Arnold Kling  

Keynesians vs. Rogoffians

More on Callahan... But Voters Might Run With Thei...

A letter in the London Times, signed by Ken Rogoff, among others:

in order to be credible, the government's goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.

In response, a letter in the Financial Times appears under the signature of Lord Skidelsky (Keynes' biographer) and others:

The Treasury has committed itself to more than halving the budget deficit by 2013-14, with most of the consolidation taking place when recovery is firmly established. In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!

This is an argument about the UK, but the same argument applies in the United States. The Keynesians are certain that deficit spending is contributing much to short-term economic performance, and they are uncertain that it is contributing much to long-term fiscal instability. The Rogoffians are certain that deficit spending is contributing much to long-term fiscal instability, and they are uncertain that it is contributing much to short-term economic performance.

I am to the right of the Rogoffians. That is, the U.S. fiscal stimulus is so poorly designed that I doubt that it is contributing anything positive to short-term economic performance. And, given the outlook for Medicare (stare at the table), we cannot afford to be casual about deficits.

Look, I may be wrong, and the Keynesians could turn out to be right. But they do not seem to me to have thought through how you can pull back from the sorts of heavy deficits that they advocate.

If the fiscal stimulus is meant to be temporary, that is hard to see in the Budget--the spending forecast looks more like a permanently higher plateau. And health care reform, which is financed by gimmicks and by cuts in Medicare that at best should be used to save Medicare and it worst will never take place, is not adding to my confidence in our fiscal path.

Part of me wishes that folks like Brad DeLong and Paul Krugman could be forced to put their money where their mouths are and sell credit default swaps on U.S. government debt. My advice to everyone else would be to take the other side of that trade.

Comments and Sharing

COMMENTS (14 to date)
Les Cargill writes:

The secret word for tonight is "deflation". Deflation is the art of going short on humanity.

Matthew Gunn writes:

But is high inflation a "credit event" for credit default swaps? If the debt burden really becomes a problem, won't the U.S. just inflate rather than default?

I think the real challenge would be if Krugman et al. would go long treasuries and go short TIPS.

To elaborate, the risk delivering positive CDS prices is that Congress doesn't get its act together and fails to raise the debt limit, triggering a credit event.

Craig Bardo writes:

Rogoff lives in a permanent welfare state. How far can he go without being marginalized as irrational? Before the end of the month, we too may make the transition to a permanent welfare state and in a couple of years, your position may be marginalized or sadly, even irrelevant.

Tyler writes:

You write, "The most important facts in health care policy are not the number of uninsured, the international comparisons of health care, or the measures of "excess cost growth." The most important facts are the numbers in the table above," in reference to the changing demography of the US, specifically the increase in population eligible for Medicare.

In a recent interview with Charlie Rose (full transcript here, Paul Krugman says, "The way I look at it, there are really just two things
that are top of the line. Everything else is secondary. First is health
care. Nothing works unless you can get health care costs under control. You look at all of those projections that show federal spending going
through the roof as a share GDP, very little of that is the aging of the
population. Demography is much overrated as a problem."

Given my biases and Krugman's track record with the truth I'm inclined to believe you, but can you offer an explanation as to why Krugman's position on the cause of excessive health care spending fundamentally contradicts your position? Do you have any data that shows the percentage of the rise in health care costs attributable to demography vs. technology/specialization (i.e. 20% is technology and 80% is demography)?

Doc Merlin writes:

Robert J. Barro actually takes a stance to the right of yours. He believes (and has data to back it up) that fiscal stimulus is actually bad for consumers. He shows past fiscal stimuli have lowered C+I.

Here is a Wall Street Journal piece he wrote about it

Doc Merlin writes:

Make a bet with them. They buy 5k of CDS. If the price rises on them, they pay you the difference from the original price and if the price falls you will pay them the difference.

I see an era of very strong fiscal responsibility coming to the US, if the healthcare vote doesn't pass, so I wouldn't bet against them, imo.

