If you head a big pharmaceutical company and you want to strengthen your patent monopolies to allow you to charge more money for your drugs for a longer time, there is no shortage of economists who are willing to argue your case. If you run an investment bank and you want to avoid regulations and oversight, there are plenty of economists who are willing to attest that government interference will slow growth and cost jobs. If you own a gas or oil company that wants to frack without paying for the damage done to farmland and drinking water, you can find economists to back you too.
In short, in keeping with economic theory, there are plenty of economists who, under the influence of moneyed interests, are willing to put forward arguments that don’t fit the data. For this reason, the public has rightly grown skeptical of economists.
The problem is that the public desperately needs economics knowledge now, when there is a strong need for measures by the government to boost demand and create jobs. The public needs to have economists it can trust to make this case because it involves measures that are counterintuitive.
The basic point is that the government must deliberately spend more money than it takes in from taxes — in other words, run large deficits — in order to create enough demand to get the economy back to full employment. This is counterintuitive because running deficits has the appearance of being irresponsible.
We all know in our own lives that we cannot persistently spend more than our income. This would leave us with large debts and growing interest payments, which would become ever harder to meet. Eventually no one would be willing to lend us more money. At that point, we would really be in trouble, since we would still be consuming more than our income and would have large interest payments to meet as well.
It is only natural that people would extrapolate from their own experience with borrowing and debt to conclude that the government should not spend more than it takes in from taxes. This is where it would be useful to have an economics profession that could explain to the public that the situation of the government is fundamentally different. It does not face the same constraints on borrowing as a household, and it has a responsibility to sustain demand in the economy, which certainly no individual household shares.
The fact that governments with their own currency, like the United States, do not face any near-term limits on borrowing is easy to show. The ratio of government debt to GDP in the United States is just over 100 percent. By contrast, the United Kingdom had debt-to-GDP ratios over 200 percent through much of the 19th century. Japan has a debt-to-GDP ratio of 250 percent and can still borrow long term at less than 1.0 percent interest. Clearly there is no basis for concern that the United States is about to hit some debt cliff at which point it would no longer be able to borrow.
Economists should be able to explain the other side of the story. Since the collapse of the housing bubble, the economy has faced a severe shortfall in demand. There was no plausible source of demand that could replace the $600 billion in lost construction demand when the housing bubble burst or the $500 billion in consumption demand that was fueled by massive amounts of home equity created by bubble-inflated prices. When the bubble burst and house prices fell back to trend levels, consumption fell back to more normal levels.
The combination of lost construction and lost consumption created a massive drop in demand in the economy that could be replaced only by government spending. This is the reason the federal government must run deficits; there is no other plausible way to compensate. In this context the decision not to run large budget deficits is a decision to leave millions of people unemployed or underemployed and to forgo trillions of dollars in potential output.
Inflicting needless suffering on tens of millions of people cannot be viewed as responsible. If economics had as much standing as astronomy, economists would be explaining this point to the public. They would be telling them why the rules for responsible household budgeting are not the same as the rules for responsible federal-government budgeting.
But economists are not scientists like astronomers, perhaps because there is so much money at stake. As a result, the United States and much of the rest of the world is likely to needlessly suffer from the collapse of the housing bubble for many years into the future.