Niall Ferguson is on about deficits. The Newsweek piece is full of fearmongering and frank imperialism---his biggest worry is that "economic weakness is endangering our global power". Well, I guess US global power, despite plenty of abuses, is more benign than most other varieties I could imagine becoming more prominent as it ebbed (except perhaps EU global power)...and could conceivably become more benign if Obama's election ushered in an extended era of sensible, moderately liberal, multilateral policies with the world's wellbeing among their major goals. But the deficit fearmongering borders on the ludicrous, and while he brings in some reasonable points, the quantitative evidence is often missing and the economic reasoning slipshod or missing too. What is perhaps most seriously lacking is a reasonable degree of balance between long-term deficit concerns and the need for deficits in the short term.
Let's take the seriously misleading stuff first. The US economic stimulus is described as "muted" because:
what makes a stimulus actually work is the change in borrowing by the whole public sector. Since the federal government was already running deficits, and since the states are actually raising taxes and cutting spending, the actual size of the stimulus is closer to 4 percent of GDP spread over the years 2007 to 2010—a lot less than that headline 11.2 percent deficit.
This verges on incomprehensible. First, what is he doing with "spread over the years 2007 to 2010"? The stimulus bill was passed in early 2009; spreading it over 2007 and 2008, years in which it was not being spent, to get an apparent lower percentage of GDP, is hogwash. On the other hand, if we take .787 trillion as the size of the stimulus package, and spread it over 2009 and 2010, estimating 2009 GDP at 14.2 trillion and 2010 GDP at 14.697 trillion (a 3.5% growth rate, based on not much but faster than the current pace of recovery; it makes little difference to this calculation), you get a stimulus of about 2.7% of GDP. That's actually quite a bit less than the 4% Ferguson uses. But that's a big boost to aggregate demand. Not as big as it should be given the magnitude of the economic shock we've been hit with, but far from negligible.
I have no idea why Ferguson feels the need to start with the size of the deficit as a candidate for the size of the stimulus, and then cut it down because "we were already running deficits" and because "state and local governments are cutting taxes and raising spending". What matters is the change in the amount of government spending, relative to no stimulus policy. Ferguson would appear to be overestimating the stimulus, perhaps because he's focusing on the idea that "the deficit is the stimulus" and then "correcting" it---but a recession usually increases deficits automatically by decreasing tax receipts, without (usually) a corresponding cut in spending. (Many states, though, now do cut spending in response to recession, often because of balanced budget laws.) So perhaps by doing this he is including some of that recession-induced deficit in his estimate of "the stimulus"...and then reducing his overestimate by spreading it over the two prior years, as well.
The main thing that is misleading, though, is that then he estimates "the cost of this muted stimulus" by using the full deficit. A recession is going to have a fiscal cost even without stimulus---chalking up the full 11.2% of GDP deficit as the cost of a stimulus, whether 2.7% or 4%, is either dishonest or a mistake that is really hard to excuse in an article for a national publication like Newsweek. The fact that he uses 4% as the stimulus figure perhaps results from some mixed-up attempt to be a little less than dumb about this while still using the full deficit as the cost---perhaps this can be thought of as a way of including "automatic stabilizers" in federal spending as "stimulus"...but then arbitrarily damping it down by dividing by the extra years. Anyway, the bottom line is that the variable spending under control of the federal government was increased by 2.7% of GDP, and roughly speaking that 2.7% is the additional cost in current dollars of the additional fiscal stimulus. Actually, the cost is slightly less, for reasons I'll explain shortly. 11.2% reflects the "fiscal" cost of the recession including, but not limited to, the additional stimulus spending. A serious macroeconomic estimate of the fiscal cost of stimulus actually needs to take into account that, if you believe the economic models used to justify the stimulus itself, the stimulus increases GDP and so increases tax revenues, and so partially pays for itself. I haven't done this calculation---lots of people were doing it this spring, and with reasonable figures for multipliers and tax rates---say 20% for taxes and a somewhat generous 1.4 for the spending multiplier---you'd get around a 28% reduction in the total fiscal cost of the stimulus, to around 2% of GDP. And let's not forget that this fiscal cost is incurred in order to obtain an increase in GDP---with this multiplier, of 3.78% of GDP. Let's also not forget that this fiscal cost is not a loss of GDP---it is just an increase in government debt. The GDP gain should be around a full 3.78%---perhaps less, if the stimulus is spread out longer, or the multiplier a bit lower (which it might be because some determinants of spending, like the propensity of businesses to invest, and perhaps of households to consume, may be lower than usual in the current climate of fear), but not less by the fiscal cost.
