A new book at my library caught my eye — “The Deficit Delusion: Why Everything Left, Right, and the Supply Side Tells You About the National Debt is Wrong,” by John Tamny. I was not familiar with Tamny, but he is Editor of the RealClearMarkets website. I would not describe this article as a review, rather I just want to outline what I see as major points in the book (which I am not too convinced about).
The angle appears interesting in that we have a pro-free markets person arguing that we should not need to worry about the American government defaulting on its debt. Given that there is a Republican in the White House, it is perhaps timely for free marketeers to pivot away from debt worrying. The author has fun skewering the professional government debt worryers that dominate “serious” fiscal analysis in the United States.
Too Much Reliance On Market Efficiency?
The following quote (from page 19) is a key argument of the book:
How, if the United State is bankrupt, can it borrow so much now, and according to the CBO, well into the future? Hopefully the answer to this question is a little bit clearer at this point. The answer is that — love or hate government borrowing — the United States is not bankrupt. Quite the opposite. Since exceedingly few throw away money or disdain potential returns, there’s no way the United States could keep borrowing trillions a year now and into the future if it were bankrupt. Sorry, but there’s not nearly enough dumb money in the world to fund all the United States’ borrowing.
This is one of the few times that I am aware of a pro-free market person pointing out that the same people who argue that markets are efficient are also prone to arguing that government bond markets are wildly mispricing the risk of default.
(Note that there might be better expressions of his this view in the book, but the text has a tendency repeat the same points, so I picked the first example I found when I started writing.)
Although I do not disagree with the sentiment, it faces an obvious rebuttal. Historically, the American government listened to the debt doomsayers, and so it did not push the bounds of fiscal propriety in peacetime. (In World War II and its aftermath, the U.S. government used “financial repression” and rationing to allow government war finance to function.) As financial disclaimers say, past performance does not guarantee future results.
The argument also ignores the obvious reality that some governments borrowed for extended periods peacefully then succumbed to financial crises. (These crises tend to be tied to currency pegs, which is a point that proponents of Modern Monetary Theory (MMT) would highlight.)
Equity Finance
The book is filled with an inappropriately large discussion of the financing of start-up firms. These anecdotes allow the author to offer flowing tributes to the entrepreneurial genius of rich people, but do not tell us much about government finance.
Tamny’s point can be summarised that the rate of interest does not matter to entrepreneurs at start-ups, as their businesses are so risky that they can only get equity finance. Since most large firms were originally small, one could try to argue that equity finance is the only thing that matters in capitalism. since it is at the root of growth.
However, even cursory knowledge of the national accounts tells us that equity financing is not relatively important within the national economy. (Equity market capitalisations are large — but the amount of financing raised is typically a very small proportion of market caps.) The modern favouring of stock buybacks means that net equity financing is typically negative. Meanwhile, established firms and the household mortgage market have extremely large gross and net debt financing flows.
Start-ups might be largely decoupled from interest rate markets, but they are small, and thus have a small economic weight (even if they catch the imagination of the financial press). So we cannot use their experience to say much about the effects of interest rates on the business cycle.
Pre-Keynesian Economics
The reason why I decided to not position this article as a review is that the theoretical basis of the discussions appear to be a variant of pre-Keynesian economics. Rather than trying to find compact quotes, I will just paraphrase the arguments as best I can.
The argument is made that only supply matters — demand (which are treated as equivalent to “desires”) is unlimited. This would be a plausible way of viewing the economy if production was always at full capacity, so we have a fixed real output that has to be allocated amongst “agents” in the economy.
A related point is that money is seen as being “real,” as exchange is always “goods for goods.” (Think of “money” as being gold — which needs to be mined and refined, as opposed to electronic entries on banks’ computers.) The U.S. dollar is real money because of the success of the American economy (and the ability of the American Federal Government to tax that ever-growing economy), while Russia and other dubious states like North Korea allegedly use American dollars because their economic prospects stink. (Business people supposedly do, but what about the rest of the economy?)
Although real goods matter, my argument is that we cannot ignore monetary constraints. Wages are paid in dollars, sales are made in dollars, and debt contracts are denominated in dollars. Dysfunctional monetary situations can happen independently of what is happening to real production. Given the gulf between my views and Tamny’s on this basic theoretical point, it would take an inordinate amount of my readers’ time to cover his theories in detail.
MMT Gets Mentioned (Yay?)
One reason that the book caught my eye was its title. A book entitled “The Deficit Delusion” released five years after Stephanie Kelton’s best-selling “The Deficit Myth.” I assumed that there had to be a call back to Kelton’s book, but nope. That said, MMT gets mentioned, but the previous theoretical issues shows up. He summarises the MMT position relatively well, but he dismisses it due to his views about money. That is, if you believe that money is a real object, that is incompatible with the MMT/Functional Finance view that the value of money is driven by convention and existing monetary contractual obligations, not real constraints. Even though governments now try to keep inflation at a target level, that does not guarantee that money can be treated as a real commodity in analysis.
Concluding Remarks
The book is written at an introductory level, which may benefit some readers. The problem is that the author is so busy giving us anecdotes about how rich people became rich that he failed to cover even the basic objections to his theory that the American Treasury market is always efficiently prices and there is no prospect of risk-taking preferences changing.
That said, free marketeers who want to have any shred of intellectual integrity might want to start changing their thinking along the lines suggested by this book. Screaming that the Treasury market is going to explode in a ball of flames due to the deficit when Obama is President and then wrack up record deficits under President Trump and arguing that everything is going according to plan is obviously incoherent. That said, I see little hope for intellectual coherence to come back into fashion any time soon.
