Economist Gary Becker – “On the Debt Ceiling” (Becker-Posner Blog)

A recent post in the Becker-Posner Blog (http://www.becker-posner-blog.com/) features the economic point-counter point discussions of University of Chicago Economist Gary Becker and legal scholar and Federal Judge Richard A. Posner.  A recent post by Gary Becker deals with the issue of the U.S. Debt Ceiling.  Gary Becker’s homepage is found here.

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Following are some excerpts from Gary Becker’s latest post (1/20/2012) titled “On The Debt Ceiling“, posted at the following web address: http://www.becker-posner-blog.com/2013/01/on-the-debt-ceiling-becker.html

On the Debt Ceiling-Becker

Various attempts have been made to introduce rules that limit the aggregate level of federal spending, such as restricting the growth in spending over time to be no greater than the growth in GDP (aside from wartime and other emergencies). Balanced budget proposals do not limit spending per se, but require that enough taxes be raised to cover whatever level of spending passes the legislature and chief executive. However, neither spending limits nor balanced budget rules have ever received enough votes from Congress, although many states and local governments do require a (nominally) balanced budget.

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The “debt ceiling” is much closer to balanced budget rules than to limits on federal spending since it tries to cap the budget deficits that are solely responsible for the growth in debt. As Posner shows, this so-called “ceiling” is not really a ceiling since it can be lifted by a majority vote in both houses of Congress combined with the support of the President. In fact, Congress has raised the ceiling more than 85 times since 1940, and 11 times since 2001.  More economically meaningful ceilings would relate debt to the level of GDP- and perhaps also to interest rates on the debt- since countries with higher incomes and lower interest rates can afford to carry higher debt levels.

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One good reason to have properly defined debt ceilings, even though the President and Congress must approve every piece of spending and taxing legislation, is to force politicians to discuss how this legislation aggregates to produce shortfalls or surpluses between total spending and total tax revenue. Budget deficits are far more common than surpluses in recent decades…..Raising sufficient taxes to cover large and excessive spending would be worse than keeping spending within reasonable bounds while financing some with debt.

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Ultimately, the only way to evaluate debt ceilings is to determine how much they affect the level and composition of spending and taxation. That would not be easy to do in a credible way because of the difficulty in determining the counterfactual; that is, what would have been spending and taxation by the federal government in the absence of the debt ceilings?

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While federal government spending in real terms has grown manyfold since the end of World War II, the ratio of debt subject to the debt limit to GDP was a manageable 57% in the year 2000. This ratio has grown rapidly since then, especially during the past four years, and it is now about 98%, higher than most other rich countries. Clearly, debt ceilings have not prevented spending and taxation from growing significantly over time. Nor would the present ratio of debt to GDP be a big problem as long as interest rates remain low.

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…what counts most for an economy is not the ratio of debt to GDP, but that of government spending to GDP. This ratio will increase or decrease as GDP grows slower or faster than government spending. A decline in this ratio would be achieved if GDP resumes its long-term growth rate of a little over 3% per year, and if the growth in entitlement and other spending were kept under control. It remains to be seen whether the American economy will regain its long-term growth rate, and whether interest groups and politicians will resist the temptation to have government spending continue to grow at a rapid rate.

Economist Milton Friedman’s View re: Government Action and Economic Liberty (Capitalism and Freedom, 2002)

In Milton Friedman’s book Capitalism and Freedom (University of Chicago Press, 2002), he addresses the question of ….”How can we benefit from the promise of government while avoiding the threat to freedom?” (pages 2-3)

 

 

East Fork River, Denali National Park, Alaska, USA

 

“Two broad principles embodied in our Constitution give an answer that has preserved our freedom so far, though they have been violated repeatedly in practice while proclaimed in precept.”

