John Mauldin is an investor and analyst that I read occasionally–he has quite a following and sometimes has interesting takes on macro issues. However, in the piece linked to above (Austerity is a Consequence, not a Punishment), Mauldin makes quite a mess of his analysis. The biggest issue with Mauldin’s take on the current macroeconomic climate is his confusing obsession with debt:
The problem that arose was that most countries rarely followed through on the second part of Keynes’s prescription, which was to pay back the debt when times were good. Rather, the debt just continued to accumulate…
You can almost hear the critics wanting to dismiss Rogoff and Reinhart’s entire book, which clearly establishes the link between excessive debt and sovereign debt crises – a pattern that has played out some 266 times over the last few centuries, if I remember correctly…
Countries and governments, small and large, can go into debt for numerous reasons. As noted above, Keynes advocated going into debt during business contractions. But there are different types of debt.
There is debt that is used to build productive assets such as roads, airports, bridges, schools, and civic centers. Then there is debt that is used for current consumption. When debt creates assets, future generations at least get some benefit when they have to participate in paying the loan back. In the case of current consumption, they get none. In essence, debt applied to consumption is spending today rather than spending in the future. You are borrowing money to spend on goods and services in the “now,” with the promise to pay for that consumption later.
Ok, I cobbled together the above paragraphs because I think they highlight the main analytical errors:
Paragraph 1: Mauldin blames current economic woes and debt troubles on a decades long public spending binge. The problem is, that binge never really occurred:
With the exception of Japan, the general trend in the run-up to the crisis in 08 was downward with respect to debt-GDP ratios. Perhaps Mauldin thinks that these ratios should have been reduced more quickly, but indicating that public debt levels were spiraling out of control is disingenuous and factually incorrect.
Paragraph 2: He writes this paragraph to defend the work done by Reinhardt and Rogoff in their book, in which they chart the correlation between increasing levels of debt and slower growth. Reinhardt and Rogoff, for those that are unaware, also wrote a paper in 2010 examining this correlation in more detail, and the paper claimed there was a debt threshold at 90% after which growth dropped off of a cliff. This was recently proven to be the result of curious data manipulation techniques and a spreadsheet coding error. Even without those errors, though, there was never much in the R+R analysis–it was merely stating a correlation, it said nothing of causation. Further analysis since the discovery of the spreadsheet error has basically demonstrated that debt has no causal impact on growth. It turns out that slow growth (that occurs for whatever reason) leads to higher debt, but not vice versa.
Paragraph 3: I think this paragraph really gets at the heart of Mauldin’s flawed analysis. Clearly, Mauldin doesn’t believe that debt fueled consumption is beneficial. But, here’s the problem–government debt is (for the most part) not used to fund consumption! It is used to invest (education, infrastructure, etc) or correct market failures by providing goods and services the private sector cannot provide efficiently (retirement income, health care, defense, public works). If I had to guess, I think what really bothers Mauldin is the use of private credit to fuel private consumption of goods beyond an individual’s ability to pay.
And, if we follow the logic of Mauldin’s thinking above, but look at private debt instead of public debt, the facts seem to fit his analysis much better.
Clearly, running up these sorts of debts in the private sector was unsustainable. However, there is a perverse logic to arguing that the solution to private excess should be government austerity. Indeed, as Krugman has written about many times, there is this urge among self-professed deficit scolds to advocate for ‘pain’ as the only prescription for past excess. But, if you think about it, this makes no sense–basically, we are advocating for an extended period of unemployment as punishment for prior excess. But whose excess was it? You could make the case that individuals that overextended themselves brought this upon themselves, but I am more prone to blame the systemic incentives that promoted flawed lending standards and easy credit.
Why should poor, less-educated Americans be forced into unemployment while the banks that lent the money out in the first place were bailed out at the expense of the taxpayer? Don’t get me wrong, letting the banks go under would have been a huge disaster–but I think we can afford to bail out the unemployed too, and, as Yglesias says, lets punish them by making them work not by forcing them into unemployment. Before we can take Mauldin seriously on matters debt-related, he needs to sort out his thinking regarding the distinction between public and private debt and get his facts straight about public debt levels in the run-up to the 2008 global financial crisis.