirical evidence as there is on the above point actually contradicts the “future tax” idea, as far as I can see. The latter idea is based on the assumption that households try to even out their weekly spending over several years: that is, that they do NOT spend a significant proportion of windfalls. The evidence actually contradicts this. That is, households DO SPEND a significant proportion of temporary increases in their income fairly quickly. See here, here, here, and here.
Whether the deficit accumulates as extra debt or extra monetary base, it is of course POSSIBLE that the debt or base will need reining in via extra taxes. It is equally possible that they WON’T need reining in. For example if the economy expands at a decent rate over the next few years then the debt, relative to GDP will decline.
A second factor which tends to reduce the need to raise taxes so as to rein in debt or base is thus. The debt and base HAVE TO BE INCREASED in nominal terms if they are going to remain (for the sake of argument) constant relative to GDP in REAL terms. That’s because of the effect of inflation. Thus EVEN IF THE ECONOMY DOES NOT GROW, then long term, there STILL might be no need to raise taxes to rein the debt or base.
But that will all be way above Rogoff’s head.
As to the idea that the debt needs reining in because of those allegedly enormous interest payments, interest on national debts has for a long time more or less equalled inflation. Thus in real terms, no interest is paid by most countries on their debt. Most countries never have paid any significant interest in real terms on their debt.
That’s another simple point way beyond the comprehension of Harvard economics professors, like Rogoff and Martin Feldstein.
But anyway, let’s suppose that inflation gets uppity in two years time and that taxes ARE raised so as to rein in the monetary base. This taxation simply removes money from private sector pockets that the private sector effectively cannot spend anyway, because if the money WAS spent, it would just stoke inflation. Thus this confiscation of money from the private sector does NOT make anyone worse off. It does not equal austerity.
It is thus completely pointless for private sector entities to save now so as to be able to pay this tax. If they save now, the effect would be deflationary, which would mean that said tax would not be necessary!!! Or put it more accurately, every dollar that the private sector saves now so as to be able to pay the future tax, reduces the amount of that tax by about one dollar.
But frankly that’s all three miles above the head of the average consumer and six miles above Rogoff’s head.