Consider r, the required real rate of interest on government debt, and the sum of n, the labor-force growth rate, and g, the labor productivity growth rate.

When r > n+g, the case for budget surpluses and lowering the debt is strong. We believe that private investments are even more productive to society than the market rate of return on private capital formation tells us. We believe that there are private knowledge and other spillovers from private capital formation. We believe that the quasi-rents from past investments are shared among all those with market power who participate in production. Thus when the government borrows and spends, it crowds out private investments that are very profitable to society as a whole. This point is strengthened by the danger of a runaway government financial crisis should a default premium begin to incorporate itself into government borrowing rates. This point is limited only by intergenerational equity considerations: that if we think the future will be richer than the present, committing funds now to private capital formation rather than to private and government consumption worsens intergenerational inequality.

The problem is that we really do seem to be in a different world than the r > n+g world–in fact, we seem to have been in a different world since 1933. And the question of what to do when r < n+g is much harder. There are then, I think, three possibilities:

One possibility is that r < n+g is telling us that private returns from investment, when properly adjusted for risk, are truly less than the growth rate of the economy–that the economy truly is dynamically inefficient. In this case, the reduction in private capital formation from higher government debt is not a bug but a feature: the economy does have too much private capital, and less would improve welfare.

A second possibility is that private capital is still productive and valuable, but that rent-sharing by stakeholders and the inability of investors to capture knowledge externalities pushes the risk-adjusted private return on capital and thus the government borrowing rate below the total economic growth rate. In this case there is a case for adding a cost-of-crowding-out term to the benefit-cost analysis of government debt finance. But it is also important to recognize that there is no danger of a runaway government financial crisis should a default premium begin to incorporate itself into government borrowing rates.

The third–and I think by far the most likely–possibility is that the fact that r < g for the government is a byproduct of an extremely large outsized risk premium because of private financial markets’ failure to mobilize the risk-bearing capacity of the public and failure to establish trust and overcome moral hazard in the credit channel. Thus more government debt provides the private sector with something that it is willing to pay through the nose for: a low-risk way to transfer purchasing power into the future.

Under such circumstances a higher government debt does not reduce but raises the amount of programmatic spending that can be sustained by any given tax share of GDP: an extra proportion (n+g-r)(D/Y) of national income is available each year for government programmatic spending or tax cuts. Plus there is the direct utility gain to debtholders for providing them with something that they value greatly. In this case, there is also (a) no reason to worry about exploding government debt and a consequent government debt crisis, (b) a relatively strong case for using the government’s borrowing power to route around the private market’s inability to unclog the credit channel and mobilize risk bearing capacity, hence (c) little reason to worry that government debt is crowding out important private capital formation–for, after all, the credit channel is badly clogged.

I certainly think that the evidence is sufficiently ambiguous that we should not make big and irreversible policy moves on the assumption that we do not live in an r

And the large long-run fiscal gap stems (a) from health-care costs exploding much faster than in other countries, and (b) from assumptions that current law provisions that restrict spending growth and raise taxes will be overturned by future congresses. It seems incoherent to say that we must do more short run damage to the economy by passing more current laws to control future deficits that can then also be overturned by future congresses.

As I look at it, there are three things not in the CBO’s Alternative Fiscal Scenario that lead me to think that we did not have a large long-run fiscal gap: (1) That someday, somehow, the rise in health-care costs would moderate and we would move toward the OECD average on health spending. (2) The Cadillac Tax and the resulting shift of what are now untaxed employer health benefits into the tax base. (3) The carbon tax–which will come sometime in the nest generation. It seemed to me that an AFS or a generational accounting calculation that did not include these was more a tendentious political intervention in the current debate then an honest technocratic forecast,

And, of course, after Reagan 1981 and Bush 2001 I have to believe that any laws passed that restrict long-run spending growth when Democrats have influence will be undone by laws that cut taxes in the long run when Republicans take control of the government.

The arguments for austerity or even for stabilizing the debt-to-GDP ratio thus seem to me to be very shaky. They are claims that:

1. Soon, very soon, r is going to rise to be greater than n+g, and much greater than n+g–but when it does we will be unable to change our fiscal policy from one appropriate for r < n+g to one appropriate for r > n+g by a substantial margin.
2. Even if r < n+g, there is still a social loss from the crowding-out of private capital formation that takes place when government debt is increased.
3. With taxes fixed as a share of GDP by political pressures, and with deficits limited by deficit phobia, a higher debt means lower programmatic spending.

