Rate your neighbor's economic attitude

[UPDATE, 10/14/05:  Warren Mosler, the father of what I have dubbed "Type D" thinking in this article, sent me a summary description that is better than the one I wrote.  I added it in red, several paragraphs below.]

The table below has been evolving in my head for thirty years; during that time, a Darwinian process has been adding, eliminating, and morphing many of the ideas inside that table.  This version is a snapshot of its current state.  It’s still evolving, but I'm publishing it in case you want to assess the economic attitudes of your friends, your neighbors, your spouse, your boss, or your family members.  Come to think of it, you could even use it to classify your own attitude. 

First: Suspend your political biases
It’s important to begin by removing political bias from the analysis, and to focus only on economics.  Why?  Here’s a real-world example: Hard-core Keynesians, advocates of demand-side economics, used to have no problem telling us that “deficits not only don’t matter, they are desirable to reduce unemployment.”  That’s what their thought leaders and nobel prizewinners said in textbooks and policy papers, anyway; Robert Eisner and William Vickrey are two of my favorites.  [...not because I’ve chosen to subscribe to demand-side economics, but because they taught me to think a lot harder before deciding.] 

However, politics has a habit of making demand-side economists clam up about their economic beliefs; many betray their beliefs altogether by switching to politically expedient Type A or B positions (explained below).  The first example is the big-deficit Reagan years: where were the deficits-don’t-matter Keynesians in the late ‘80s?  (‘nuff said?)  The second example begins right around 1997, when their party held the presidency, and their president started telling everybody how great it was to be running surpluses; then, the next president, their enemy, began presiding over huge deficits, which continue to this day.  Result: Nary a peep from most Keynesian demand-siders about the economic benefits of deficits—nary a peep for nine years and counting.  You'd think they were all Type A and Type B folks—but they're not; they're just hiding there temporarily. 

All because of one simple truth:

Politics trumps economics. 

In short, it’s important to think only about the economic preferences of the person your are evaluating; set political biases aside, because they have a nasty habit of leading to a different classification for non-economic reasons.  And with that said, you can now examine the table to decide where your neighbor fits in. 

Type A
If the person you have in mind is a die-hard debt phobe, insistent on paying down the debt—to save our grandchildren from being annihilated when the terrible, fire-breathing beelzebub of debt-reckoning arrives to collect—then you probably don’t have to go much further to classify that person’s attitude as “Type A.” 

Type B
This is another easy one.  Does this person advocate a “Balanced Budget Amendment”?  Stop there, you have almost certainly identified a “Type B” attitude. 

Type C
This one is more difficult, because it contains two groups who usually find themselves opposed to each other politically.  Classifying both as “Type C” is unpleasant politically, but necessary when limiting the analysis to an individual's desired economic outcomes.  Here are the strange bedfellows that coexist in Type C:

Keynesians (or PKTers):  Tend to place low unemployment as top priority, with predictable inflation and higher, demand-driven growth as their other high priorities.  (They love income redistribution, too, but that’s more of a power politics or social issue than economics.) 

Supply siders: Tend to give maximum, free-market-driven growth top priority, with low inflation and growth-driven low unemployment as their other high priorities.  (Contrary to popular misconception, supply-siders consider lower tax rates to be one possible means to growth maximization, not an end in itself.) 

Both groups in Type C conclude that measured deficits are acceptable, even desirable, to achieve the results of high real growth and low unemployment.  Because the two groups have huge, ongoing political battles about how the government should spend the money, it’s easy to miss their common, tacit agreement that measured deficits resulting in a level or declining debt-to-GDP ratio are acceptable, even desirable.  [FYI, I am a “Type C” but I do not accept any labels.]

Type D
This one is a big surprise for me.  I just discovered it recently; “Keynesianism on steroids” is the best description I can think of so far.  I’m not mocking it; on the contrary, it is very thought-provoking, and I’m not done studying it yet.  Don’t be surprised if I end up taking a pass on rating myself as a Type D, but don’t think it isn’t thought-provoking, either. 

A Type D person’s basic premise is this:

Folks, we are in a floating exchange rate world.  Why on earth is everyone’s economic thinking still bogged down in a fixed-exchange-rate, gold standard paradigm?  Deficits are not merely desirable, they are absolutely necessary.

[That was my attempt to summarize it, anyway; below is the definitive summary, from Warren Mosler.]

There is NO financial or funding risk with government deficits.  Operationally, government deficits add to non-government savings and income; surpluses subtract from same.  Either one can be deemed "desirable" as policy options for macroeconomic management.

In short, if the person you're assessing is an advocate of stoking the economy until all slack is eliminated (labor, capital)—never mind the debt, never mind the interest on the debt, hooray for deficits—then you’ve found yourself a Type D attitude.  (Want to find a few?  Read this paper and this paper, then visit this website.)

Lastly
I have a lot more to say about the four attitude types, and I plan to follow up with several more articles on this theme in the future. 

For now, my general observation is this: Notice which boxes are shaded green.  Notice that the Type A and B attitudes are focused on the money, while the Type C and D attitudes are focused on what we get for the money.

Please examine the table and send me an email if you have any ideas how to make it better.