Matthew Gunn writes:

@Doc Merlin
The problem as I stated in my post is that I think CDS turns out to be a bet on congressional buffoonery such that they fail to pass an increase in the debt limit, triggering a "credit event." This is DIFFERENT than a direct bet on unsustainable levels of U.S. debt.

I think the way to bet on long run U.S. debt problems is to bet on long term inflation. The U.S. won't fail to pay back the nominal value, but it might fail to pay back the real value.

When I did research on this, my understanding is that the demographics alone make Social Security and Medicare unsustainable over the long run. Every year there are fewer payroll tax paying workers per beneficiary.

But what makes the problem far more acute is the yearly increase in per person Medicare spending, and this is driven by technology+current law. That's just a fact. What portion of yearly Medicare cost growth is from more old people and what portion is from more and more expensive health care? The latter dominates the former.

(A good question to ask is why new technology in health care almost always increases price as opposed to other areas of the economy (tvs, computers, etc...) where quality goes up AND price goes DOWN)

Daniel Kuehn writes:

Arnold - correct me if I'm wrong, but you seem to be thinking that this "high plateau" is somehow consistent with a Keynesian view. I think that's wrong - it's as inconsistent with Keynesian view as it is with the "Rogoffian" view. Keynesians simply are concerned that the burden of unfunded liabilities presents a crushing long-term budget outlook, and that that outlook would be even more crushing without fiscal stimulus right now. That doesn't mean they're any more OK than you are with all this stuff that's getting put into the budget baseline. The deficit caused by the stimulus itself is a blip compared to the long-term concerns. Everything after that blip I think you and the Keynesians agree on - that high plateau is certainly bad.

Now - what Keynesians and most "Rogoffians" have done to address these concerns is talk seriously about a VAT. You don't seem to take the IMAC and their Medicare cut talk seriously, but that's OK because they're also pondering tough solutions on the revenue side. What have you suggested? I don't know why, but the last several posts of yours seem to be based almost entirely on some unflattering and inaccurate caricatures.

Daniel Kuehn writes:

Doc Merlin -
Barro's "data to back it up" is extremely flimsy - this has been addressed in the comment section of several past posts, as well as some posts on Coordination Problem. What he estimates is a small mutliplier in non-depressionary conditions. Big deal. Any Keynesian would tell you that.

Arnold Kling writes:

Krugman and others can point to very long-term projections of health care spending. Yes, by 2080, excess cost growth swamps demographics as the cause of fiscal imbalance.

What their analysis ignores is the fact that we will never get to 2080 on our current path. Between now and 2030, the demographics are bad enough that we will have a fiscal crisis. By then we will have a higher ratio of debt to GDP than 10 out of the 13 countries that have most recently defaulted on their debt, and that is under a relatively optimistic budget scenario.

So, the fact that demographics are less important after 2030 is a very misleading one to use.

Ano writes:

Arnold, you write: "the U.S. fiscal stimulus is so poorly designed that I doubt that it is contributing anything positive to short-term economic performance."

I want to understand more precisely what you mean. Do any combination of these capture what you mean?
(1) Current unemployment would be the same or lower if ARRA had not passed.
(2) Current GDP would be the same or higher if ARRA had not passed.
(3) "short term economic performance" means actual value to society created (i.e. Henderson's GDP Fetishism article), so even if GDP is higher this quarter due to ARRA, I still think that we would be better off not having passed it.

Andrew writes:

"the Keynesians could turn out to be right."

As the saying goes, there is a first time for everything.

gnat writes:

Krugman's right:
The increase in healthcare costs is about 7% each year while the increase in the over 65 population through 2025 is about 6% (it remains relatively constant thereafter). See and ttp://

Allen writes:

Before we decide whether the Keynesians turn out to be right, we need to make sure the Keynesians are even advocating what Keynes would have advocated in the first place! I recently thought it might be interesting to re-evaluate what Keynes actually advocated...

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