David Stockman and N. Gregory Mankiw published economic essays this past weekend. Stockman, the budget director during the Reagan Administration, titled his essay, “Sundown in America” and it ran as an op-ed opinion piece. The essay by Mankiw, a Harvard professor, was called “A Sustainable Budget Should Endure Any Storm,” and ran as an economics column.
The essays are very different. Though longer, Stockman’s manages to evoke a visual image of an indictment read aloud by the light of the villagers’ torches. Mankiw’s is more questioning, and reads like an explorer’s journal.
As different as they are, though, the two essays have a lot in common. Both authors take a historical perspective, and both take a realistic view of economic policies. The essays converge, in fact, in the authors’ concern about sustainability and government debt.
The Mankiw essay explores the question of what we know and don’t know about the level of government spending and debt that is sustainable. This may not sound like an earth-shaking issue, but it is, politically and economically.
The White House has stated that the president’s goal is a “fiscally sustainable path,” rather than a balanced budget. The problem with this as an economic policy is that the president has not provided a definition of what that means, and economics cannot provide a definition of “sustainable.”
More to the point in this case, economics cannot define “sustainable” in a way that has any practical meaning: economists cannot, for example, evaluate a federal budget and say it is, or is not, sustainable.
What we have to work with instead is a set of probabilities. At some point, logically, the costs in both interest charges and credibility of our accumulated debt will render the government’s fiscal position unsustainable. The probability of financial collapse at that point is high. And, by the same logic, there is a point where the government’s debt is so small that sustainability is unquestioned and the probability of collapse or market resistance is near zero.
Those two extremes are about all we know for sure, and that is not enough to be helpful in the real world. It would be like a weather forecast that says the chance of rain is somewhere between zero and 100 percent, the same as the chance of snow or a volcano eruption. It’s technically true, but 100 percent useless.
In the area of fiscal policy sustainability, economics is facing the same kind of uneasiness that physics faced a century ago when quantum mechanics forced it to leave the comfort of certainty and confront a world of subatomic particles where all was probability.
With any luck, economic theory developers will adapt to this new reality and begin examining ways to calculate the probabilities, introducing market experience and expertise, for example, as factors. They might very well discover that the probabilities of a financial collapse accelerate at critical times. Things happen fast in financial markets; bad things faster than good.
Real life cannot afford to wait around for economists to wake up, of course. Fortunately, though, both real life and politics have been around a lot longer than economics and neither theoretical gaps nor complicated math are insurmountable barriers. In fact, even a missing definition of what we’re talking about doesn’t slow us down. When scientific precision is not available we substitute opinion. That is what keeps the wheels turning in the real world.
Opinions are not in short supply when it comes to the budget deficit and, more generally, our public debt. In the short run, then, we will make our spending decisions while dining on the tried-and-true recipe of politics, public opinion, and expediency — varying the proportions as necessary.
The dominance of public opinion polls in the news media leads us to overestimate their value as a predictor of events where the public has no vote and little influence. Very few of us, for example, can exert any influence on global financial markets’ view of U.S. debt. These polls, then, are best viewed as reflecting what people think about an issue rather than their likely actions.
Both the Stockman and the Mankiw essays leave us very concerned about our country’s current situation and fiscal policy. Stockman’s conclusion is that a financial collapse is coming and we should prepare for it as best we can. Mankiw’s level of worry is clearly visible but less feverish and still allows us some time to mend our ways.
Whether you support Stockman’s view and are already building a bunker, or prefer Mankiw’s assessment that we can still fix the system one conclusion is the same. There is a high probability that the current administration’s “What, me worry?” approach to government spending isn’t sustainable.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.