Tag: alan blinder

Note to Larry Summers: The Government Borrows for Transfer Payments, Not Investment

“It is time for governments to borrow more money,” according to former treasury secretary Larry Summers.  He is not peddling this advice to Greece and Spain, but to countries like the United States and Japan that can still sell long-term bonds at very low interest rates. Summers urges the United States, in particular, to borrow more for “public investment projects” that are presumed to raise the economy’s future output. He offers the hypothetical example of “a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate.”

Even if such promising projects were easy to find, however, that is not the way the current government has been inclined to spend borrowed money. Despite all the rhetoric about “shovel-ready projects,” about 95 percent of the 2009 stimulus bill consisted of government consumption (salaries), refundable tax credits, and transfer payments which, as Robert Barro notes, “dilute incentives to work.”

Summers says, “Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates — the opposite of what central banks are doing.” Locking-in low borrowing costs would indeed make sense if the money from selling long bonds were used to retire short-term Treasury bills, but that would not involve borrowing more as Summers proposes.

For both government and households, it is certainly more prudent to use borrowed money to finance investments that will yield a stream of income in the future—either actual income (such as toll roads) or implicit income (the benefits from living in a mortgaged home).

Apostles of the Keynesian doctrine, such as Larry Summers, Paul Krugman, and Alan Blinder, invariably use hypothetical public works examples to make the case for more and more national (taxpayer) debt. Keynesian forecasting models, used by the Congressional Budget Office (CBO) to warn of the looming fiscal cliff and defend the fiscal stimulus of 2009, likewise assume the highest “multiplier” effect from tangible government investments.

In the real world of politics, however, Congress and the White House use borrowed money to placate constituencies with the most political clout. Federal spending on investment projects has essentially nothing to do with the huge 2009-2012 budget deficits (only 29 percent of which can be blamed on the legacy of recession, according to the CBO).

The Table shows that transfer payments and subsidies account for 63.8 percent of estimated spending in 2012, while federal purchases account for 28.4 percent. Also, most federal aid to states is for transfer payments like Medicaid.  Within federal purchases, only 7.6 percent of the spending ($152.5 billion) was counted as gross investment in the first quarter GDP report, and two thirds of that was military equipment and buildings. Net investment, minus depreciation, is smaller still.

If borrowing more for investment was a genuine political priority, rather than an academic conjecture, the government could do that by borrowing less for government payrolls, transfer payments, and subsidies.  At best, Larry Summers has made an argument for spending borrowed money much differently, not for borrowing more.

Alan Blinder Owes Me $5 for Wasting My Time

In today’s Wall Street Journal, Alan Blinder writes one of the most error-ridden and discourse-debasing op-eds I have ever read. About any topic. Ever.

A sampling:

[O]ur country was founded on the idea that the rights to life, liberty and the pursuit of happiness are inalienable. Access to affordable health care is surely essential to two of these three rights, maybe to all three.

This is absurd. Does Blinder really mean to say that until about a hundred years ago, when modern medicine really began, the lack of access to affordable health care alienated every single human being to walk the Earth from their rights to life, liberty, and the pursuit of happiness?

I wish people would think—long and hard—before they write about health care. Especially the smart ones.

Ricardo Paging Alan Blinder

I almost hesitate to suggest that anyone actually read Alan Blinder’s defense of Keynesian economics in today’s Wall Street Journal, except that the piece lays out clearly in my mind why Blinder is so wrong.  The only part you really need to read is:

In sum, you may view any particular public-spending program as wasteful, inefficient, leading to “big government” or objectionable on some other grounds. But if it’s not financed with higher taxes, and if it doesn’t drive up interest rates, it’s hard to see how it can destroy jobs.

So in Blinder’s world, deficits are explicitly not future taxes, despite what I believe is a fairly strong consensus among economists that some form of Ricardian equivalence holds (see John Seater’s literature review and conclusion, “despite its nearly certain invalidity as a literal description of the role of public debt in the economy, Ricardian equivalence holds as a close approximation.”).  Perhaps Blinder is blind to the fact that deficits are so much a part of the public debate today because households absolutely see those deficits as future taxes.

I also think Blinder misses that fact that crowding out can occur without raising interest rates.  As Cato scholar Steve Hanke points out, the Fed’s current policies have basically killed the interbank lending market, which has encouraged banks to load up on Treasuries and Agencies, rather than lend to the productive elements of the economy.  While I sadly don’t expect most mainstream macroeconomists to focus on the link between the banking sector and the macroeconomy, Blinder has no excuse; he served on the Fed board.

As I have argued elsewhere, banks are indeed lending, but to the government, not the private sector.  The simplistic notion that crowding out can only occur via higher interest rates, as if price is ever the only margin along which a decision is made, has done serious harm to macroeconomics.  But then if macroeconomists actually understood the mechanics of financial markets, then we might not be in this mess in the first place.

Dancing on Cash for Clunkers’ Grave

My colleague Chris Edwards called the government’s “Cash for Clunkers” program the “Dumbest Program Ever.”  Given that Chris is familiar with more than a few dumb government programs, that’s quite a statement.

Today, the Washington Post provides more evidence that he might be right:

After the shopping binge inspired by the government’s “Cash for Clunkers” incentive program ended, U.S. auto sales plunged in September and the industry sunk back to the depths from which it started, figures released Thursday showed… The results raised doubts from some economists about the effectiveness of the $3 billion federal program as a stimulus.

Alan Blinder, a Princeton professor who was among the first to push an auto sales incentive program in the United States, doubted it provided much stimulus, in large part because it was in effect for only a month. “Most of the idea of any stimulus is to pull spending up from the future, but it doesn’t make any sense to design a program that only pulls up spending by one month,” said Blinder, a member of the Council of Economic Advisers during the Clinton administration. “Why in the world would you make it a one-month program? The Germans didn’t do that. The British do that. When I designed a mock version of this I was thinking of it as a one-year or two-year program.

So, Professor Blinder, what happens to auto sales after your one- or two-year program disappears? Regardless of whether the programs lasts one month, three months, one year, or three years, when the “free” money from Uncle Sam goes away, the result is going to be the same.

Milton Friedman said “Nothing is so permanent as a temporary government program.”  Let’s hope he’s wrong in the case of Cash for Clunkers.