Sunday, June 17, 2012

Niall Ferguson Exposes Two Problems with Balanced Budget Amendments

Niall Ferguson intended to make the case for austerity measures including a balanced budget amendment. Dean Baker read this before going to bed last night and started the critique of this tiresome BBC op-ed:
Hmmmm, $200 trillion at the federal level and $38 trillion at the state and local level? Can we get a source for this? Is there a date there for when the Martians will attack Planet Earth? In fairness, there are nutty projections that assume that per capita health care costs in the United States will be four or five times as high as in all other wealthy countries. If this proves true, over an infinite horizon we will have a very bad deficit problem. Of course, these health care costs would wreck our economy regardless of what we do with public sector health care programs. These projections would cause serious people to talk about the need to fix the health care system. But this is national economic policy that we are talking about. But this piece suggests an easy route for dealing with the deficit. Clearly there is a big market for deficit hawks.
Dean’s clever solution would be to spend money training college grads to write more gibberish like what the BBC should published. This would employ resources currently being left idle and hopefully generate more tax revenue via the traditional Keynesian mechanisms. Niall, however, suggests we pass a balanced budget amendment (which BTW does not tell us which tax rates we need to raise or which expenditures we need to reduce). As he does so, he does note:
The trouble is that the experience of the financial crisis has substantially strengthened the case for using the government deficit as a tool to stimulate the economy in times of recession.
Well – yea! Isn’t that the classic problem with balanced budget amendments – they turn fiscal policy into a pro-cyclical disaster. But let’s move onto the other problem by quoting Neill:
The present system is, to put it bluntly, fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even the current income and expenditure statements can be relied upon in some countries. No legitimate business could possible carry on in this fashion.
In other words, the way we normally measure deficits – current spending minus current taxes – does not capture those allegedly large present value shortfalls. Here is where Dean’s call for a course and his quip about the date that the Martians will attack Earth comes in. Niall’s alleged $238 trillion shortfall relies on some discounted cash flow calculation that he doesn’t even specify. What is the discount rate? What are projected expenditures over an infinite horizon? What are projected taxes over an infinite horizon? Such calculations require a host of assumptions. We are supposed to put all of this into a Constitutional Amendment?

2 comments:

dwb said...

A constitutional amendment that limited state and federal spending to (say) 30% of GDP (averaged over a 5 year period) would be fine I think.

Roger said...

I would love to find out why people listen to, or read the ravings -- I mean writings -- of Niall Fergusson. Did he have a fairy godmother who sprinkled Magic Dust on him in his cradle? The man must be a gifted story-teller, although I don't get it, but I can't imagine why people pay him large amounts of money for telling his stories. Does he just have a large network of friends who help him out like George W. Bush or Megan McCardle? Anyway, it seems to thoroughly discredit the Rational Expectations assumption that is critical to the Efficient Markets Hypothesis.