Chomskyesque

I have a love/hate relationship with Noam Chomsky.

On the one hand he is a public intellectual and promotes the erudition that made me love academics. I loved listening to his lectures and these were a primary target of my searches as an undergraduate student on what seems a very primitive internet back in the 1990s.

On the other hand his logic always made me feel sick, just like eating too much pizza with extra pizza sauce. I would choke on some of the claims and verbally exclaim, "come on!," when he was opportunistic with facts or skipped over several steps in logic.

Still, I maintained a fascination with Chomsky. He was what I imagined a good representative of the left's sympathies would be. He also had better logic than that on cable news. For a young student, this was enough.

Recently, Diana has been frustrated at Brad DeLong's status as a public intellectual. We listened to an op-ed read by voice software over dinner the other night (note that link is to a Soros funded media aggregator). His claims seemed to be incomplete. He filled in the gaps with narrative meant to embellish and compel listeners to a certain interpretation. When I say that he is opportunistic with the facts, I point specifically to his description of Greece and his volte face in his commentary on England. See for yourself. I am happy to discuss this in the comments.

What strikes me as unusual is that he lampoons the new Prime Minister's position on expectations. Given the changing position on sovereign debt in the world, it seems like DeLong's claim: low interest rates are a signal to borrow as much as you can temporarily cheap money; is misleading. Presumably, and admittedly I am reading this into his column, DeLong wants to grow the scope of government with the use of bonds rather than taxes in the current period. But we know that as debt grows the interest rate will rise (simple a priori economics, supply and demand). In the future, taxes will have to rise if rolling the debt over into new forms is not a possibility because of higher interest rates. What DeLong omits is that this would be contractionary at some point in the future. With Keynes firmly in his corner, he seems to think that we will be richer in the long-run and therefore can afford contraction in the future.

To counter DeLong's claims of the banality of the bond-spending policy please see "Democracy in Deficit" which explains why our democratic system will expand the budget to the limit systematically.

But you really don't have to think that hard to dispense with the bond-spending policy. All you really need is the identity: "g > r" (thank you T. Cowen). That is, that if growth is greater than the interest rate, everything is fine. As long as continued government spending increases growth in the economy, then you are OK. So let us examine what this means in more detail.

I teach my students that the first thing that the government does has the highest rate of return. The folks at the government are here to help, at least given their stated intentions. Rule of law, (e.g. providing a legal system, contract enforcement, and transparency) is a really high rate of return items. It is tricky to implement, and we can go a great deal of political philosophy on the specifics, but the return is there and high.

Studies also show that rate of return on things like infrastructure are quite high. We can debate the knowledge problem and talk about private provision, but we don't dispute the rate of return -- if government does it, it will produce economic growth. As we move down the line the rate of return argument starts to fall away as the government controls resources and actually destroys more information through the implementation of plans than is justified by the free-rider problem of "market failure." At some point the rate of return measured in growth is lower than the interest rate because of the distortions of centralized decision making. We can debate where this is, but I just assert it as a theoretical approach.

Now DeLong seems to argue that government growth is consistent with rates of return that are always in excess of the interest rate -- so he doesn't worry about this problem. But, picture a world where interest rates double or triple, as they would with an increased risk of a sovereign debt crisis. Once interest rates start their upward journey they are likely to rise quickly as the unraveling begins. The debt service portion of the budget would rise if the country tried to roll the debt over into new bonds which are priced higher (from the G, perspective).

So issuing bonds would be less attractive. Taxes would have to rise to service the debt that is coming due because we would not want to issue as much new debt. Spending would start to be cut for the same reasons, we have been financing spending through bonds for a very long time. As we cut programs, and we assume that we cut the lowest rate of return programs first (a bad assumption if we want to preserve social programs which don't necessarily show up in rate of return arguments) then we unravel. The growth continues to fall, the interest rate continues to rise and the situation has become critical. All remaining productive capacity in the economy goes to servicing debt.

This story can lead to a miserable period of low growth or to the collapse of the government as a result of fiscal crisis. Encouraging this outcome by becoming a cheerleader of borrowing to spend is strange, even from a politically committed economist. It is even stranger when we consider some very interesting global dynamics.

The BRIC countries are growing. I love this increase in happiness BTW, but this means that Brazil, Russia, India, and China all are slowly becoming self-sufficient. As people there get rich, they will start to consume their own products. Rather than throwing American Dollars back into the treasury securities as China has been doing for decades, they can start selling products domestically and to each other eroding the need for their high rates of saving and the vehicle of aggregate saving they have been using, the US treasury. This also implies that interest rates will rise.

The long-term picture seems to suggest that bonds will be less useful in policy outside of the short-term (I am biting convergence theory heavily here). While DeLong is technically right, we CAN borrow. The implicit argument that we SHOULD borrow is not a positive argument. He is politicking and not producing economic analysis.

The reason I relate this to Chomsky is that, it is strangely fascinating to peak underneath this argument and view it as the state-of-the-art for a public intellectual. This term, public intellectual, therefore becomes pejorative. While it is important in guiding the debate, I think it is rightly viewed by the academy as contemptuous. I propose we label this Chomskyesque, to reward the rhetorician and path-breaker who paved the way.

Aside: Please view this post on Chomsky from DeLong which is particularly ironic