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I’ve spent the last couple of newsletters talking about the knobs of society, the way technology allows us to “turn them up” in the pursuit of knowledge and progress. While I could continue to put things in terms of that metaphor, possibly forever, at some point we have to move from the realm of parable to the realm of policy. Policy is many things, but behind all those things is the government deciding how much money to spend on something, and more controversially how much to go into debt for something.
You’ve almost certainly heard of the trillions of dollars the government spent attempting to mitigate the economic effects of the pandemic. And you’ve probably also heard of the trillions more Biden proposes to spend between the American Jobs Plan and the American Families Plan. In mentioning Biden I do not intend to lay specific blame for anything on the Democrats. During the Trump Presidency the national debt increased by nearly $8.3 trillion dollars. This is enough money, in today’s dollars, to refight World War II twice over.
It’s not just Biden, we’re all big spenders now.
One would think that this is a problem, that the debt can’t keep going up forever, that eventually something bad will happen. And mostly, people don’t think that it can go up forever, but short of “forever” there’s huge disagreement over how long the debt can go up for and how high it can go to.
Part of the problem is that historically there has been a lot of worry about the debt. Republicans mostly didn’t bat an eye when Trump proposed a $2 trillion stimulus package at the beginning of the pandemic, but when Obama was trying to pass an $800 billion stimulus package at the beginning of his presidency, not a single Republican voted for it, and there were many predictions of doom and financial ruin. Those predictions appear to have been wrong.
Going farther back in time I’m old enough to remember Ross Perot’s charts and their warnings of out of control spending during his run for president in 1992. He lost and Bill Clinton became president, and by the end of that presidency we were actually running a small budget surplus. All of which is to say, that people have been worried about this issue for a long time, and since then the debt has gotten astronomically worse, but yet the sky hasn’t fallen. (Astronomically and sky, get it?)
No one believes that the sky will never fall, but there are a lot of people who still think such an event is a long way off. Some believe that as long as interest rates are low that it borders on the criminal to not borrow money as long as there are people still in need of it. Others believe that it doesn’t matter if the government takes in less than it spends, all that matters is inflation, and that if inflation starts going up then you just raise taxes, which takes money back out of the economy and reduces inflation.
These people seem to imagine that the knobs of society can be set to whatever they want. That when necessary they can easily turn down the spending knob and turn up the taxes knob and we can go about our merry way. But as it turns out the spending knob is much easier to turn up than to turn down, particularly when that’s the only direction we’ve been turning it for decades. And it’s the exact opposite for the taxes knob.
If we’re agreed that the spending knob can’t be turned up forever, then what happens when we run out of time? Do we default on our debt, sending the world into chaos? Do we end up with runaway inflation like in the 70s or worse like in Germany before World War II? I suspect it will be along the lines of the latter, and I suspect it’s already started.
I suspect a lot of things, but a couple of things I know. I know that everytime we turn the spending knob up, the harder it becomes to turn it down, and that this level of spending really can not last forever.
I said “we’re all big spenders now” and by “all” I mean everyone, even you. The kind of big spender who donates to blogs because he likes the content, or just because I asked.
I too remember Perot’s charts. That was about 30 years ago. I also remember the deficit commercials in the 80’s, where a newborn baby had these men in suits show up letting him know his ‘bill’ was something like $30K. Horror! That was 40 years ago. I even remember some CSPAN reruns of the Carter-Reagan debate from 1980 (there was a time when one particular party not currently in the WH actually nominated people for Presidents who had positions based on ideas and a sensible person could think watching debates was useful) talking about gov’t ‘printing money’ to cover deficits….
There was also inflation in the 70’s, now nearly 50 years ago which I was too little to really get direct experience of. Yet the 1960’s were not big spending times, at least not by the standards of today.
One problem here is spending has multiple meanings. For example, consider this statement:
“This is enough money, in today’s dollars, to refight World War II twice over.” Is it? Has Biden proposed drafting 80% of men between 18-45 to, say, build solar panels and run vaccination centers (see https://history.stackexchange.com/questions/12375/percentage-of-the-draft-pool-that-were-conscripted-during-ww2-and-vietnam)? Obviously not. But then how could we be fighting WWII 2x over if, well, no one is doing it? Answer is you’re confusing spending by the gov’t with spending facilitated by the gov’t as a medium. They are not the same thing.
More importantly, I think the last 50 years has simply demonstrated Perot was wrong. I think modern history has demonstrated a few things:
1. National spending and saving does not mimic the dynamics of households, unless you are talking about small nations.
2. Economic growth makes national savings impossible. If having a crystal ball caused the people of 1870 to realize the costs of upcoming WWI and WWII, no amount of impoverishment by cutting spending and raising taxes would have ‘paid for it’. Much like Bill Clinton’s surpluses, they were wiped out the first time anything dramatic hit from Bush’s need to have a tax cut to 9/11/Gulf War/ and 2008 recession. I suspect even in a world of low economic growth, saving like this is pretty much impossible. Like a child trying to protect his sand castle from the tide by building a little sand wall in front of it. It’s cute the first few times but if he hasn’t gotten it by then you may worry about developmental problems.
