Deficits Are Bad and the Sun Goes Around the Earth

Most of us accept that the earth goes around the sun. This is impressive, since we can look up in the sky and see the sun going around the earth. We believe the opposite because we have been told about the research of astronomers over the centuries showing that what we can see with our own two eyes is wrong. Instead, we accept that the motion of the stars and planets can be much better explained by the earth going around the sun.

Suppose for a moment that astronomers and people who write on astronomy did not agree on earth or solar orbits. Imagine that a substantial group of these people, including many of the most prominent astronomers, insisted that the sun goes around the earth, as anyone can plainly see. In that case, there would likely be huge numbers of people who refused to accept that the earth goes around the sun. This is the state of modern economics.

A new study by three researchers at the University of Massachusetts found major arithmetic errors in the widely cited paper by Carmen Reinhart and Ken Rogoff, “Growth in a Time of Debt” which purports to show high levels of government debt sharply slow growth. This study has been widely cited by political figures demanding deficit reduction, in spite of the fact that the unemployment rate remains high and interest rates are at extraordinarily low levels.

When the errors in the Reinhart and Rogoff study are corrected, the strong relationship between high debt levels and slower growth disappears. In other words, there is little obvious reason that we need to fear higher debt levels. We can have the government make investments in infrastructure and education that will boost growth, create jobs and increase future productivity.

If economics were like astronomy, the experts in the field would all be calling for the government to spend what is needed to boost growth. But economics is not like astronomy. When this key piece of evidence arguing for austerity was discredited, many experts just doubled down.

If any prominent economists reversed their support for austerity, they did so quietly, but the best comment came from Erskine Bowles, the co-chair of President Obama’s deficit commission: “What it doesn’t change is the common sense and my own personal experience in both the public and private sector that when any organization has too much debt that is an enormous risk factor and your risks go up then people lending you money will want more money for their money.”

In other words, Bowles told the public to ignore the state of economic research; we can all see the sun goes around the earth.

Of course, economists could explain how governments are not like people. In principle, governments do not die. A country likes the United States borrows in its own currency so it literally can never go bankrupt as long as it knows how to print dollar bills. And, unlike an individual, the government has the obligation to support the economy when private-sector demand collapses, as it did after the housing bubble burst. But hey, Erskine Bowles knows from his personal experience that we are borrowing too much and the sun goes around the earth.

It may help explain the difference between debates in astronomy and economics that many people can profit from slow growth and high unemployment. The after-tax profit share of GDP is at its highest level in more than 60 years. For those who own lots of stock and are at the top of the income ladder, times are good. These people may see efforts to lower unemployment as posing a risk. With lower unemployment, workers may be able to get a larger share of productivity growth. This may be good for most of the country and mean increased economic growth, but it would mean less for the 1 percent.

In the current situation, the blame for the bad economic situation of much of the workforce turns to the failure of individual workers. There is no shortage of news articles that blame workers for lacking the skills needed to succeed in the modern economy, as opposed to blaming policymakers for failing to design policies that keep the economy operating at its capacity.

It is probably worth noting that playing the role of an Erskine Bowles and spreading confusion about basic economics carries large financial rewards. According to The New York Times, Erskine Bowles gets paid $40,000 for many of his speeches.

In addition, Bowles has collected millions of dollars sitting as a director on corporate boards. Perhaps most notable are the hundreds of thousands of dollars he pocketed as a director of Morgan Stanley, one of the too-big-to-fail banks that would have gone bankrupt in 2008 had it not been saved by the Fed. He also was pocketed hundreds of thousands of dollars as director of General Motors, until it actually did go bankrupt in 2009.

The point is that there is lots of money on the table for those who are willing to use their status to help spread confusion and convince the public that there is nothing that can be done about continuing high unemployment and stagnant wages. And every economist knows that if there is money sitting on the table, someone will take it. There will be no shortage of reputable economists and economic pundits prepared to yell about the risks of the debt, even if they have no evidence to support their concerns.