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Home Publications Blogs Beat the Press Niall Ferguson: More Mistaken Musings from the Land of the Excel Spreadsheet Error

Niall Ferguson: More Mistaken Musings from the Land of the Excel Spreadsheet Error

Thursday, 20 June 2013 04:10

Harvard's standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson's strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.

The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.

It's fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.

Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.

Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone's property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.

Of course there would be no accounting of the destruction to people's property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don't enjoy this freedom to excavate or to in other ways damage the environment and the public's health.

Other parts of Ferguson's argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It's not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.

By Ferguson's measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.

Finally, Ferguson is badly confused when it comes to economic growth. He tells us:

"The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period."

Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.

The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson's low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.

So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.

Comments (27)Add Comment
written by Chris Engel, June 20, 2013 5:27
Check and mate.

Nothing else to add to such a smackdown.
Once again
written by Kat, June 20, 2013 6:21
"But Littlefield's great value was as a spiritual example...He confirmed the businessmen in their faith. Where they knew only by passionate instinct that their system of industry and manners was perfect, Dr. Howard Littlefield proved it to them, out of history, economics, and the confessions of reformed radicals."
Sign of Progress
written by Jennifer Reft, June 20, 2013 6:50
At least he rambling from the WSJ, were he belongs, and the not cover of Newsweek or any other cover. The complaints about the length of regulations by conservatives are amusing. As many have pointed out, the most effective regulation (and taxes for that matter) are the simplest. However in order to look like they are cooperating AND to make it possible to weasel out of doing they should be doing corporations purposely make regulations complex.

written by JSeydl, June 20, 2013 6:53
Those hack studies are so infuriating. Economists think they can apply CBA to everything, remaining ignorant of the insight that CBA is a terrible tool for policies involving human rights. The political philosophers have been talking about the problems with CBA for decades. Why do economists never listen?
No Rules, No Harm, No Foul: The Fallacy of Ultimate Freedom from Regulation
written by Last Mover, June 20, 2013 7:12
By Ferguson's measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.

Among libertarians is the notion of negative or positive freedom. Negative freedom means ultimate freedom from any constraint. Positive freedom means control over some freedoms necessary to acquire other freedoms.

It quickly becomes obvious that the difference between positive and negative freedom is circular and redundant because there is no such thing as pure negative freedom, the part embraced by libertarians. Any "freedom" necessarily requires control of other "freedoms" to exist.

Ferguson, like the 18-year old who just read Atlas Shrugged, is waving around meaningless evidence of regulation around like it all works in one direction to suppress negative freedom, as if it could never constitute forms of positive freedom as demonstrated by Dean Baker in the paragraph above that actually works to protect selected negative freedoms.

Specifically, the Volcker Rule acts to enforce the economic capability to compete on a level playing in a positive freedom context, while its watering down with other rules acts in the opposite direction on negative freedom grounds designed to suppress the freedom of others to compete. (In this case, consumers of financial products get ripped off because of severe asymmetry of information in the sellers favor which depends on barring competition from correcting the problem.)

Yet Ferguson would have you naively believe there is a bright line between regulations and no regulations at all, as if counting and removing them one by one based on an imaginary baseline of "perfect negative freedom" would result in an illusory utopia of economic freedom.

In fact it would destroy economic freedom for the many by the few as it already has. This is what happens when the ideology of freedom trumps the economics of freedom.

Like the saying goes, free markets are not free. They have a cost, and much of that cost is about suppressing the very freedoms intended to destroy them.
Niall Who?
written by reason, June 20, 2013 7:58
Come on Dean, Niall Ferguson writing some rubbish is just normal. It can't possibly reflect on Harvard, it is already marked to market.
Niall Ferguson: More Mistaken Musings from the Land of the Excel Spreadsheet Error
written by caseyf5, June 20, 2013 8:10
What is the difference between the presstitutes such as Niall Ferguson and prostitutes? A prostitute will not do everything for money.
written by Ryan, June 20, 2013 8:10
You should have seen him on Marin Bashir yesterday. His metric for regulations now versus Reagan (we haven't had deregulation since 1980) was that there are now more regulators than there were before Reagan.