“First, the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow-citizens: to preserve law and order, to enforce private contracts, to foster competitive markets.  Beyond this major function, government may enable us at times to accomplish jointly what we would find it more difficult or expensive to accomplish severally.  However, any such use of government is fraught with danger.  We should not and cannot avoid using government in this way.  But there should be a clear and large balance of advantages before we do. By relying primarily on voluntary co-operation and private enterprise, in both economic and other activities, we can insure that the private sector is a check on the powers of the governmental sector and an effective protection of freedom of speech, of religion, and of thought.”

“The second broad principle is that government must be dispersed.  If government is to exercise power, better in the county than in the state, better in the state than in Washington. If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and though few may take this step, the mere possibility acts as a check.  If I do not like what my state does, I can move to another.  If I do not like what Washington imposes, I have few alternative in this world of jealous nations. ”

“The very difficulty of avoiding the enactments of the federal government is of course the great attraction  of centralization to many of its proponents.  It will enable them more effectively, they believe, to legislate programs that – as they see it – are in the interest of the public, whether it be the transfer of income from the rich to the poor or from private to governmental purposes.  The are in the sense right.  But this coin has two sides.  The power to do good is also the power to do harm; those who control the power today may not tomorrow; and more important, what one man regards as good, another may regard as harm. The great tragedy of the drive to centralization, as of the drive to extend the scope of government in general, is that it is mostly led by men of good will who will be the first to rue its consequences.”

Milton Friedman’s critique of JFK’s “Ask not what your country can do for you – ask what you can do for your country”

“Ask not what your country can do for you – ask what you can do for your country.” John F. Kennedy, Inaugural address, Friday, January 20, 1961. (see further info on JFK’s inaugural address here: http://www.presidency.ucsb.edu/ws/index.php?pid=8032 )

President John F. Kennedy’s Inaugural Address, January 20, 1961

Americans of all political and personal persuasions need to sincerely appreciate the work and service and sacrifice of former U.S. President John F. Kennedy.  That said, in the introduction on pages 1-2 to “Capitalism and Freedom” (1962), Economist Milton Friedman gave his thoughts and constructive critique on how a free man in a free society should respond to former President John F. Kennedy’s famous quote in his 1961 inaugural address.

No disrespect is meant here regarding the statements of President Kennedy or his contributions to our country. But rather the ideas and thoughts of Milton Friedman regarding this famous statement are particularly relevant to the role of the individual citizen in relation to the government in the United States today (emphasis in terms of bold, underlined, or italicized text are mine)

   “In a much quoted passage in his inaugural address, President Kennedy said, ‘Ask not what your country can do for you – ask what you can do for your country.’  It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not its content.  Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society.”

“The paternalistic “what your country can do for you” implies that government is the patron – the citizen, the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny.  The organismic, “what you can do for your country” implies that government is the master or diety – the citizen, the servant or votary.” 

“To the free man, the country is the collection of individuals who compose it, not over and above them. He is proud of the common heritage and loyal to common traditions, but regards government as a means, an instrumentality – neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served.  He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve.  He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.”

“The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us achieve our several goals and purposes, and above all, to protect our freedom?” 

“And he will accompany this question with another: “How can we keep the government we create from becoming a ‘Frankenstein’ that will destroy the very freedom we establish it to protect?“”

“Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power.  Government is necessary to preserve our freedom – it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.”

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Source: Africanliberty.org

President Kennedy’s words were no doubt intended to call, inspire, and challenge we as Americans to more selfless service to our fellow citizens – and he and his legacy are to be commended for them.  However, here Milton Friedman provided a wary warning about the leeway that Kennedy’s words of challenge and inspiration allow for the misuse of concentrated government power in inhibiting and limiting the economic and political freedoms of free people in free societies – such as is the United States.

“U.S. Unemployment Rates and FED/Central Bank Policy (Becker on “Becker-Posner” Blog)

The Becker-Posner Blog (http://www.becker-posner-blog.com/) features the economic point-counter point discussions of Gary Becker and Richard A. Posner.

