Department of “Huh”?!: Where is the Arithmetic in Robert Rubin’s Financial Times Piece? Weblogging

Robert Rubin: Sound government finances will promote recovery: “Debates persist in the US and eurozone about growth and job creation versus fiscal discipline. This false choice diverts fiscal focus away from a balanced approach that could achieve both imperatives….

Our unsound fiscal trajectory undermines business confidence, and thus job creation, by creating uncertainty about future policy and exacerbating concerns about the will of Congress to govern…. A sound fiscal trajectory is also a prerequisite for interest rates conducive to growth…. Unconventional policy decisions by central banks are sometimes justified as the only available tools in the absence of necessary government policies. The right criterion for action, however, is not the absence of alternatives, but an assessment of costs and benefits. In the US, the Federal Reserve’s first programme of quantitative easing was a courageous response to the crisis…. In the US, there are widely posed questions about the benefits of QE3, but the risks are significant…. The Fed’s dramatic expansion of bank reserves could feed excessive credit growth. Along with the possible erosion of Fed credibility on inflation, that could also feed inflationary expectations….

Unconventional monetary policy and stimulus can be part of a successful economic programme for a period of time. But they are no substitute for fiscal discipline, public investment and structural reform…

Here is the arithmetic: Right now the U.S. government can issue a 30-year inflation-protected maturity with a yield of 1.5% per year. Right now if the U.S. spends an extra $100 billion next year it gets $200 billion of increased real GDP and $67 billion of additional tax revenue next year, for $33 billion of additional debt and $500 million of additional annual debt interest in the further future. If $200 billion of additional GDP next year has a long-term boost to GDP of even 1/100 as large–either as extra workers set to work brush-up on their skills, as organizations and capital learn more about how to produce, or as greater corporate cash flow leads to productive private or as government purchases are diverted to productive public investment, the extra annual debt service is more than covered by extra taxes produced by higher potential output. Rubin says that stimulus is “no substitute for fiscal discipline”. But as long as interest rates and economic slack are at their current levels, stimulus is fiscal discipline. It is the failure to undertake fiscal stimulus right now that is long-run fiscal profligacy.

Why doesn’t this arithmetic show up anywhere in Rubin’s piece?

You cannot compare costs and benefits without valuing them–without using numbers. And yet there is not a single number in Robert Rubin’s op-ed…

January 9, 2014

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