Home > Uncategorized > What Glenn Beck Understands About the Economy that Paul Krugman Doesn’t

What Glenn Beck Understands About the Economy that Paul Krugman Doesn’t

Keynes once referred to economists as “the trustees not of civilization, but of the possibility of civilization.”  We live in a highly specialized world and economists specialize in figuring out how it all works.  This means that all the people who specialize in other things trust economists, to some degree, to keep the economy running smoothly, or at least to sound an alarm if there is a potential problem coming up.  This makes perfect sense except for the fact that mainstream economists have pretty much never sounded an alarm before any major economic problem (Austrians tend to do this but they’re basically sounding an alarm all the time…).  I get the feeling that right now people in general are relatively at ease (more so than they would be otherwise) because mainstream economists seem to be at ease. To explain why it may not be wise to trust mainstream economists to forsee a catastrophe and help us avoid it I will have to explain a little bit about how economics works.

Economics is the study of how resources get allocated in a world of scarcity.  The fundamental problem of economics is that people’s wants are seemingly endless but the amount of available resources is not.  This means we have to choose between competing uses.  To understand the effects of these choices economists use models.  A model is a mathematical representation of a decision by one or more economic agents.  Typically these models consist of an objective function which agents are trying to maximize and a set of constraints.  The objective function is a way of quantifying their desires and the constraints are a way of quantifying the scarcity which they face.  Then you use math to figure out how these things interact given the way you chose to quantify them to begin with.

As a simple example, take a model of consumer optimization.  A consumer has a utility function which represents his desire for goods.  He tries to get the most utility he can by buying goods.  If you stop here you have a very uninteresting model because, assuming he always gets more utility from more consumption, he will consume infinite quantities of every good.  An economic model that says that everyone has as much as they want of everything isn’t very useful since in the real world we seem to observe that goods are scarce.  We need to add scarcity into the model somehow.  The way we do it is with a budget constraint.  This says that the consumer can only buy bundles of goods that he can afford.  The scarcity he faces is then quantified by his income and the prices of the goods.  Imposing this condition on the model means you cannot get a solution where the consumer consumes more than he can afford.

Now, more to the point, essentially every macro model used by mainstream economists has what is called a no ponzi game constraint.  Without getting into the mathematics of this thing, which is a little tricky, it basically imposes the condition that the government cannot constantly spend more money than they have.  This is necessary for a macro model because if you didn’t have it you wouldn’t have scarcity.  The optimal solution would always be that government borrows and spends infinitely and everyone gets as much as they want of everything.  The important thing to understand here, though, is that this condition is a constraint.  It is not a result.  This means that the model is incapable of considering any state in which this is not the case.  Every result coming from these models assumes that any budget deficits are temporary and will be paid back at some point in the future.  The model cannot be used to answer the question “what happens if we just keep running deficits forever?”

The real important question facing us right now is “do we believe that the government is going to pay off its debts someday?”  This is a question that the economists aren’t going to answer for us.  I don’t think we need them though.  Let’s play a little game where you pretend to be a lender and I pretend to be a guy asking for money.  I will tell you some facts about myself and then you decide whether you think I’m a good credit risk.

“I am 234 years old.”

“I was in debt when I was born.”

“I had 0 debt for about a year 175 years ago.”

“So far this year my income has been $2.1 trillion and I have borrowd about $1.4 trillion.”

“I only borrow in the bad times. When times are good I pay it down.  Since 1931, there have been eleven years when I ran a surplus.  Including four years in the 90’s when I was experiencing one of the greatest technological booms in history along with a massive real estate bubble.  During those years I paid back about 1% of what I owed (this is debatable, and I am being liberal).  The total of the surpluses for those eleven years, adjusted for inflation, is only slightly less (about 1/3) than the amount I borrowed last year.”

“In addition to the $12.6 trillion I owe to lenders, I have also accumulated an estimated $108 trillion in liabilities that I don’t count as debt because I don’t like to think about it.”

“You don’t have to worry because I have an entire country that I can tax at will to pay you back.  The total assets of the country amount to about $72 trillion, which is only about $49 trillion less than the amount I owe…. Oh and the people who own those assets only owe $16.6 trillion to other people.”

“I am restrained by law from borrowing too much.  Although I can change the law whenever I want.  Last year I raised the limit….this year also.”

“I did recently make a law that every time I wanted something new I would pay for it without borrowing… except for spending associated with the $108 trillion of liabilities mentioned above.  I had a rule like this in 1990 and it lasted all the way till 2002.  Then I brought it back in 2007.  I went almost a year before breaking the law and passing the alternative minimum tax, the stimulus bill of 2008, and a farm subsidy bill.  Then I made this sort of thing legal by adding an “emergency” exemption.  Since then I’ve hardly done anything that did comply with this rule.  Last month when congress tried to extend unemployment benefits, out of 535 legislators 1 man suggested that we should pay for it somehow.  He was promptly shouted down.”

“I have a vast portfolio of failing businesses including banks and car companies and I have the ability to acquire all sorts of other entities so long as they are failing.”

“Oh and since this loan will be in nominal terms and I control the money supply, I have the ability to reduce the value of my liability to you at any time to whatever degree I want.”

Would you loan money to me?!  You probably are…

Here is what Moody’s has to say about our credit rating, as quoted in a NYT article

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenue — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Translation: “You can’t go on the way you have been.  You have to give some things up!  And we are getting a little nervous because we can imagine the things you will have to give up and we can imagine the political fallout and it won’t be pretty.”  Meanwhile our government is passing another gigantic entitlement.  So we have to start asking: “is it even conceivable that the government will suddenly wake up and cut what they would need to cut in order to start paying off this debt?”  Personally I can’t see that happening.  Maybe you can but it’s important to keep in mind that it’s not the kind of thing that economic models can predict, it’s a political issue. Furthermore, economic models don’t give us much information about what will happen if the real-world government decides not to obey the constraint that is required to make the model work.  The only thing we are pretty confident about is that it wouldn’t work….

debt clock

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Categories: Uncategorized
  1. Free Radical Generator
    March 22, 2010 at 4:43 pm

    Keep up the good work. I see a syndicated column in your future!!

  1. August 9, 2011 at 12:13 am

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