3. It’s not so much a ‘spending dial’ we should be worrying about because such a dial does not really exist, or it doesn’t really read anything useful. I’ve been told the ‘oil pressure’ guage on some car dash boards is essentially useless. I would imagine a thermostate positioned next to a window you keep open most of the time would also be pretty useless. The metrics we are using to capture things like spending, borrowing and debt are not useful. For example, my Youtube happened to catch a Dave Ramsey snippet talking about how banks are upset that post pandemic credit card balances have fallen 50% in the US. So if you are looking at a ‘spending/debt’ guage pre-pandemic you would see lower on both and say that’s safer, yet would it be safer for a country where a huge portion could not manage an unexpected $400 emergency bill to double their credit card balances? Something’s wrong with how we are measuring this.
4. From a systems perspective, I’m reminded of 2001. If you recall the HAL9000 computer declared the AE-35 unit was going to fail. He stated the failure was 100% certain but the unit would function perfectly until that moment, when it would go out. Contrast this with most other systems like global warming or you becoming overweight and developing diabetes or heard disease.
In those systems you can have runaway catastrophic evens that happen suddenly very fast but if you’re paying even a bit of attention, there are warning signs along the way. If you put even a bit of effort into some monitoring, even more indications of building trouble will be detectable.
Yet it is still possible a system may have an ‘AE-35 flaw’. Everything will work perfectly, until the 2.5 billionth person signs up for Facebook and then the whole Internet collapses to 1990 level and cannot be restored. Such a flaw, though, is effectively outside our control
I came across this article which I thought was interesting reference to the 70s: https://www.project-syndicate.org/commentary/fed-sanguine-inflation-view-recalls-arthur-burns-by-stephen-s-roach-2021-05
As far as your points:
1- Agreed
2- And? I can see where this might mean that there’s nothing we can do about it, but a problem we can’t do anything about is still a problem, and at least we can try and soften the impact even if we can’t prevent it.
3- I definitely think there’s a spending dial, though I would agree that it’s not directly tied to the federal budget. I think it’s how much money we’re comfortable spending and that amount has gone way up. And to return to point to, even if we can never save could we have at least slowed down the rate at which this amount went up, and forestalled doom long enough to do something cool like invent fusion power?
4- I’m not saying that disaster will strike without warning, I’m saying 1) we may already be getting these warnings and 2) that if we wait until the problems are obvious it will be too late.
I think the Burns take is important. What I see in it is special pleading. Kind of like saying your team would have won but for that bad call or field goal. Yes but can you also perceive breaks your team got and also factor them out? Did Burns take items in the CPI out that also had special, non-monetary stories, to explain their decrease in price and remove them? It seems he only filtered out data that cut the way he didn’t like and justify it with explanations he felt justified removing them post facto. This temptation happens in clinical studies. Doctor is testing some treatment but he feels a patient who died wasn’t really a fair test because he had so much else wrong so he excludes him from the final results improperly.
As we agree on #1, that just leaves #2 and #3.
#2, I would say yes there is nothing that could be done. If the people of 1870 were told about the cost of the two World Wars, there is nothing they could have done to prepare for that. Yes they might have avoided the World Wars themselves if they were provided details of the next 50 years of history, but if they were just told “something” would cost X Trillion, then there is nothing that could have been done. Such information would be as useful as being told your great-great grandson will have a gambling problem in his late 70’s.
#3 I feel like the spending dial is just connected to cash outlays which miss something real. That’s why I noted no one is drafting 80% of young men to do things for the Federal Gov’t despite this claim we are ‘fighting WWII twice’. Who is fighting it? Where is, say, the shutting down of every car company in the US in order to make solar panels or vaccines? In WWII there were no new cars made for half a decade or so.
If you say something will cause a disaster, the AE-35 Flaw argument is a type of fallback. Everything will be fine until it fails. HAL-9000 was pretty fair, he limited himself to 72 hours before it failed. Presumably every part on the ship would fail at some point in the future but 72 hours is pretty limited. They could have just played along with him 3 more days and possibly have avoided pissing him off and getting almost all of them killed.
But a non AE-35 flaw is going to require not just warning signs but a set of predictions that say what sequence and intensity of signs indicate the impending problem, and how to tell the difference between the price of gas going up $0.50 because inflation is hitting versus all the other times gas goes up $0.50 w/o inflation.
So given the conversation so far:
If warning signals do not appear to be flashing, then that would imply an AE-35 flaw hypothesis.
If warning signals may be flashing, but we do not know how to recognize them or they may be so subtle that we’re not sure we really see them, that would imply we have an AE-35 hypothesis.
If we have some other potential problems, and there warning signals appear to be sounding and are more clearly flashing (although some could make increasingly convoluted cases that they are just misfiring)…then that would seem to imply we should put the first issue on hold as more likely AE-35 and address the first? Agreed?
Now application problem: Borrow $1T today to decarbonize the economy as much as possible. Yes or no? This is an either or problem, no alternative is on the table to, say, raise taxes $1T to pay for it without debt.