So, the 11.2% of GDP estimated federal deficit for 2009 (I should check that this is the change in net, rather than gross, public debt) is just not the cost of the "muted" stimulus, in any sense. The "muting" of the stimulus by state budget cuts, etc., is of course argument for more short-term stimulus---for example, aid to states so they don't have to make those budget cuts.
"We are, it seems, having the fiscal policy of a war, without the war." Well, hurrah for that, I say. Better to avert a potential depression, and mitigate a serious recession, with war-footing fiscal policy than to get out of a depression the way we did in the 1940s---with the fiscal policy of an actual world war. Of course we have the Afghan war, and had the Iraq war. Ferguson pooh-poohs these as contributors to the fiscal situation---and here's the second highly misleading bit of his article.
these are trivial conflicts compared with the world wars, and their contribution to the gathering fiscal storm has in fact been quite modest (little more than 1.8 percent of GDP, even if you accept the estimated cumulative cost of $3.2 trillion published by Columbia economist Joseph Stiglitz in February 2008).
Since, despite the "even if" which suggests he doubts these estimates, no other estimates are offered, let's with Ferguson accept Stiglitz' ones, which seem in line with what I recall hearing. Where the heck does he come up with "little more than 1.8 percent of GDP"? Recall that (based on three quarters of official government estimates) I estimated 209 GDP at $14.2 trillion; the total cost of the war comes to 22.5% of this year's GDP! (Just to clarify: this is not the yearly rate of war spending as a percentage of GDP; but Ferguson is comparing national debt to GDP, so we are looking at war debt on the same footing he's using for total debt.) More to the point, the Nov. 25th, 2009 net federal public debt was $7.612 trillion; the estimated cost of the wars thus comes to 42%---nearly half---of the current public debt!!! If you take at face value the CBO deficit estimates for 2019 that Ferguson cites (I have not evaluated them myself), those 3.2 trillion are still 22.4% of the projected 2019 debt of $14.3 trillion---hardly negligible (and they'd look like a higher percentage, if debt service on them were included). I'm guessing the 1.8 percent Ferguson refers to must mean the debt service on the Stiglitz estimate of the cost of the war. But then, since the entire rest of the public debt is less than one and a half times this war cost estimate, why doesn't Ferguson tell us that the cost of servicing it is currently modest, too?
Now, I haven't looked carefully, recently, into the contribution of the tax cuts of the Bush years to the deficits. Early in the administration, they probably helped stimulate the economy out of the post-9/11 recession; but on balance they've added plenty to the deficit and the national debt. By the "radical fiscal reform" we need to forestall the "fatal arithmetic of imperial decline", does Ferguson mean things like the repeal of these tax cuts, and maybe even some modest tax hikes? And could the current low rates private investors afford the US treasury even on long term borrowing, suggest that just maybe, these investors are pretty confident that the US will, eventually, through some combination of health care reform, tax cut repeal, tax increases, and other measures possibly including non-draconian social security adjustments, bring things into reasonable shape in the medium term, averting Ferguson's calamitous projections? Perhaps these low rates are a vote of confidence in a Democratic administration, as Democratic administrations have added to the national debt at a substantially lower rate than Republican ones in the past few decades. Numbers along these lines, and more on Ferguson's article, to come.
But I can't end without mentioning Ferguson's comparisons to he fiscal situation of Habsburg Spain in the 16th-17th century, or prerevolutionary France---well, this sounds fun, and there may even be lessons from this far back in history. Like, maybe it's better to ditch the empire than trash your economy to support it? I'm not ready to argue historical points with a historian, but it does seem like these comparisons just might be stretching it a bit, as far as the political economy of the situation and the economic and financial policy tools and knowledge available. I do think the Habsburg Spain analogy might have fit better under Bush and Cheney.