Any question??? :. by .:Calaveracafè:., on Flickr

Gregory Mankiw, long-time Republican economist and current Yale professor, offers a disarming confession in the Sunday New York Times: he doesn’t know everything about economics. Here are three things he doesn’t know:

1. How long will it take for the economy’s wounds to heal?

2. How long will inflation expectations remain anchored?

3. How long will the bond market trust the United States?

Dean Baker takes the quiz here. He says number 1 is a trick question: it depends on the policies that the government adopts:

If the deficit hawks get full control over the levers of government and we start cutting spending rapidly, then it will take many many years before the economy recovers.

Similarly, if inflation hawks at the Fed can force increases in interest rates, like their counterparts at the European Central Bank, then recovery can take a very long time.

On the other hand, if we could get another big jolt of stimulus, a more aggressive monetary policy, or a big fall in the dollar to boost net exports, then we could see the economy recover fairly quickly.

As far as I can see, the other two questions are only interesting to people who own bonds, namely rich investors and the funds they control, and to the business press. They are really excited about these questions, because they want to dump their bonds just ahead of the herd.

It makes you wonder why he picked these three questions. This is the kind of mindless nattering one expects of an economic courtier, a servant of the rich, looking for approval and promotions. It’s David Brooks bedecked in doctoral robes.

Let’s try a real quiz, Professor.
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Matt Bai apparently plans to remain perfectly ignorant about Social Security and the Social Security Trust Fund. First he wrote this piece for the New York Times, in which he mingles his wrong-headed ideas with quotes from Earl Blumenauer in a way that makes it look like the mild-mannered long-term Congressman from Portland agreed with him. Blumenauer was forced to issue a denial. When asked about it by reader english444, who correctly describes the situation, Bai doubled down on his ignorance:

Well, this topic did come up a lot, and I’m not looking to get into a whole new debate about it here. But the most credible experts I’ve talked to believe we need to draw a distinction between principle and reality. The principle to which you’re referring is that the government guaranteed all of this Social Security surplus money (which it spent) with Treasury Bills. The reality is that redeeming that trillions of dollars in debt would require issuing trillions more in debt. Now, if deficits are low and the national debt is manageable, that’s not such a huge deal. But given the projections for the next few decades (the national debt could reach 90 percent of GDP by 2020, which puts us in Greece territory), issuing that kind of debt would still entail some serious budget cuts, either in Social Security or other social programs, or a sharp rise in taxes. The longer we postpone this debate, the more draconian those measures would likely be.

Now, I can sympathize with the view based on principle, but I can’t really understand why introducing the pragmatic side of this, as I did, is somehow immoral or requires my having some sinister “agenda.” And I find it amusing that it tends to be boomers — whose generation happily spent all this money and who are now collecting their full Social Security benefits — who do most of the lecturing about the sanctity of the trust fund. But that’s a discussion for another day.

Bai needs to learn the basics before he starts relying on anonymous “most credible experts”. Here’s a starting place: the US Treasury website that gives the national debt to the penny every day. At September 21, the total public debt outstanding was $13.477 trillion. The GDP can be found on here, Table 3 (.pdf). At June 30, 2010, the estimate is $14.575 trillion. That puts US debt at 92.5% of GDP, or as Bai would say, into Greece territory. In May, 2010, the debt-GDP ration of Greece was about 115%.

As Dean Baker has repeatedly tried to explain, most recently here in response to Bai, bonds are easy to understand. I lend you money. You spend it. Then you start paying me back. There is nothing nefarious about this process. Baker speculates that Bai may be arguing that the Treasury should default on some of that debt. That will cause some heartburn at the FDIC, because it invests in Treasuries. In fact, at May 31, the FDIC held $38.531 billion of that kind of debt, just in case some bank might fail.

It would also anger baby boomers, whose Social Security Bai wants to cut after they paid $2.54 trillion into the Trust Fund. Bai thinks they should just shut up, because it’s all their fault. Actually, of course, it’s the “fault” of a completely different group of people. The same failed economists who promised that cutting taxes for the very rich would raise total tax revenues were the people who in 2001 told Congress that it was a bad idea to run surpluses, I’m looking at you, Alan Greenspan. There wouldn’t be an issue if not for the ludicrous Bush tax cuts. Our borrowing capacity would easily absorb the tiny amount of money needed to fund Social Security.

The people who are collecting Social Security today include a few baby boomers, but mostly it’s our parents, and I don’t know about you, but I’m glad they will be able to live on their own.

To top it off, actual credible economists like Paul Krugman at Princeton and the NYT, and James Horney of the Center on Budget and Policy Priorities, don’t agree with Bai’s theory that bad things happen when debt hits 90% of GDP, or that the correct measure excludes intra-governmental debt.

Mr. Bai, tear down that wall of secrecy and put some names to those “most credible experts”. Or admit that you are just repeating the latest whispers from the Catfood Commission and its servile staff minions, or some other tool.