Clarity, Honesty and Modesty in Economics
January 22nd, 2013
Get ready to pop the cork and celebrate an anniversary in economic policy. On January 25, we reach the 12th anniversary of Federal Reserve Board Chair Alan Greenspan’s stern warning: the Federal budget SURPLUS is rising so high and so fast, Congress faces a frightening task. What do we do with all the extra cash piling up in Washington? He warned that the 10-year surplus would hit nearly $6 trillion and would stay in the black long after 2030! The government would have no choice but to start buying up private companies.
It didn’t turn out that way. Instead of taking in heaps of excess dollars, Congress is bleeding about $9 billion in red ink over the next 10 years. Of course, Greenspan was proved right about one thing: the U.S. government did end up owning parts of private companies, notably General Motors (but not for the reasons Greenspan anticipated).
I once gave a speech at the White House entitled “Clarity, Honesty, and Modesty in Economics.” To borrow a line from Churchill, economics is a modest science, with much to be modest about. And yet every so often we are bombarded with sweeping, grandiose forecasts that prove to be wrong. Of course, you can blame all sorts of factors for today’s budget disaster and for Greenspan’s cracked crystal ball in 2001: 9/11, tech meltdowns, wars in Iraq and Afghanistan, the Great Recession, bogus stimulus plans, etc.
But the fundamental error in budget surplus forecasts is uncovered by Nobel Laureate economist James Buchanan, who died a few weeks ago. In my book New Ideas from Dead Economists, I discuss Buchanan’s disdain for the bon vivants and eastern elites who run Washington. He said they “can’t leave the mindset” of their role as lofty and wise elders who deliver Olympian pronouncements. Buchanan was an earthy fellow who worked on a farm and attended Middle Tennessee State Teacher’s College.
More important than his past, though, Buchanan forces us to grapple with the following claim: If businessmen are self-interested, why not assume that government officials are “political entrepreneurs?” What do they maximize? Their power and ability to gain votes.
What does this have to do with the budget deficit? From 1958 to 2013, the U.S. has enjoyed a balanced budget only 6 times. Why? Surely, we haven’t been in recession or at war for 49 years. Buchanan argued that politicians are driven to please their constituents. What do people generally want from government? More stuff. What do they not want to do? Pay for it. And so, Greenspan’s surplus forecast was unsustainable, even if the economy had not gone over the ledge in 2008.
But don’t deficits hurt people? Sure, but the pain is indirect and diffuse. Build a wasteful commuter rail project and congressmen pose at ribbon-cutting ceremonies and get their photos in the papers. When the project starts losing money, no one shows up for a mug shot photo in bankruptcy court. Future generations may be bankrupted by our rampant spending spree. But they don’t get to vote today. That’s why you don’t see politicians campaigning in nursery schools or maternity wards.
Another country boy said it as well as Buchanan. “I saw a startling sight today,” Mark Twain said, “A politician with his hands in his own pockets.”