(3) seems to me to be simply confused. (3) says that the present value of spending is fixed, so all that spending increases and cuts do is move spending around from decade to decade. In that case, you would want spending to be high when r is low because the amount of future spending you have to forego to stay under the tax + interest cap is low; and you would want spending to be low when r is high because they you are foregoing a lot of future spending for each dollar of spending financed by debt today. It’s not an argument for not running a large deficit now, when r is low. (2) is possible, but needs to be developed more. (1) is an argument that we should not even set out what the best policy is now because our current political system is so broken that even pointing out that r < n+g will lead to destructive political economic consequences.

Ryan Cooper: America is running out of jobs. It’s time for a universal basic income: “The politics of a guaranteed income get a lot easier…

when you acknowledge that the U.S. is no longer the land of opportunity…. The fundamental bargain of American society is that for anyone willing to hustle, there is a decent job to be found, or one that will at least prevent abject destitution. It underpins our national mythos as the land of opportunity and self-reliance. It has always been less true than anyone wanted to admit, but for an increasingly large fraction of the population–start with the 16 percent of Americans who regularly don’t have enough to eat–it’s a sick joke…. One can easily imagine the historical process described by Marx going in reverse. In today’s labor market, where there are still twice as many job seekers as job openings, the constant conservative carping about the ‘dignity of work’ sounds more jarring and vindictive by the day. As someone with a nice, stimulating job, I agree that work can help people flourish. But in an economy that is flatly failing to produce enough jobs to satisfy the need, a universal basic income will start to seem more plausible–even necessary.

Andreas Fuster, Basit Zafar, and Matthew Cocci: Why Aren’t More Renters Becoming Homeowners?: “With a stronger economy and eased credit standards…

…flows into homeownership would pick up. However, one caveat is that many potential buyers with relatively low credit scores (35 percent of renters in our sample think that their credit score is below 680) might now be ‘discouraged’, meaning that they are convinced that they would not be granted credit and thus may fail to apply for a mortgage even after an easing in standards. Also, relaxing credit standards may, of course, have undesirable consequences down the road, since borrowers with lower credit scores are at higher risk of default.

This time only 295 conversations snoozed to later. We are making progress!

Cf. September 3, 2014: Is It Really “Inbox Zero” If You Have Snoozed 335 Conversations to “Later”?

Andrew Harless: Employment, Interest, and Money: An Ultraminimalist Model of the Beveridge Curve, or, How I Learned to Start Worrying and Love Structural Unemployment: “The cumulative sum of the residuals peaks in July 2006…

…suggesting that there may be a structural break in August. A casual look at the residuals strongly suggests another structural break in July 2010. Both purported structural breaks go in the same direction: a decline in the number of hires associated with any given number of job openings. So, contrary to what I said in 2010, it does look like we are seeing more structural unemployment now than in the past…. So what does all this imply about the natural rate of unemployment?… If the relationship between hiring and unemployment is stable, as it appears to be, then my model implies that shifts in the matching function will determine a shifting relationship between the (assumed constant) NAIRV and the NAIRU (Non-Accelerating Inflation Rate of Unemployment, a.k.a. the natural rate of unemployment). For what it’s worth, my estimates suggest that the hypothesized August 2006 and July 2010 shifts in the matching function would, collectively, increase the NAIRU by a factor of about one and a third. So if the NAIRU was 4.5% (my best guess, which happens to be conveniently divisible by 3) in July 2006, it is 6% now…

Jens H.E. Christensen and Simon Kwan: Assessing Expectations of Monetary Policy: “An ongoing concern has been that the public might misconstrue the Fed’s forward guidance…

…about future monetary policy and underappreciate the extent to which short-term interest rates may vary with future news about the economy. Evidence based on surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants. The public also may be less uncertain about these forecasts than policymakers.”

