Shadow Government

A curiously selective economics rethink

The policy world has turned on Ken Rogoff and Carmen Reinhart with a vengeance. The two are the celebrated authors of multiple studies showing that very high levels of government debt have historically been associated with slower growth. After a review of one of their articles revealed a spreadsheet mistake, the ever-temperate Paul Krugman was driven to ask: "Did an Excel coding error destroy the economies of the Western world?"

John Maynard Keynes once said that "even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist."Apparently, this bondage is felt even more acutely when those practical men are in the thrall of a living, breathing pair of economists. Now that Rogoff and Reinhart have been discredited, the thinking seems to go, the masses who had been suffering under the yoke of austerity are now free to spend as they had always wished.

There are a number of reasons to see this as an overreaction. The episode is a bit analogous to a researcher finding that a daily Twinkie adds 10 pounds over a year. A subsequent study finds that, with different methodology, a daily Twinkie might add only 5 pounds over a year. Then the baying pack howls that they knew Twinkies were good for you all along, they abjure dieting, and stuff themselves with cake and cream filling. [Reinhart and Rogoff respond to the criticisms and put the dispute in the context of a broader literature without resorting to any talk of dessert cakes.]

An odd strain of the discussion has been the implication that the only restraint on unbounded budget deficits has been the Reinhart-Rogoff admonition that it could slow economic growth. In fact, there are other constraints. How much can Portugal or Greece or Cyprus spend beyond current tax revenue? They can spend the money they have in savings (negligible) plus the amount they can borrow in the open market (negligible) plus the amount that other countries or international financial institutions (IMF, ECB) are willing to lend them. The limitation, then, is not Harvard researchers' findings but rather the willingness of other leaders to risk their funds, as their thoughts teem with admonitions about "sending good money after bad."

Of course, countries such as the United States, France, or the UK can borrow on open markets. That does not free them from all non-academic constraints, however. If borrowing is excessive, a country begins to look riskier. The United States was downgraded in 2011, France in 2012, and the UK last week. Even the IMF, cheering now for a spending boost, has argued for offsetting medium-run budget cuts.

The Reinhart-Rogoff episode has prompted deeper ruminations about how grounded our economic beliefs really are. In the Wall Street Journal, Carl Bialik elicits a confession from the editor of the American Economic Review that peer review rarely involves line-by-line checks of authors' calculations. Bialik lays bare some of the inherent vagaries of working with historical macroeconomic data -- there are no controlled experiments and the numbers can be unreliable.

It is thoroughly healthy to review the limitations of empirical macroeconomics. It is the part of economics that deals with the most moving parts and has the least opportunity to isolate treatment effects from confounding variables. Economics does far better as a field when conditions are more favorable -- predicting how an auction will work, for example. Yet citizens and policymakers want to know what will happen with inflation, unemployment, and growth, and how these will be affected by government spending, taxes, and the money supply. These are all macroeconomic questions.

Let's stipulate, then, that macroeconomic point estimates should be treated as somewhat fuzzy. That was always acknowledged in the formal economics (standard errors), but it does not usually make for good newspaper copy. If multiple studies, using different data sources and different techniques, find similar results, then we will have steadily more confidence in those findings. This has always been true too, though in public debate participants tend to prefer a single bold study to a lengthy lit review.

The newfound caution about macroeconomic findings has, so far, been curiously selective. Foes of austerity argue that, after slaying the dreaded Reinhart-Rogoff result, they are not even bound by warnings of credit downgrades. After all, if only we adopt new fiscal stimulus, it will promote growth and pay for itself (debt/GDP will fall as GDP rises faster than debt).

How do we know this? Why should we believe that the stimulative effects of new spending will overcome people's worries about the new taxes that will inevitably follow? How can we calculate how much stimulus is appropriate? Are tax cuts or spending increases more appropriate? If we do not see booming economic growth after stimulus has been tried, how will we know that the stimulus was worthwhile, that it saved us from an even worse fate?

We have macroeconomic findings. Precisely calculated macroeconomic findings. Based on historical data. Published in peer-reviewed journals. Worked out on spreadsheets. Let the spending commence.


National Security

North Korea’s growing missile threat

While America's attention has been drawn to last week's terrorist attack upon Boston, events in North Korea continue to be cause for concern. The revelation last month that North Korea has taken "initial steps" to deploy a mobile intercontinental ballistic missile, the KN-08, and the disclosure earlier this month that at least part of the U.S. intelligence community believes "with moderate confidence" (in intel-speak) that it possesses the ability to deploy a nuclear warhead atop the missile highlight the threat that Pyongyang poses to the United States. 

It should come as no surprise that North Korea possesses, or will soon possess, the ability to strike the United States with a nuclear-armed ballistic missile. After all, U.S. government commissions, U.S. and foreign intelligence agencies, and defense analysts have been warning of this eventuality for more than a decade. Pyongyang has been working on nuclear warheads for two decades and has conducted three nuclear tests. Both Israel and South Africa, by contrast, developed nuclear warheads for their missiles without conducting any nuclear tests. Moreover, as Peter Pry noted last week, the United States has possessed for more than fifty years nuclear missile warheads smaller and lighter than the satellite that North Korea lofted in December. 

Skeptics will argue that North Korea has yet to demonstrate it has the ability to deploy nuclear warheads atop its ballistic missiles. Fair enough. But policy makers should not have to wait for Pyongyang to test a nuclear-armed ICBM to respond -- particularly when countermeasures are likely to take years to come to fruition.

The very real threat posed by North Korea has thrown into sharp relief the Obama administration's zig-zagging on missile defense. After coming to office, Obama's team scrapped the Bush administration's missile defense plan, putting in place the Phased Adaptive Approach that promised to deliver more effective missile defense based upon yet-to-be developed interceptors such as the Standard Missile 3 IIB. 

Some analysts suspected at the time that the Obama administration was engaging in a game of bait-and-switch, junking a missile defense system based upon proven technologies in favor of a supposedly better one down the line that it would then fail to fund. It thus came as something less than a surprise when, in a move largely missed by the major news outlets, last month Secretary of Defense Hagel announced the cancellation of the final phase of the missile defense plan while promising to beef up the Bush-era missile defense site at Fort Greely, Alaska. These interceptors will not be deployed until 2017, however. 

Enhancing U.S. missile defenses in response to North Korea's nuclear missile program would appear to be warranted, but it alone is likely to prove insufficient.  The United States should consider enhancing its ability to strike North Korea, including its leadership and its ballistic missile launch infrastructure. As former Secretary of Defense William Perry and current Deputy Secretary of Defense Ashton Carter wrote on June 22, 2006:

"Should the United States allow a country openly hostile to it and armed with nuclear weapons to perfect an intercontinental ballistic missile capable of delivering nuclear weapons to U.S. soil? We believe not."

Perry and Carter went on to argue in favor of a pre-emptive strike on a North Korean test missile on the launch pad. It would be worth asking Carter whether he continues to hold this view.

Finally, the United States should explore ways to enhance its extended nuclear deterrent of its allies, particularly South Korea and Japan. The Obama administration's 2010 Nuclear Posture Review scrapped the nuclear variant of the Tomahawk missile, which Tokyo looked to as the embodiment of the U.S. nuclear guarantee, and yet is years away from fielding the variant of the F-35 strike aircraft that will be capable of carrying nuclear weapons. Reassuring U.S. allies in the face of North Korean nuclear threats is likely to be both vital to stability in the region and an increasingly challenging task.