Listen now (59 min) | In this week’s TGS, my old friend Larry Kotlikoff, an economist at Boston University, is back to talk about some of our most pressing economic concerns. Chief among them is the inflation rate, which has hit a 30-year high. By some accounts, inflation is now threatening to do major, possibly longterm damage to the US economy. But are things as bad as they seem? Larry will take us through his analysis and talk about some other looming economic troubles. If you want to understand how these things work, Larry is your guy.
Prof. Loury - Thanks for posting this. I have listened to a lot of Dr. Kotlikoff's thinking since I saw a video with you and he a while back. I have several questions:
1) Is it appropriate to think of federal income as GDP or Tax Receipts?
2) Would rising rates be all bad? (Especially further out the curve) Wouldn't that make the present value of those future liabilities lower in today's terms? (thus helping Net Debt + Unfunded Liabilities as a percent of GDP) *genuine question I have been thinking about. I'd love to know the discount factor and how sensitive this type of work is to relatively small changes in that factor.
3) Current implied breakeven inflation rates (observed and implied through capital markets) are expected to annualize at 2.92% (https://fred.stlouisfed.org/series/T5YIE) for the next 5 years. That is much lower than the current quarter annualized, but meaningfully higher than recent history. It still implies the basic concern you guys discussed (which as I see it is a very low real return environment). Pretty tough in a 10 year treasury world of 1.6% nominal rates and forward P/E Multiples in the mid-20's.
4) How are the European countries fiscal gaps so much smaller provided their relatively large social safety net programs? (Revenues as a Percentage of GDP are much higher in most of those markets. Do you think that on the margin harms incentives (assuming we move in that direction *which seems inevitable)
5) What are their tax rates particularly on their middle and lower classes?
6) To what extent is dilution of ones currency a material factor in durable inflation particularly in an increasingly global economy?
7) In the scenarios of hyper inflation in the past (Weimar Republic) has rapid divestment of foreign capital (thus the social construct stops being believed in) been a serious contributor? (If so, to what extent are those risks to the US).
To be clear I am NOT a fan of MMT and I generally agree with everything you guys discussed on this. However, I have some general questions that I don't fully know how to answer. You both are subject matter experts and I'd love for you to opine.
I respect both of these men's accomplishments, but I can't shake an underlying anxiety about all of macroeconomics when you can have experts minted with doctorates who hold as widely divergent views on both First Principles and practical recommendations as Kotlikoff, Krugman, Summers, Milton Friedman, Steve Keen, and the MMT people.
This isn't like physicists arguing over "Does the Higgs Boson explain the mass of the universe?" - those guys still have consensus on what kinetic energy is, how strong a magnetic field has to be to create a working car alternator, how you get a rocket ship to the moon, heck, even most of the results of General Relativity and QM is settled, provable, and repeatable in experiment.
You all make compelling arguments on their own grounds and obviously spend a lot of quality time on professional research, but you obviously can't all be right. What are your shared principles, and can you steel-man each other better before dismissing each other's claims?
I don't understand how you can wave away the pork in these bills as an "investment." You mention that the new spending is only $550 over 10 years. But that does not account for the full increase in the fiscal gap. Any increase in the fiscal gap this year compounds based on 6% or so of the budget already spent on interest. Other estimates put the total cost at $5 trillion if the temporary spending measures are made permanent. And there is nothing as permanent as a temporary government program. You know as well as anyone that the 10 year gimmicks are just that, gimmicks to get past rules in the legislature.
You also seem to have some new found faith in the ability of the federal government to execute on its promises of "investment." I would like to point out that there is a federal gas tax, state gas tax, and tolls that are designated for roads which make up a lot of infrastructure. In 2009 the American Recovery and Re-Investment Act was the biggest infrastructure bill since the New Deal. Did all that money evaporate? Do we need to spend $100 billion dollars every year on top of all the money we currently spend on infrastructure? Or is this the opportunity for the new legislation to hand out $$ to their friends?
Money that gets pulled in by the Feds rarely ever leads to anything productive. I am tired of hearing that our roads and bridges are falling apart. Where are these roads? and why are the funds we currently have not going to fix them. This bill is chock full of pork and useless nonsense including a very large tax cut for the rich in the form of the SALT cap increase. You need to read someone other than Radnor Larry.
I had a hard time understanding Kotlikoff's seeming indifference with regard to the spending in Biden's various mammoth spending bills along with his alarm over the long term growth of the fiscal gap. First, it seems obvious to me that you get to a long term fiscal gap only via the smaller amounts of debt you run up due to spending outstripping revenue each year. Second, I suspect a lot of what is in the current spending packages is not in any real sense investment that will increase the nation's productivity and therefore does nothing to ease the handling of the fiscal gap. I understand a lot of annual spending is set by the two big entitlements, Social Security and Medicare. And yes, they are both headed for insolvency. So I suppose the idea is that other "infrastructure" and BBB spending is peripheral. But were we using the revenues to pay for BBB to pay down some of that debt instead, we could be addressing that long term problem instead of largely squandering it on boondoggles.. As to boondoggles, take all that climate related "investment" for example. In my view, it will result only in substituting less efficient for more efficient energy spending, more expensive car production subsidized for the benefit of relatively well off car buyers, wasteful duplication of green energy that will still need to be backed up by coal, gas, and hydro, etc. And with little actual climate related improvement anyway, if climate even is the big problem we are told it is.