Gary Becker is University Professor Department of Economics and Sociology Professor, Graduate School of Business at the University of Chicago.  He was awarded the Nobel Memorial Prize in Economic Sciences in 1992 and received the United States Presidential Medal of Freedom in 2007. He is currently a Rose-Marie and Jack R. Anderson senior fellow at Stanford University’s Hoover Institution.  His homepage is found here.

Richard A. Posner is a legal scholar and Federal Judge on the United States Seventh Circuit Court of Appeals, and Senior Lecturer, University of Chicago Law School.  His home page is found here.

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Following is and excerpt from Gary Becker’s latest post (12/16/2012) on “The Unemployment Rate and Central Bank Policy“, posted at the following web address:

http://www.becker-posner-blog.com/2012/12/the-unemployment-rate-and-central-bank-policy-becker.html

The Unemployment Rate and Central Bank Policy-Becker

Low inflation and “full” employment have been statutory goals of the Federal Reserve for the past 35 years. Often, however, inflation received the most attention, as when former Fed chairman Paul Volcker in the early 1980s sharply raised interest rates and put the economy in recession in order to wring inflationary expectations out of the system.

On December 12th, Ben Bernanke, the chairman of the Fed, indicated that the Fed would pursue what one might think is simply a variant of the full employment target by keeping nominal interest rates close to zero until the US unemployment rate dips below 6.5%-it is currently 7.7%- or until inflation is forecast to exceed 2.5%. The challenge facing this proposal is that while an unemployment rate target may seem to be just the flip side of the full employment target, unemployment can be nudged by other government policies in ways that have little effect on employment.

The present high level of unemployment in the US in good measure reflects the slow rate of recovery of real GDP and employment from its recession levels. According to “Okun’s Law”, the recovery in employment from a recession is simply related to the recovery in real GDP (see the discussion of Okun’s Law in my blog post on 11/4/2012). Okun’s Law implies that a central bank can use the recovery in real GDP as a proxy for the recovery in employment toward a full employment goal.

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The complication is that changes in unemployment rates during business cycles are not just mirror images of changes in employment rates. This has been especially the case during the Great Recession. By definition, the unemployed equals the difference between the number of persons in the labor force and the number of persons working. The unemployment rate is then defined as the number of individuals who are unemployed as a fraction of the labor force. It follows from the definition of unemployment that the unemployment rate equals one minus the employment rate (the ratio of the number of persons employed to the number of persons in the labor force). This relation shows that changes in the unemployment rate would be equal to but opposite in sign to changes in the employment rate only as long as the labor force remained fixed.

During business cycles, the employment rate and the unemployment rate do move in opposite directions, but the relation is far from one to one, especially during severe recessions. The reason is that the labor force also changes over the course of a business cycle. Especially during severe recessions, some workers get discouraged about finding jobs and leave the labor force. This would tend artificially to reduce the unemployment rate even when both employment and unemployment did not change. This is why the official unemployment rate is usually supplemented with measures of the “total” unemployment rate that include both individuals who got discouraged and withdraw from the labor force, as well as those working part time because they could not find full time jobs. This total unemployment rate now stands at 14.4%, much above the 7.7% official rate.

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The unemployment rate is also affected by policies that affect eligibility for unemployment compensation, such as the extension of unemployment benefits during this recession to 99 weeks. Such an extension increases unemployment because it encourages individuals to become or remain unemployed in order to collect unemployment benefits for a longer time. The net effect of extensions in unemployment benefits is to increase the unemployment rate differently from any decline in the employment rate.

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A major risk of trying to implement an unemployment target through present Fed policies is that the inflation rate could increase in a futile attempt to bring down further the unemployment rate to a targeted rate, as happened in the 1970s. To its credit, the Fed protected against this possibility by setting its target at a relatively high unemployment rate of 6.5%, even though the rate prior to the onset of the recession in 2007 was well under 5%. The Fed also directly faced the risk of creating excessive inflation by setting its target as no more than 6.5% unemployment only as long as the inflation rate does not rise about 2.5%, a modest rate of inflation.