Tuesday, December 15, 2020

Macroeconomic Conventional Wisdom Watch or Big Government: I'm Lovin' It!

Annie Lowrey in The Atlantic on budget deficits:
"A number of lessons have emerged from the past decade. The first and perhaps most important is to run a deficit. Or, put more technically, the United States should abandon the goal of balancing its budget when the economy is good, and it should run deficits, sometimes large deficits, in perpetuity. Not too long ago, many green-eyeshade types held that the government should run deficits to stimulate the economy when it is suffering, but not when it is doing well. Following this orthodoxy would keep Uncle Sam’s borrowing from “crowding out” the private sector, stoking inflation, and increasing interest rates. The loss of dollar dominance, bond vigilantes, and inflation spirals: These were prevalent fears as recently as the last recession.
Not so much today. Right now, the bond markets cannot get enough U.S. debt, so much so that the government often borrows for free, after you adjust for inflation. There are few signs of the dollar getting ditched as the global reserve currency, even as its relative value ebbs and flows. The U.S. is experiencing low growth, low productivity, and low interest rates. Given those dynamics, the government is highly unlikely to squeeze out private investment, Larry Summers, the former Treasury secretary and one of the thinkers propelling that paradigm shift in public economics, told me. Indeed, government spending has become necessary to drive GDP in an era of “secular stagnation,” as Summers has famously described it.
Many others agree with him. “I wouldn’t counsel throwing out the rule book and saying, We’re off to the races; spend what you want; debt doesn’t matter at all,” Mark Zandi, the chief economist at Moody’s Analytics, told me. “But we’re in a period where it’s important for governments to be expansive with fiscal policy. We’re not going to get into a death spiral with investors jacking up interest rates because we’re spending more.”
A second, related point is to forget about the national debt as a share of GDP. This is an argument made forcefully in a new white paper from Summers and Jason Furman, a Harvard economist who led President Barack Obama’s Council of Economic Advisers.....Furman and Summers suggest focusing instead on debt-servicing costs as a share of GDP—that is, how much the United States needs to pay its creditors in a given year, relative to the size of the economy. Because money is cheap right now, the country has much more capacity to spend its way out of the current crisis and to make investments to bolster growth in the future.
That gets to [another] point: Use deficits to fuel growth. “Before this period of sustained low rates, we had this approach of emphasizing the measure of the national debt and the budget deficit, and the burden it was placing on future generations,” Summers told me. “But right now, the policy debate needs to be about the composition of fiscal policy, not the level of the deficit or surplus.”
This means taking a close look at what the United States is spending money on, and figuring out how to get more bang for the government’s buck. In the short term, that means pouring money into proven forms of stimulus to keep the recovery going: food assistance, unemployment-insurance payments, and aid to state and local governments, not write-offs for business meals, tax breaks, and the like.
In the longer term, Washington needs to invest more in physical infrastructure and the country’s human capital. Crumbling ports, falling bridges, fire-prone electrical systems, carbon-belching utility operations, dismal public-transit options, outmoded and patchy broadband networks: The United States needs an additional $2 trillion in spending to fix them, experts estimate. With that kind of outlay, “you’re not making the budget deficit worse; you’re making demand in the economy greater,” Summers said. “You’re increasing the capacity of the economy down the road.” Investments in people do the same. Ending child poverty, stopping the opioid crisis, improving child nutrition, providing a high-quality public education to students, ending the racial wealth gap: These kinds of policies would boost the economy, too."
In my opinion, this analysis has been true for quite awhile including earlier periods where most economists were quite hawkish about the deficit. But, hey, better late than never.
And speaking of spending, let's not forget the very important role of investment in scientific research, as the rapid development of the covid vaccines should remind us. David Leonhardt in the Times:
"[Y]esterday morning, less than a year after the discovery of Covid, a critical care nurse in Queens named Sandra Lindsay became the first American to participate in the mass vaccination program for the coronavirus. “I feel like healing is coming,” she said afterward.
It is a stunning story of scientific success.
It also fits a pattern that stretches back decades: Many of the biggest technological breakthroughs in American history have not sprung from the private sector. They have instead been the result of collaboration between private companies and the federal government.
The Defense Department, after all, built the internet. Government research and development also led to transistors, silicon chips, radar, jet airplanes, satellites, artificial limbs, cortisone, flat screens and much more, as the M.I.T. economists Jonathan Gruber and Simon Johnson point out in their recent book, “Jump-Starting America."
“Almost everything about your computer today — and the way you use it — stems from government funding at the early stages,” Gruber and Johnson write.
Why? Because basic research is usually too uncertain and expensive for any one company to afford. Often, it isn’t even clear which future products the research may create. No kitchen appliance company ever would have thought to do the military research that led to the microwave oven.
With Covid, the vaccines from both Pfizer and Moderna rely on years of government-funded (and sometimes government-conducted) research into viral proteins and genetics. That research, Kaiser Health News explains, is “the essential ingredient in the rapid development of vaccines in response to Covid-19.”....
As my colleague Neil Irwin has written: “The nine months of the pandemic have shown that in a modern state, capitalism can save the day — but only when the government exercises its power to guide the economy and act as the ultimate absorber of risk. The lesson of Covid capitalism is that big business needs big government, and vice versa.”
What are the lessons for the post-Covid world? Solving the biggest challenges, like climate change, will almost certainly depend on a combination of public-sector funding and private-sector ingenuity.
Yet as Gruber and Johnson note, federal funding of science has become a smaller part of the U.S. economy than it used to be."
Ruh-Roh. Can Big Government come to the rescue? Stay tuned.

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