Marika Cabral, Michael Geruso, and Neale Mahoney: Does Privatized Health Insurance Benefit Patients or Producers? Evidence from Medicare Advantage: “The debate over privatizing Medicare…

…stems from a fundamental disagreement about whether privatization would primarily generate consumer surplus for individuals or producer surplus for insurance companies and health care providers. This paper investigates this question by studying an existing form of privatized Medicare called Medicare Advantage (MA). Using difference-in-differences variation brought about by payment floors established by the 2000 Benefits Improvement and Protection Act, we find that for each dollar in increased capitation payments, MA insurers reduced premiums to individuals by 45 cents and increased the actuarial value of benefits by 8 cents. Using administrative data on the near-universe of Medicare beneficiaries, we show that advantageous selection into MA cannot explain this incomplete pass-through. Instead, our evidence suggests that insurer market power is an important determinant of the division of surplus, with premium pass-through rates of 13% in the least competitive markets and 74% in the markets with the most competition.

**Walter Frick: If Your Kids Get Free Health Care, You’re More Likely to Start a Company: “Starting a business is risky enough in the best of circumstances…

…Most new ventures fail, and the prospect of forgoing a salary is enough to keep many would-be entrepreneurs from taking the plunge. But think about how much harder it would be if your child had a health condition, and you couldn’t get her insurance if you struck out on your own. That’s less of a problem in the U.S. than it was a few years ago, thanks to Obamacare, but until recently it was a very real conundrum…. Gareth Olds of Harvard Business School… analyzed Census data from before and after the passage of the Children’s Health Insurance Program in the U.S…. The self-employment rate for CHIP recipients increased from just under 15% of those eligible to over 18%. That amounts to an a 23% increase. The rate of ownership of incorporated businesses–a better proxy for sustainable, growth entrepreneurship–increased even more dramatically, from 4.3% to 5.8%, an increase of 31%…. The basic intuition behind his methods is that a family just above the CHIP cutoff isn’t all that different from a family just below it…

Jonathan Chait: Why the Worst Governments in America Are Big Small Local Governments: “Police militarization bore only the faintest responsibility for the tragedy in Ferguson….

…Old-fashioned policing tools were all the Ferguson police needed to engage in years of discriminatory treatment, to murder Michael Brown, and to rough up journalists covering the ensuing protests…. Ferguson has exposed a genuine opening for thinking about public life in a way that cuts across traditional ideological lines. The problem is what you might call Big Small Government…. Ferguson… is an Orwellian monstrosity. Its racially-biased Police Department is the enforcement wing of a predatory system of government described in scathing detail in a recent report by ArchCity Defenders… an instrument of fiscal (in additional to social) domination. Court fines account for a fifth of the city’s revenue. Police officers disproportionately search black drivers…. The city issues three warrants per household, and its draconian justice system appears designed to bleed its victims. The report notes, ‘A Ferguson court employee reported that the bench routinely starts hearing cases 30 minutes before the appointed time and then locks the doors to the building as early as five minutes after the official hour, a practice that could easily lead a defendant arriving even slightly late to receive an additional charge for failure to appear.’…

There are not many people who find their freedom so unjustly impaired by the government in Washington as the people of Ferguson are by their local government…. Big Small Government is all around us. We simply haven’t trained our minds to notice it… both right and left have exhibited forms of this mental block…. Why do coastal states lack affordable housing? Because regulations prevent dense construction…. Here is a genuine case of onerous regulation with dire economic consequences…. Or consider occupational licensing. Some 29 percent of American workers need a state-issued license in order to legally do their job…. Income inequality isn’t just about low taxes for the rich and generous compensation for executives; it’s also about the difficulty working-class Americans have getting a job as a barber or a dental hygienist. These regulations don’t exist because of a popular outcry from voters terrified that the person they hire to help them pick out new drapes may lack formal training for the job. They exist because they serve the narrow interests of tradesmen…

On Twitter:

• https://twitter.com/delong/status/508000245205450752 .@djsziff agreed: Toobin shd hv wren: “fed exch Nvalid §1311 exchange & cannot prvd sbsds” & not “fed exch Nvalid”. Big deal? Not really…
• §1311 says the state establishes the exchange. §1321 says that if the state doesn’t then the federal government establishes
• a §1311 exchange–“establish… such exchange” it says. Now along comes Jonathan Adler to complain that even though §1321
• empowers and commands the federal government to establish a §1311 exchange, it is so crystal clear and obvious that
• established exchanges are not §1311 exchanges as to pass the Chevron test and make insurance buyers ineligible for
• subsidies. And U say Toobin has problems understanding the ACA? Seems to me ur priorities R misplaced. Badly so… .@djsziff (5/5)

