Nine years ago I discovered the writings of economist Paul Romer, father of the "New Growth Theory." He's now on everybody's short list for a future Nobel prize in economics. What a pleasure it was to discover a top expert willing to explain his ideas in plain talk to the rest of us, ideas about the nature and causes of the wealth-creation process. What a relief it is to read economics explanations unencumbered by any thinly-disguised political agenda, and what a contrast that is with the way some other well-known economists choose to communicate. (Here's a sampling of Paul Romer's writings and interviews: Economic Growth article; Reason Online interview; WSJ interview; New Growth Theory interview; In the Beginning was the Transistor. He is a world-renowned economic growth expert, easy to understand, objective, even-tempered, no hidden political agenda. A rare combination; read his stuff, you won't regret it.)
Here's just a snippet from his article, Economic Growth:
Only a failure of imagination—the same one that leads the man on the street to suppose that everything has already been invented—leads us to believe that all of the relevant institutions have been designed and that all of the policy levers have been found. For social scientists, every bit as much as for physical scientists, there are vast regions to explore and wonderful surprises to discover.
[Now, be honest: Isn't that a lot more fun to read than all the politically-inspired sarcasm or gloom-and-doom drivel from everybody else out there?]
Nine months ago I started this weblog partly to see how effective I could be at communicating, in plain talk, the overwhelming importance of economic growth, and the need to elevate it in a public debate that was (sorry, is) hopelessly stuck on the dangerous sidetrack of all-consuming debt-phobia. Frequently when writing, I've paused to envision how Paul Romer might have made a given point, and it has helped improve at least my thought process, if not my end results.
Nine days ago the cacophony of debt phobia and deficit neurosis pegged the needle on the noise meter. Measuring it will soon require seismometers and the richter scale. Every journalist in the country has started jumping onto the economic-catastrophe bandwagon:
Alas, how will we ever pay for Katrina in this fiscal climate?
• Tax rate hikes?
• Porkbusting?
• Federally-guaranteed recovery bonds?
• Borrow even more from the dreaded Chinese?
• Borrow from our grandchildren?
I couldn't write fast enough to respond properly to all the hysteria (not that anyone would have been listening), but here's the short version:
• No.
• Maybe, but be very careful.
• Why not; that'd make them similar to T-bonds.
• Sure, the Chinese love USA T-bonds almost as much as the Japanese do.
• No, that's impossible; I checked my ten-week-old granddaughter's bank balance, and she doesn't have enough money for a T-bond yet. So let's do the opposite: Let's bequeath to our grandkids the Katrina-induced T-bonds we'll buy today, paid for by the extra money we save by not imposing higher tax rates on ourselves—a process the late William Vickrey called "federal recycling of income into investment."
Lost in the cacophony of debt phobia, of course, was any mention of economic growth as a way to boost not only our country's tax receipts but also our country's creditworthiness. In other words—to make the understatement of the year—the fundmental economic premise of this weblog is obviously not propagating as fast as I'd originally hoped. Why not? Have I been wrong all along?
To obtain a reality check, I decided to test my premise with the Growthmeister himself, Paul Romer. Here's what I asked him this week (...it was virtually identical to what I asked James K. Galbraith and N. G. Mankiw four months ago):
I'd like to know if you agree or disagree with the following premise: We can comfortably sustain permanent deficits, as long as GDP grows at least at the same rate as the debt ...in other words, as long as the debt-to-GDP ratio remains level or declines. Don't pull any punches.
Here's how he responded:
I do agree. It is a very important point. In my lectures, I ask students to pay much more attention to the debt to gdp ratio than any measure of the deficit.
I was relieved to get that response—because frankly, if it had been different, I'd have a whole lot of rethinking to do. As it is, you can expect me to continue updating the National Debt Thermometer each month, and to continue hammering away at the theme of economic growth here at this weblog. (I'm already picturing some future headlines, such as: "Which is better: $8 trillion debt in a $12 trillion economy, or $800 trillion debt in a $1.2 quadrillion economy?" If you have other ideas, the suggestion box is open.)
Anyway, now that Paul Romer has recharged my batteries, I'll end with two quotes from the late Robert Eisner's lucid, concise little book, The Great Deficit Scares; the first is about the fiscal deficit, the second is about the trade deficit:
• Deficit paranoia and budget-balancing mania can be dangerous, extremely dangerous, to our economic health. [...here I would add: "and also to our national security."]
• If exchange rates are free to play their ultimately equilibrating role, and if government follows appropriate fiscal and monetary policies at home to achieve maximum employment, Americans have nothing to fear from trade deficits, deficit in the current account, or net foreign investment in the United States. Like the concern about budget deficits, such fears are illusory.
