Time is Money

EconTalk Extra
by Amy Willis
Alberto Alesina on Fiscal Poli... Arnold Kling on Specialization...

Tough talk on taxes and spending in this week's episode, as Russ sat down with Harvard's Alberto Alesina to talk about the promise and perils of austerity. Which is better to shore up a nation's fiscal situation- tax increases or spending cuts? How long are government deficits sustainable? What's unique about the case of Greece?

Please lend some more of your considerable consideration to these issues, and share your thoughts with us in the Comments. We love to hear from you.

debt crisis.jpeg

1. What's the difference between "strategic" and "oh my gosh!" austerity? Under what circumstances does each arise? Is one more dangerous- or more promising- than the the other?

2. What is the "narrative approach" Alesina describes? To what extent do you think this is a better methodology for analyzing the effects of fiscal policy?

3. At the end of the conversation, Russ poses a huge political economy challenge in the discussion of the future effects of entitlement programs such as Medicare and Social Security. Both he and Alesina argue that Congress will need to take some form of action, but little incentive exists to do so right now. So...Should economists and/or pundits "spread the terror" to the public in order to incentivize Congress to act? Why or why not, and if yes, what form should this take?

4. Why do you think Alesina and Krugman disagree over the effects of austerity? Is there a way to resolve the disagreement?

COMMENTS (4 to date)
jw writes:

Re: 2:

Whether it is described by Keynes as a "theory", von Mises as "praxeology" or Alesina as "narrative", it is currently the best way to explain economics.

Samuelson and his follower's attempts at mathematically quantifying economics were novel, but as proven almost daily by our most esteemed econometric models, we still can't predict ANYTHING.

Trent writes:

Replying to #3:

I don't think that a 'spread the terror' campaign would incentivize Congress to act. Especially when entitlement programs are involved, they won't act until there's an actual crisis because they're too afraid of losing votes. Until the projected fiscal crisis in actually in sight/it's going to happen in the short run, they're going to keep deferring action.

And what happens the first time the esteemed economists appear before Congress in 'spread the terror' mode, and their prophesies don't come true? What I mean by that is say they claim catastrophe in 2018....and it doesn't happen. Or a 100% Medicare cost escalation by 2020....and it doesn't happen. And even if they make predictions they consider 'safer', those may still not come true (another reason for 'The Dismal Science' moniker - bad track record of accurate predictions).

Given last week's topic on sports, I'll draw a sports analogy. Formula One racing for the first few decades saw a lot of drivers die during races - it was a very dangerous sport. Safety didn't really become an issue until the late 1960s, after the death of Jim Clark, when fellow Scot Jackie Stewart organized some fellow drivers to petition for safety changes. There were some, and it was a less dangerous sport....but still dangerous.

The push for increased safety stagnated until Imola in 1994, where F1 had the worst weekend in its history. Rubens Barrichello had one of the worst-looking wrecks in practice that you could imagine, but survived with minor injuries....no immediate push for increased safety. Then in qualifying, Roland Ratzenberger had a horrific crash that claimed his life....no immediate push for increased safety. And then in the race, the sport's top driver and most popular driver at the time, Ayrton Senna, had a horrific crash that claimed his life.....now finally something had to be done because the FIA & the sport were in crisis mode. It's debatable about whether the FIA went too far/continues to go too far in the name of safety, but the results have been that since that weekend, F1 has been among the safest sports in the world.

It's an imperfect analogy because I don't expect Congress' 'solution' when in crisis mode to be equally effective. They're going to be too concerned about their public image/voters, rather than actually fixing the problem.

Rodney Miller writes:

This is a comment re: episode "Should we fear?" I can't comment because comments are closed. I am behind in listening to every episode which I try to do. My beef is with Jayson Lusk's comment on GMO externalities. He has it right the benefits accrue to ag interests and not necessarily to the public and certainly not to the environment. Economists typically under value externalities while the public may value them beyond their monetary significance. Having debated this issue with Steve Nevella of the Skeptics of the Universe I got chance to argue science to a biased GMO supporter. The science is that ag benefits through operational efficiencies from GMO while consumers and the environment suffer the externalities (as ususal). Consumers end up consuming more glyphosate (roundup) residues from roundup ready crops. Glyphosate affects the ability of cells to absorb nutrients. The environment suffers from the loss species diversity due to BT laden pollens (BT containing GMOs spread the BT through their pollen and organisms that eat the pollen are killed) and greater roundup run off and the result loss of susceptible plants in the environment and the organisms that feed on the plants. These are just examples. How do we value environmental effects? Regulation is valuation with a meat axe but there isn’t a better method AFAIK. I would love econtalk to do an episode on why our economy is so bad at preventing environmental externalities.

Luke J writes:

4) Disagreement is purely ideological. Austerity is on the conservative side of frugality. What of the studied countries even obtained a level of frugality? Thus, this whole discussion of austerity is based on myth and thus is purely ideological, not empirical.

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