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Home Publications Blogs Beat the Press Growth, Debt, and Assets: Why Politicians are Better at Economics Than Economists

Growth, Debt, and Assets: Why Politicians are Better at Economics Than Economists

Friday, 31 May 2013 09:08

The wealthy countries of the world have spent the last three and half years falling off a 90 percent debt-to-GDP growth cliff that we should now all be able to agree does not exist. While I am happy to see that economists have been able to demonstrate conclusively that the world is not flat, I will just quickly explain again why I always knew this fact.

As I have explained numerous times, in addition to debt, governments also have assets. In fact, governments routinely sell assets, not just out of ideological or corruption driven privatization drives, but in the normal course of events they will have occasion to sell off items like land, unneeded office space, portions of the broadcast spectrum, etc.

If there were some serious growth penalty associated with certain debt levels then it would imply that selling off assets would give an above market return. Not only would the government get the market price for whatever asset it was selling, but it would also lead to a growth premium as a result of pushing its debt lower. In the case of the Reinhart-Rogoff cliff story, this premium would be enormous since we could envision raising growth by a full percentage point by selling enough assets to lower our debt-to-GDP ratio from 95 percent to 85 percent (roughly $1.6 trillion in assets).

We don't typically see governments selling assets for this reason. This would suggest that either governments were very dumb for not taking advantage of an easy way to boost growth or that debt does not have the negative impact on growth that was advertised.

While there are plenty of politicians who are to lunch when it comes to economic policy, this struck me as too out to lunch to be believed. For this reason, I could never be a believer in the Reinhart-Rogoff debt cliff even before other economists were able to show that the relationship did not exist. 

Comments (4)Add Comment
DOD Can Save America in More Ways than One: Kickstart Military Selloff Now!
written by Last Mover, May 31, 2013 10:22
Exactly. Take the bloated military for example. It's a no brainer that DOD is sufficiently wasteful and inefficient it could sell off half its assets with no loss in defense of national security.

Selling off useless weapons systems to American enemies would not only prime the austerity pump from the supply side RR style, it would also be win-win for national defense since no one could use them against America as well.

Thank you Dean Baker. Only a true patriot could come up with this one.
And economists should emphasize that debt can be used in more productive ways
written by John Wright, May 31, 2013 10:50
And Rogoff-Reinhardt focused on debt percentage as a percentage of GDP not on where or for what purchase the government borrowed money is spent.

Debt spent on a foolhardy foreign war or bank/farming subsidies versus the same amount spent on improved electrical grid or infrastructure can have very different long term effects on a country's well being.

But I believe future historians will not be kind to the economics industry that seemed all too willing to provide intellectual justification for actions the industry's patrons in the political and business class wanted to do during the late 20th century and early 21st.

Climate change is the next elephant in the room that economists will not see and incorporate into their world views and models.

We do live in interesting times..
written by RZ0, May 31, 2013 6:55
You mention this fact often, but I'm surprised you never give the best example of how valuable these assets are: the Chicago parking meter.
In 2009, Chicago sold the 75-year revenue stream for its parking meters for $1.15B to a private company. Rates immediately quadrupled, and the most common complaint I hear is that Chicago sold the rights too cheap.
Yet if one were to have assembled a balance sheet for Chicago circa 2008, it would not have included $1.15B+ on the asset side for future parking revenues. So whatever debt load Chicago showed, it was overstated by more than $1.15B.
Keep it up, Prof. Baker
written by Alex Bollinger, June 01, 2013 1:24
You have the patience of Mother Teresa to keep on finding new ways to explain what is really a simple argument. And I always come to look at the comments and see people who refuse to get it.

I say "refuse" because this has to be willful ignorance. Not only is it simple, it's pretty common: liberals love a good "If conservatives really believed X, they'd do Y."

LM: Baker's not advocating selling weapons to rogue states to pay debt (no, that was Reagan, and it wasn't even to pay debt but to start a war in a third country). This is a thought exercise.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.