Think I lost a comment. Let’s push the discussion into actual application:
1. If a warning sign is ‘maybe there’ but we don’t know how to read it or see it, that sounds like a potential AE-35 flaw.
2. If we see warning signs for problem A, but we either don’t for problem B or we are in situation 1 for problem B, you seem to imply we should confront problem A. After all, what’s the point of warning signs?
3. So now, $1T to decarbonize the economy financed by borrowing or nothing. Which choice would you take? Assume this is a choice you must make, other options like pay $1T via taxes are off the table given your position of power.
I’m currently reading “Theory and Reality”. It’s an introduction to the Philosophy of Science. I just finished the chapter on Kuhn and his theory of paradigms and paradigm shifting. And how people operating from a different paradigm often seem to be talking past each other, that they each have languages which are not mutually comprehensible. It reminded me of our current political situation, but I also think it’s a good description of this discussion as well. Under the old paradigm there’s warning bells all over the place. Under the new paradigm of MMT and MMT adjacent thinking, inflation is low and so if there is a flaw it’s as you say an AE-35 flaw. I’m deeply suspicious of the new paradigm, in particular I think we may have gotten very good at fighting visible inflation, but that inflation is a little bit like whack a mole, and we’ve gotten really good a hitting it when it pops out of one hole, but there are lots of holes it could pop out of it. That’s why I thought the Burns article was so interesting, if we’re willing to redefine inflation until it matches our expectations then we might miss it.
As far as your decarbonization question. I would not borrow $1T. But I think that’s mostly because I don’t think government spending is the right way to accomplish the goal. I would prefer carbon tax, and an updating and simplification of nuclear power regulation.
Speaking of paradigms, as I think about it the one that makes the most sense to me is that we’re in a bubble. There’s all sorts of warnings we’re in a bubble, and if we want to deflate the bubble there are ways to do that, but pumping more air in is not one of them.
Speaking of Kuhn, a good companion book would be “The Ashtray (Or the Man Who Denied Reality)” by Errol Morris. Morris a director known for A Thin Blue Line and A Brief History of Time, but he once as a grad student at Princeton and had Kuhn as his graduate advisor. Kuhn booked no dissent and oneday threw an ashtray at him (see how much safer academia has become now that smoking is banned everywhere!).
You’re right, Kuhn didn’t just argue that one paradign pushes out an older one, but the two are so different they ultimately cannot communicate with each other. A physicist raised under Newton’s mechanics, cannot talk to one raised under Einstein. The only reason Einstein prevails today is because Newtonian only physicists are now dead and out of the game. Morris points out this ends up being a lot more relativistic than people think when they first hear of Kuhn. Ultimately there is no objective description of reality as opposed to a continuous improvement in descriptions as new paradigns fix the flaws in old ones. A major debate is did Kuhn really believe paradigns were incommensurate with each other or just that advocates of different ones are really stubborn?
I don’t think, though, that MMT and 1970’s era monetarism are incommensurate. The MMT person will point out “you said if money supply rapidly expands, there will follow rapid inflation. It did and it hasn’t. Your theory has a problem”. But then I think Einstein would be able to say to Newton “Your theory says if I have accelerated a billard ball to 3/4 the speed of light and I then apply equal force to it, I should get the ball up to 1 1/2 the speed of light. I don’t, instead the energy just pours into the ball and it gets more massive. Your theory has a problem”. Newton might call him a dingbat and throw something at him, but Newton in theory could understand what Einstein is saying. The ashtray is not a philosophical problem, its a personal one IMO.
There is no theory of bubbles in traditional economics. Milton Friedman would say in the 1970’s, if you increased money supply, it would spill into all the goods and services into the economy bidding up prices. It would not spill into just Gamestop stock or Bitcoin. In fact he would say even if the gov’t printed money and brought those things directly, people selling those things for higher prices than they expected to get would run out and use their profits to buy things like hamburgers and new cars still causing prices in general to rise.
There is no economic theory of bubbles and no theory of how gov’t is supposed to ‘pop bubbles’ in the economy. There have been central bankers who using gut instinct declared things like ‘the stock market’ were overvalued and tried to prick them. This seems very much like ad hoc gov’t price setting without much theory or method behind it.
I think while you tried to dodge my hypothetical with great skill, you did still trip up on it. You advocated a carbon tax combined with deregulation of nuclear power. But what if you thought debt was the bigger problem? You’d present your solution as a carbon tax to cut the debt which might offer the side benefit of addressing warming.
While you didn’t say your carbon tax would be offset elsewhere, I think your emphasis does reveal you’d address global warming as a priority as it has actual warning signs while either debt or bubbles seem to be living as a AE-35 unit issue.
This might be where we have an eschatology issue. If we say the universe has, say, another 50B years in it and humanity is on its first 0.001B years, AE-35 issues might be scattered out there on the time line the way prime numbers are scattered on the number line. Unlike the ‘great filters’ in the Drake Equation, AE-35 filters are by definition unknowable, the only way to deal with them is to encounter them and see what happens.