Must- and Shall-Reads:

• Noah Smith: Macroeconomics Gets Sucked Into Dark Corners
• Tim Harford: Why inflation remains best way to avoid stagnation
• Daniel Drezner: Has Politico Hit Peak Strawman?
• Eric Wemple: 7 problems with Politico Magazine’s [Michael Hirsh’s] hit piece on Glenn Greenwald

1. Michael Strain: Conservatives, wake up: The tax code is not your biggest problem: “Our health-care system is in need of serious reforms. The Affordable Care Act is an ugly package filled with unintended consequences. One of those consequences is a significantly smaller labor force. It should be repealed and replaced with a conservative alternative. And health-care costs are projected to put Medicare and Medicaid spending on an unsustainable and destructive path, and are putting downward pressure on wages and salaries. I would make progress with conservative health-care reforms before worrying about tax reform. It’s a bigger economic problem today–and it’s a problem that will only grow in importance over the coming years…”

2. Michael Hiltzik: That predicted double-digit rise in Obamacare premiums? Not happening: Another stake in the heart of a popular anti-Obamacare claim has arrived from the Kaiser Family Foundation, which compiled the projected premium changes for 2015 in 15 states and the District of Columbia. Its finding is that premiums for the lowest-cost, most popular individual health plans will be dropping for next year, by a nationwide average of 0.8%…. ‘Now that insurers have been able to see what their competitors are charging… they are making strategic adjustments in how they price…’ [said the] Kaiser Family Foundation, explaining why healthcare premiums are holding steady…. That’s just one of several indicators recently released that demonstrate that the Affordable Care Act is working as planned and that the parade of horribles so deeply relished by its opponents hasn’t materialized.”

3. Peter Diamond: Video: Unemployment “Debates about higher structural unemployment occur when unemployment has stayed high. With monthly publication of the US Beveridge curve (the relationship between the unemployment and vacancy rates), the recent debate has focused on the shift in the Beveridge curve and whether the shift will be lasting long enough to move the full-employment point. The curve appears stable through the NBER identified business cycle through in June 2009 or possibly the month of the maximal unemployment rate in October 2009. This shift in the Beveridge curve, with the economy experiencing a higher level of unemployment than before for the same level of the vacancy rate, suggests a deterioration in the matching/hiring process in the economy. It is tempting to interpret this decline as a structural change in the way that the labor market works and thus assume that it is orthogonal to changes in aggregate demand. Indeed, an assumption that a shift in the curve is structural has been a staple of the academic literature since at least 1958. This interpretation has an obvious policy implication: however useful aggregate stabilization policies while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession, since the labor market is structurally less efficient than before in creating successful matches. This lecture reviews the theory underlying the Beveridge curve and US evidence on the ability to draw an inference of structural change from its shift or a shift in the hiring (matching) function.” | Mark Thoma: Economist’s View: A Conversation with Peter Diamond

4. Bryan Caplan: What Every High School Junior Should Know About Going to College: “College is a good deal for good students, a mediocre deal for mediocre students, and a poor deal for poor students. Once in a long while, a poor student morphs into good student. But expecting any particular poor student–yourself included–to morph into a good student is wishful thinking. How do you know if you’re a good, mediocre, or poor student? Look at your past academic performance – your grades and standardized test scores…. The main reason why college is a good deal for good students, a mediocre deal for mediocre students, and a poor deal for poor students: good students usually finish college, mediocre students usually don’t, and poor students almost never do. And most of the payoff for college comes from finishing…. When you decide whether to go to college, you should consider the college experience as well as the career benefits…. A good rule of thumb: If your studies bore you in high school, they’ll probably bore you in college too…. Suppose your 150-pound friend dreams of being a professional football player. Would a true friend urge him on? No, he’d warn his mid-weight friend that he is astronomically unlikely to succeed…. I’m trying to play the same role for mediocre and poor students who expect to succeed in college. Please don’t get mad at me. I am only a messenger…”