Prof. Loury - Thanks for posting this. I have listened to a lot of Dr. Kotlikoff's thinking since I saw a video with you and he a while back. I have several questions:
1) Is it appropriate to think of federal income as GDP or Tax Receipts?
2) Would rising rates be all bad? (Especially further out the curve) Wouldn't that make the present value of those future liabilities lower in today's terms? (thus helping Net Debt + Unfunded Liabilities as a percent of GDP) *genuine question I have been thinking about. I'd love to know the discount factor and how sensitive this type of work is to relatively small changes in that factor.
3) Current implied breakeven inflation rates (observed and implied through capital markets) are expected to annualize at 2.92% (https://fred.stlouisfed.org/series/T5YIE) for the next 5 years. That is much lower than the current quarter annualized, but meaningfully higher than recent history. It still implies the basic concern you guys discussed (which as I see it is a very low real return environment). Pretty tough in a 10 year treasury world of 1.6% nominal rates and forward P/E Multiples in the mid-20's.
4) How are the European countries fiscal gaps so much smaller provided their relatively large social safety net programs? (Revenues as a Percentage of GDP are much higher in most of those markets. Do you think that on the margin harms incentives (assuming we move in that direction *which seems inevitable)
5) What are their tax rates particularly on their middle and lower classes?
6) To what extent is dilution of ones currency a material factor in durable inflation particularly in an increasingly global economy?
7) In the scenarios of hyper inflation in the past (Weimar Republic) has rapid divestment of foreign capital (thus the social construct stops being believed in) been a serious contributor? (If so, to what extent are those risks to the US).
To be clear I am NOT a fan of MMT and I generally agree with everything you guys discussed on this. However, I have some general questions that I don't fully know how to answer. You both are subject matter experts and I'd love for you to opine.
Prof Loury - love your race/social commentary, but please more economics too!
I respect both of these men's accomplishments, but I can't shake an underlying anxiety about all of macroeconomics when you can have experts minted with doctorates who hold as widely divergent views on both First Principles and practical recommendations as Kotlikoff, Krugman, Summers, Milton Friedman, Steve Keen, and the MMT people.
This isn't like physicists arguing over "Does the Higgs Boson explain the mass of the universe?" - those guys still have consensus on what kinetic energy is, how strong a magnetic field has to be to create a working car alternator, how you get a rocket ship to the moon, heck, even most of the results of General Relativity and QM is settled, provable, and repeatable in experiment.
You all make compelling arguments on their own grounds and obviously spend a lot of quality time on professional research, but you obviously can't all be right. What are your shared principles, and can you steel-man each other better before dismissing each other's claims?
Thanks for this. It's nice to hear something different, and I enjoy economics.
Larry,
I don't understand how you can wave away the pork in these bills as an "investment." You mention that the new spending is only $550 over 10 years. But that does not account for the full increase in the fiscal gap. Any increase in the fiscal gap this year compounds based on 6% or so of the budget already spent on interest. Other estimates put the total cost at $5 trillion if the temporary spending measures are made permanent. And there is nothing as permanent as a temporary government program. You know as well as anyone that the 10 year gimmicks are just that, gimmicks to get past rules in the legislature.
You also seem to have some new found faith in the ability of the federal government to execute on its promises of "investment." I would like to point out that there is a federal gas tax, state gas tax, and tolls that are designated for roads which make up a lot of infrastructure. In 2009 the American Recovery and Re-Investment Act was the biggest infrastructure bill since the New Deal. Did all that money evaporate? Do we need to spend $100 billion dollars every year on top of all the money we currently spend on infrastructure? Or is this the opportunity for the new legislation to hand out $$ to their friends?
Money that gets pulled in by the Feds rarely ever leads to anything productive. I am tired of hearing that our roads and bridges are falling apart. Where are these roads? and why are the funds we currently have not going to fix them. This bill is chock full of pork and useless nonsense including a very large tax cut for the rich in the form of the SALT cap increase. You need to read someone other than Radnor Larry.
https://www.crfb.org/blogs/build-back-better-cost-would-double-extensions
I had a hard time understanding Kotlikoff's seeming indifference with regard to the spending in Biden's various mammoth spending bills along with his alarm over the long term growth of the fiscal gap. First, it seems obvious to me that you get to a long term fiscal gap only via the smaller amounts of debt you run up due to spending outstripping revenue each year. Second, I suspect a lot of what is in the current spending packages is not in any real sense investment that will increase the nation's productivity and therefore does nothing to ease the handling of the fiscal gap. I understand a lot of annual spending is set by the two big entitlements, Social Security and Medicare. And yes, they are both headed for insolvency. So I suppose the idea is that other "infrastructure" and BBB spending is peripheral. But were we using the revenues to pay for BBB to pay down some of that debt instead, we could be addressing that long term problem instead of largely squandering it on boondoggles.. As to boondoggles, take all that climate related "investment" for example. In my view, it will result only in substituting less efficient for more efficient energy spending, more expensive car production subsidized for the benefit of relatively well off car buyers, wasteful duplication of green energy that will still need to be backed up by coal, gas, and hydro, etc. And with little actual climate related improvement anyway, if climate even is the big problem we are told it is.