Okay, no growth. No complexity in managing a greyer regulatory environment and consequent need for regulators. And what is this last several year obsession on counting numbers of things (dollars in the budget, pages in the health care law). Is this the outcome of our obsession with math and science, an inability to evaluate qualitative indicators of change for good or bad?

written by Jeffrey Stewart, June 20, 2013 9:49
Dr. Baker's already demolished the "substance" of Dr. Ferguson's argument. Josh Fox humiliated and exposed him as a bully on Real Time with Bill Maher last week.

One question is: what qualifies historian Niall Ferguson to comment at all on economic matters? "Expertise" in one discipline doesn't carry over to another as he makes blatantly obvious.
written by medgeek, June 20, 2013 10:01
I actually hold an A.B. from Harvard. Rogoff, Reinhart, Mankiw, Feldstein, Ferguson et al. make me ashamed.
written by kharris, June 20, 2013 11:40
At least as regards ACA, Ferguson seems to have fallen into the old net-vs-gross trap. Or perhaps more realistically, he is pretending that private sector regulation is somehow less onerous than public sector regulation.

In most areas, Obamacare's regulations supplant rules that were already imposed by private insurers. You can get X covered now, you could get Y covered before. You can be on your parents insurance till 26 now, whereas before it was whatever it was, but there was a rule. Maybe a more complex rule. Premium determination will very likely be simpler under ACA for individual insurance policies, and certainly for the market as a whole. There were explicit rules for all this stuff, insurance provider by insurance provider, state by state. ACA doesn't end that entirely, but ACA regulations will tend to normalize regulation across policies. On net, ACA may represent an increase in federal regulation of health insurance, but very probably not an increase in regulation overall. That's from the perspective of the insurance firm. From the perspective of the client, either an individual or a firm, ACA may simplify matters greatly. How does the world come to an end because of very little change in net regulation?
Rookie generalization
written by C Richard Riopel, June 20, 2013 11:43
re written by JSeydl, June 20, 2013 6:53
Those hack studies are so infuriating. Economists think they can apply CBA to everything, remaining ignorant of the insight that CBA is a terrible tool for policies involving human rights. The political philosophers have been talking about the problems with CBA for decades. Why do economists never listen (emphasis added)?

Why do some pseudo-cognicenti resort to generalization to buttress their observation?

I believe there ialzpas a logical error here.

Economists never listen.
Dean Baker is an economist.
Therefor Dean Baker never listens

Is this the your opinion of Dean Baker ?
Growth for whom?
written by Amit, June 20, 2013 12:13
Ferguson and other supply-siders, while pointing to growth post deregulation (with 1980 as a starting point), conveniently fail to address the fact that real wages haven't kept up with productivity growth. The only people who have seen substantial growth are the owners of capital.

On a side note, I wouldn't mention the 90s under Clinton as an example of a well-regulated era. It was Clinton, along with the holy triumvirate of Greenspan, Rubin & Summers that repealed Glass-Steagall and paid no heed to Brooksley Born's warnings.
written by Nick Batzdorf, June 20, 2013 12:49
There are no regulations against offensively stupid journalism and punditry. This contributes to aggregate growth - of the disinformation industry.

The negative externality is a know-nothing electorate.

Josh Fox humiliated and exposed him as a bully on Real Time with Bill Maher last week.

What Fox said was just right: "You haven't allowed me to finish a single sentence!"