5. Rajiv Sethi: The CORE Project “Back in October 2012 I got an unexpected email from Wendy Carlin…. ‘I think that a curriculum that places before students the best of the current state of economic knowledge addressed to the pressing problems of concern… could succeed.’ I attended the meeting, and joined a group that would swell to incorporate more than two dozen economists spread across four continents… with funding from the Institute of New Economic Thinking, we began to assemble a set of teaching materials under the banner of Curriculum Open-Access Resources in Economics (CORE). A beta version of the resulting e-book, simply called The Economy, is now available free of charge worldwide to anyone interested in using it…. So if you’re teaching an introductory economics course, or enrolled in one, or just interested in the material, just register here for complete access without charge. We will eventually set up instructor diaries to consolidate feedback, and welcome suggestions for improvement. This is just the start of a long but hopefully significant and transformative process of creative destruction.” 

6. Robert Waldmann: “This post endured the test of 5 years, that is 35 dog years, or 563 @intenetyears. I think the key word is ‘taboo’. Yes, exactly: ‘The “lowbrow” theories of 1920-1980 from Fisher, Wicksell, Keynes, and Hicks through Metzler, Tobin, and Friedman–are taboo. They would be demonstrating to their peers that they were not serious highbrow economists if they consulted them.’ That’s the thing about taboos–you can’t violate them just a little, you aren’t allowed to mention the possibility of considering maybe violating them some day. Other slighly less useful words are ‘orthodoxy’, ‘doctrine’, ‘heresy’, and ‘betrayal’. You can’t expect an Eastern Orthodox theologian to consider the possibility that the holy spirit proceeds mostly from the father but maybe 1 or 2% of it proceeds from the Son (in any case at least when the Federal Funds rate is under 0.25%). Similarly you can’t expect a Midwestern Orthodox Macroeconomist to consider the possibility that Keynes might have said something useful on some Easter Sunday.”

Should Be Aware of:

• Zephyr Teachout: Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United
• The Antidote: How Staten Island Is Fighting a Raging Heroin and Prescription-Pill Epidemic

1. Tim Harford: Here today, gone tomorrow: “Don’t draw up your task list in the morning–do it the evening before, when you will have a more distant perspective…. Strange things happen to us when tomorrow turns into today. Tomorrow we’ll eat fruit rather than candy bars. Tomorrow we’ll watch Krzysztof Kieślowski’s Blue rather than Sleepless in Seattle. And yet curiously when tomorrow arrives, we eat chocolate and watch romcoms. Our preferences flip…. Economists give this tendency the charmless name of hyperbolic discounting…. What are the solutions? One possibility is to schedule tasks ahead of time in the calendar…. Putting long-term priorities firmly in the calendar helps deal with the hyperbolic discounting problem…. Ariely is part of a team producing a new smartphone app, Timeful, which aims to deliver the diary-stuffing approach more intelligently…. Whenever a new invitation arrives, ask yourself not, ‘should I accept the invitation in March?’ but, ‘would I accept the invitation if it was for this week?’ The fundamental insight of hyperbolic discounting is that while tomorrow always looks different, eventually tomorrow will be today…”

