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March 31, 2013

'Reactions to Mankiw on the Long Run Budget Path'

Greg Mankiw says the goal for the budget should not be a stable debt-to-GDP ratio as the president has called for, instead the ratio should be falling. But there are a few important qualifiers to this statement that are easy to miss.

Even if you agree with Mankiw that the debt to GDP ratio should be falling rather than stable, he never answers falling to what? (Does it fall forever until it hits zero, then a surplus which gets larger and larger until spending is zero and taxes take everything? I doubt that's what he has in mind.) How fast it should fall? (Do we balance the budget this year or over 100 years?). Should the debt to GDP ratio vary over the business cycle (i.e. can we do countercyclical fiscal policy?). On the latter point, Owen Zidar:
Reactions to Mankiw on the Long Run Budget Path: I agree with most of Greg Mankiw NYTimes piece on long-term debt to GDP but can’t overlook a fairly glaring omission –  he seems to ignore the fact that we are currently experiencing a major economic catastrophe. ...
While I completely agree that we should save in good times (i.e. have a falling debt to GDP ratio), we are not in good times and it’s quite likely that trying to save too much in bad times will be counterproductive. A primary reason why we want to be creditworthy is to have the ability to borrow for times like this. I simply have a hard time understanding why preparing for the next crisis should supersede adequately dealing with the current one.
It's easy to miss, but Mankiw actually covers this when he says " In normal times, when we are lucky enough to enjoy peace and prosperity, the debt-to-G.D.P. ratio shouldn’t just be stable; it should be falling." Notice the key words "normal" and "prosperity". That's what Owen is saying too, we should a surplus in good (normal, prosperous) times. But we should also run deficits in bad times so that on balance the debt load is stable (or hits some target). Mankiw slips in the part about a surplus in good times, though the qualifiers are easy to miss, but fails to address what to do in a recession (these are not the normal, prosperous times he cites as a condition for a falling ratio). That's a big omission because many people are going to conclude he is pushing austerity, i.e. reducing the debt during a severe recession. If he's really saying that (and I don't think he is), he should make it clear. If he's not saying that, if he believes in countercyclical fiscal policy, he should say that as well. Leaving it vague, as he does, is not helpful at all.
PGL comments:
Mankiw’s Mistakes on the Long-Run Debt Issue: Greg Mankiw wants to lecture the President on fiscal sustainability. Alas, his op-ed is full of errors starting with:
Representative Paul D. Ryan, chairman of the House Budget Committee, has a plan to balance the federal budget in 10 years.
Should we just fall out of our chairs laughing at such an incredibly absurd statement? Ryan wants to cut tax rates but assume a level of tax revenues that is over $500 billion a year above what many analysts suggest. And I have a plan to replace Tim Duncan as the center for the Spurs even though I’m only 5 feet 6 inches. And then we get these canards:
With the exception of a few years starting in the late 1990s, when the Internet bubble fueled an economic boom, goosed tax revenue and made President Clinton look like a miracle worker, the federal government has run a budget deficit consistently for the last 40 years.
Internet bubble? Mankiw really seems to hate that the Clinton years, which started with the 1993 tax rates increases, had better economic performance that either the Reagan-Bush41 years or the Bush43 years. As far as the deficit being positive for all these other years, he should read what both Milton Friedman and Robert Barro were writing on the deficit back in 1979 and 1980 – that the debt in inflation adjusted terms was falling. Hey – I don’t mind a conservative economists lecturing the President on fiscal policy if he gets the facts right. This op-ed, however, fails to get a few key facts right.
Confused Americans want to know: Does Greg Mankiw believe in countercyclical fiscal policy in deep, prolonged recessions or not?

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