But it's Bill Maher's fault for providing him a forum.
written by Slugger, June 20, 2013 2:03
the Ferguson article begins by invoking de Tocqueville. By the third paragraph it says that de Tocqueville would not recognize the United States today. It has been 180 years since he wrote; things have changed in 180 years. I stopped reading at that point.
Love it
written by Justin Whittier, June 20, 2013 3:51
Always love to see Ferguson taken down a peg or two, and especially when done with such aplomb. Well done, Dean.
written by fledermaus, June 20, 2013 5:36
I still can't believe that he actually thinks no regulations have been cut since Reagan.
Sooooo, more regulations actually increase GDP? Who knew?, Low-rated comment [Show]
"More regulation"
written by Hugh Sansom, June 20, 2013 9:54
Dean Baker makes, tangentially, a very important point: It's not at all clear what "more regulation" even means. To conservatives, it evidently means "the government telling business that it has to do something or refrain from doing something." So if the law expressly says you are free to do x or if the law is silent on doing x, that's freedom to do x. It's for this reason, in turn, that conservatives are utterly unable (or unwilling) to consider the possibility that inequality in itself might curtail freedom, or that one person's 'freedom' to do x might imply a lack of freedom for another person. This explains the inclination of some conservatives (to this very day) to assert that Africans _wanted_ to be slaves or that enslaved Africans were happy. Or their constant assertion that anybody at the bottom of the income ladder is just as free as a Lloyd Blankfein or Jamie Dimon. In the case of Ferguson, you have to wonder whether he even concedes the possibility of an externality.
written by watermelonpunch, June 20, 2013 10:25
What Hugh Sansom said.
So much wrongness
written by Robert Waldmann, June 21, 2013 12:02
I think prof Ferguson managed to outpace your ability to flag error. He claims Reagan deregulated. I think by Reagan he means Carter. There was a wave of deregulation of trucking, airlines and breweries in the late 70s when the Democrats had huge majorities. What exactly did Reagan deregulate ? The main regulatory event I recall was the extreme move of breaking up AT&T. I'm not criticizing Reagan.

I guess this is your point about the irrelevance of the page count of the Federa Register, but it is amazing how eager conservatives are to claim the legacy of Jimmy Carter.
Linked and Endorsed
written by DRN0001, June 21, 2013 1:30
Over @CJR, Ryan Chittum cites and links, then piles on powerfully and persuasively:
written by AlanDownunder, June 22, 2013 12:07
Familiar filter: private command economy regulation good; public democratic economic regulation bad. Impose and rationalise.

The difference with Ferguson is that he is a ham-fisted rationaliser.
written by joey2times, June 22, 2013 3:08
Bloviating from both sides.

Nothing new here. Move on, Citizen
written by skeptonomist, June 22, 2013 8:35
Huge rewards are not necessary to get creative people to work - certainly not any more necessary than they are to get ordinary people (teachers, factory workers, janitors, etc.) to work. I'm sure that Rowling had no idea that her books would earn as much as they have. Even if there had been no prospect of Apple becoming as big as it is, Jobs would have worked as hard, just as a lot of other businesspeople do all the time. Anyone who starts a small business can't hope to succeed without working much harder than a typical wage earner (with one job). Claims that anyone won't work without the prospect of huge rewards are just nonsense.

The theoretical benefit of huge rewards is in the allocation of capital and in some cases the direction of the creative effort. Would a fixed, moderate reward cause capital to flow to really worthwhile enterprises, or even popular ones? How much capital does each innovation require, and are huge rewards really necessary in all cases? Someone has to decide where to make the investment. In the field of drug manufacturing the main expense is in research and maybe gifted researchers are needed, but they will work without the prospect of a huge payoff, nor is it necessary to attract vast capital if a beneficial drug is found. If say fusion energy were to be funded privately that would be a different matter.
Rationalization ... the lazy alternative to thinking
written by Seth, June 23, 2013 7:03

"The difference with Ferguson is that he is a ham-fisted rationaliser. "

Yep. Most arguments seem to be of the form: here's what I like to believe (and is convenient for my interests) and "look here's a random factoid that appears to suggest I am right." One used to hope for more from Harvard professors, but maybe that was always a mistake.
written by Chris Engel, June 25, 2013 1:05
It's astounding that a mere few years after the climax of the latest financial crisis that has spawned a new Depression the conservatives are back with their sad old talking points about regulation hounding growth.

It's the lack of regulation which is responsible for now 5 years of persistent negative output gaps.

It's the lack of regulation and rigged tax system which is responsible for funnelling society's wealth to oligarchs.

But like a poorly-trained parrot, Niall is stuck repeating the same old historical line of the right-wing: that we must deregulate and let the unfettered private industry whimsically develop through unexplained channels of "market efficiency"!

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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.