2. Scott Lemieux: Republicans are still trying to destroy Obamacare, and they’re still losing: “Conservatives want to protect your right a totally avoidable death due to a lack of health insurance. It’s the principle of the thing…. ‘Today’s decision by the DC Circuit to grant en banc review of Halbig v. Burwell is unwise and unfortunate. It has the appearance of a political decision’, sniffed Michael Cannon of the conservative-libertarian Cato Institute. The chutzpah it takes for one of the architects of the case to accuse the judges who voted to re-hear it of being ‘political’ is like the Atlantic Ocean accusing the creek running behind your house of having too much water. But nothing will stop the Obamacare truthers–not logic, reason, legal rulings, common sense or human decency. Earlier this year, based on a hyper-literal reading of an isolated part of the Affordable Care Act, a two-judge panel from the court ruled that Congress did not intend to provide subsidies to participants in federal health insurance exchanges in order to make their insurance affordable–though they did so for state exchanges. Their argument–that Congress went through the trouble to create a federal backstop in case certain states didn’t establish exchanges while intentionally (but secretly) intending for the backstop to fail–is both absurd on its face and inconsistent with the understanding of literally everyone involved in passing the statute…. Unlike the bizarre ruling that conservatives loved, the decision to re-hear the case is legally unassailable…. It is unusual for the court to agree to a full review–but it’s also highly unusual for an unrepresentative panel to issue a widely-derided ruling that would have massive policy consequences. If this Obamacare case isn’t important enough to merit a re-hearing, what would be?… Obamacare truthers are reviving an idiotic Republican talking point from last year. There is now a Democratic majority on the court, Cato’s Cannon charges, because ‘President Obama and Senate Democrats then “packed” the D.C. Circuit with their judicial nominees’–an absurd characterization of events. The supposed ‘court-packing’ involved Obama nominating people to fill existing vacancies, after which they were approved by a majority of the Senate. What dastardly lawlessness!… This contempt for democracy saturates the entire legal campaign against the Affordable Care Act. A series of ad hoc legal arguments, each more absurd than the last, are raised in order to sabotage or nullify legislation passed by the people’s representatives that its political opponents have been unable to overturn through the electoral process…”

3. Thoreau: Hype. Let’s talk about hype. What is it? How do we parody it? That’s the subject of this TED talk: “I am fond of the famous saying by Gen. Kurt von Hammerstein, who considered clever and lazy people to be suited for the highest command, and stupid and diligent people to be the most dangerous. I’d like to add another variable: Susceptibility to hype, motivational talks, TED talks, etc….I’ve come across lamentably many people who are smart in many regards but fall for all sorts of fads, gimmicks, TED talks, etc.  I don’t get it.  So, let me expand the taxonomy…. Stupid and lazy people… can be used for suitable tasks. If they are susceptible to hype, they are somewhat easier to motivate. If they are not susceptible to hype, well, there are still ways to make them do what is needed. Diligent and stupid people are dangerous…. If they aren’t susceptible to hype, you have one less lever to influence them with. If they are susceptible to hype, they will fall for all sorts of things. Either way, it’s best to contain them. Diligent and clever people are useful. If they fall for hype, they should be put in charge of implementing something that a superior has indicated enthusiasm for. If they are skeptical of hype, they should be retained as trusted aides who will vet proposals and reports. Clever and lazy people who fall for hype are incredibly dangerous…. Clever and lazy people who are immune to hype are the ones to put in charge, because they will make very good decisions, use resources wisely, and see through most of the bullshit.”

4. Jeff Sachs: The Wall Street Journal Parade of Climate Lies: “That Rupert Murdoch governs over a criminal media empire has been made clear enough in the UK courts in recent years. That the Wall Street Journal op-ed pages, the latest victim of Murdoch’s lawless greed, are little more than naked propaganda is perhaps less appreciated. The Journal runs one absurd op-ed after another purporting to unmask climate change science, but only succeeds in unmasking the crudeness and ignorance of Murdoch’s henchmen. Yesterday’s (September 5) op-ed by Matt Ridley is a case in point…. Ridley quotes a sentence fragment from the press release suggesting that roughly half of the global warming in the last three decades of the past century (1970-2000) was due to global warming and half to a natural Atlantic Ocean cycle. He then states that ‘the man-made warming of the past 20 years has been so feeble that a shifting current in one ocean was enough to wipe it out altogether’…. The total warming is distributed between the land and ocean surface on the one hand and the ocean deep water on the other. The total rise of ocean heat content has continued unabated, while the proportion of heat absorbed at the surface and in the deeper ocean varies over time…. ccording to the paper, the period of the late 20th century was a period in which the surface was warmed relative to the deeper ocean. The period since 2000 is the opposite, with more warming of the deeper ocean…. If the surface warming is somewhat less in recent years than in the last part of the 20th century, is that reason for complacency? Hardly. The warming is continuing, and the consequences of our current trajectory will be devastating…. As Chen and Tung conclude in their Science paper: ‘When the internal variability [of the ocean] that is responsible for the current hiatus [in warming] switches sign, as it inevitably will, another episode of accelerated global warming should ensue’.”