From the Lecture Hall: The Euro Crisis and U.S. Debt

Every once in a while, I like to talk about things that my economics professors say in class. My last post about my class was on the history of recessions.

As I've said before, a lot of my criticism isn't directed toward my professor's conclusions - rather how they got to those conclusions. An economics class is supposed to push students to explain and prove why something is happening based off of the tools that we know. And I like to blow the whistle when they relax that requirement.

So yesterday, we're brushing over capital utility and interest rates. Throughout class, my professor enjoys diverging from the material and applying what we're learning to the real world. Of course, this being George Mason, those applications often involve anti-liberal, anti-government, pro-liberty themes.

Yesterday's divergence was about Greece and the United States. We were calmly told that the US was on the same path as Greece given our debt-to-GDP ratio (shown below), and that we should invest $45-50k in gold so that we can get out of the country when it collapses. 

I believe what we have here is a breakage of Noah Smith's Principles of Arguing with Economists: Arguments by accounting identity almost never work. 

Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case the accounting identity acts like a budget constraint. But that is a very rare situation indeed.

My professor says that America will become the next Greece because both dept-to-GDP ratios are on the same path. That sounds like an argument by accounting identity to me.

So that's all scary and everything. But how much is it really telling us? Because while our debt ratios are on the same path, just take a look at U.S. interest rates:

I don't see many people fleeing from U.S. bonds with that trend. I haven't done Macro in a while, so I'm still a little rusty at comparative economics. But what I'm trying to show is that there is more to the Euro crisis than just debt and output. A lot more. Some of these things are applicable to the U.S. (like fiscal policy, interest rates, bond yields) and some of them are not (like the political structure of the EU, monetary unions).

But here's my point. If you're going to tell the class that the U.S. is will become an apocalyptical hell zone in the next few years, don't just casually tell us why. I think we're grown up enough to get the full picture of why you think that's happening. 

From the Lecture Hall: The History of Recessions

Part of what inspired me to write this blog is my ongoing frustrations with the GMU economics department. I'll write a more detailed post about this later, but for now I want to focus on a particular topic raised by my professor.

I'm taking Econ 306 (Intermediate Microeconomics) with Professor Walter Williams, who is a pretty well known economist and public intellectual throughout the nation. He is very intelligent and an excellent teacher. Nevertheless, I feel like I need to write about what he said to our class last week.

Here is a pretty good summary of what he told us:

"If you look at the history, from 1790 to 1920 the government did not respond to or took limited actions against recessions. These recessions would usually last from one to two years, and then naturally  resolve themselves. However, if you look at recessions following 1929, they lasted much longer when the government tried to stop them. In fact, during the depression in 1920, the Harding Administration did barely anything, and the following decade was famously known as the "roaring '20s". So according to that track record, the government has done far more harm than good when it gets involved during economic downturns."

There's a few problems that I have with this conclusion.

1. This analysis is incredibly simplistic and sounds like something a politician would say on the campaign trail, not what a professional economist would say to his students. How could you quantitatively measure the effects of government intervention on recessions by simply looking at which downturns last longer? If you think that government intervention doesn't help the economy, fine. But don't tell your students that by looking at a timeline, you're going to find out why. Economics is about empirical explanations! With proofs, numbers, and logic!

2. I could have easily said that by not acting in 1920, developments in the '20s set the foundation for the Great Depression. Did it? I don't know. But the logic is just the same.

3. The recessions of a pre-globalized, pre-industrialized, pre-Wall Street America must be different from the recessions of the 1900s. So wouldn't it make sense that government policy would have a different affect on each one? Or maybe "modern" recessions have bigger impacts?

A lot of my friends majoring in a math or science like to tell me how economics isn't a "real science." If professors teach their students like this, then they are right.