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Reinhart-Rogoff, Debt, and Assets

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Tuesday, 28 May 2013 04:15

Since folks seem to have difficulty understanding how assets can be relevant to the Reinhart-Rogoff debt kills growth story, I will give a concrete example. Brad Plumer had a piece this weekend in the Post that discussed the potential of a carbon tax to slow greenhouse gas emissions and raise revenue. He presents estimates that a $20 a ton tax would raise $1.2 trillion over the next decade.

Okay, at this point everyone should have heard of the idea of selling emissions permits as being roughly equivalent to a tax in terms of raising revenue and discouraging emissions. Suppose that we decided tomorrow to auction off permits that were issued in a number that was intended for carbon to be priced at $20 a ton. This should raise $1.2 trillion for the government, an amount equal to 7.5 percent of GDP. (I'm ignoring discounting to keep this simple, I'm trying to make a point. If we need more money we can make the permits good for 20 years.)

If we had crossed the Reinhart-Rogoff danger line of 90 percent, say with a debt-to-GDP ratio of 95 percent, this sale of permits would push us safely under the threshold with a debt-to-GDP ratio of 87.5 percent. If the Reinhart-Rogoff 90 percent cliff was real, how could anyone be opposed to this policy?

It would increase annual growth by something like 1.0 percentage point, while helping to save the planet. The cumulative gain to GDP would be somewhere in the neighborhood of $8 trillion or more than $100,000 in additional output for an average family of four.  

The United States has many other carbon permit sale option type policies available. If we believed in the Reinhart-Rogoff cliff, these would be the obvious answer as these asset sales would provide incredible growth dividends.

I'm not personally advocating such asset sales because I don't take the Reinhart-Rogoff cliff seriously. But any honest economist who does believe in the RR cliff should be highly vocal proponents of asset sales. (They are much easier politically than cutting Social Security and Medicare.)

So here's the perfect lie detector test for economists arguing the RR case. Are they pushing large scale asset sales?

Comments (7)Add Comment
When Selling America Down the Drain to Freeloaders, Asset Price is Everything
written by Last Mover, May 28, 2013 7:58
If the Reinhart-Rogoff 90 percent cliff was real, how could anyone be opposed to this policy?


Because the political right never sells it this way and the political left is too cowered to sell it this way. Emission rights would be treated like the flip flop tax policy sold to Americans.

Specifically, whenever a tax increase is attempted on the rich to pay off more debt on grounds of "fairness" per Obama style it is shot down on grounds of killing the economy by causing less aggregate demand and growth. When the economy is not in a recession it is shot down as well on grounds of killing the ongoing recovery/boom or simply by default since unemployment tends to be lower and the pressure is off to redistribute the tax burden.

Emission rights are an explicit assignment of property rights to the atmosphere that monetizes them for distribution at a price paid to pollute clean air.

The political right doesn't see it this way since all air is the same to them, free for the taking to produce whatever by the free riders they are. To price the taking of air in the name of declaring air as an asset of economic value treads on their precious liberty to pollute it (with carbon dioxide in this case) at the expense of everyone who needs clean air to survive.

Emission rights on carbon dioxide are opposed similar to how taxes are opposed by the rich, as macro demand and growth killers when the economy is down, then when the economy is up they are suppressed with micro lies like trickle-down job creation and upside down claims of what entitlements are.

Besides, much of America's public property assets have already been sold off to freeloading private corporations in one way or the other at far below anything resembling a fair market price. If Dean Baker's challenge to take up large scale asset sales per RR to reduce debt was pursued, rest assured it would be so expensive in real terms as to backfire and actually create more debt, not less.
there is no saving the planet
written by mel in oregon, May 28, 2013 9:05
We are going to run out of oil & water, so helping to save the planet is a pipe dream. As far as asset sales, when the white man began the genocide of the red man, all the land's assets such as oil, timber, iron, etc. were given away to politicians & their business friends. the subsidies that go to big farming, big pharma, etc. are nothing new, this has been going on as soon as europeans landed here. A carbon tax to slow greenhouse gas emissions? Haha, except it ain't funny, it's just another in a long line of assinine proposals meant to reassure ignorant people that everything will turn out just fine. Nope, we're going down as a species & taking most of the rest with us.
...
written by dax, May 28, 2013 9:45
I think R&R are aware of the importance of assets. In their letter to Krugman they mention at the end the advantage the US has had (vs the UK) from its sudden increase in gas and oil production.
Is your math right?
written by Paul Broni, May 28, 2013 12:43
$1.2 trillion over a decade is NOT 7.5% of GDP.
$1.2 Trillion is 7.5 percent of annual GDP
written by Dean, May 28, 2013 2:34
Paul,

annual GDP (@ $16 trillion) is the denominator in the Reinhart and Rogoff story.
...
written by Chris Engel, May 28, 2013 6:20
The underlying point shines bright: this whole debate is being framed by the far-right and the center-right to set up a justification for slashing the safety net and middle class benefits to make wages drop and labor desperate. the result of course is a continuation of the trend of the rich getting richer and the poor getting poorer (per the latest Pew household survey -- http://www.businessinsider.com...her-2013-4 )

Most reasonable people see the 90% "cliff" or threshold or whatever to be a total myth and history will see it as one of the greatest SNAFUs in this neo Gilded Age.

But of course, the common sense plan Dean puts forth is not possible because it involves actually taxing and at least half the country doesn't want any tax increases, not even on the richest (look how hard it was just for them to swallow the rollback of Bush top marginal tax rate).

There's no room for governance or reasonable discussion on reform or big ideas. Because as soon as a tax increase or a spending increase is mentioned, half the room empties out, and the other half is too derped about the next election to take chances with BIG serious ideas like a New New Deal or stepping up to the banksters and getting an amendment to end money in politics.
Aren't they doing this in Greece?
written by Jim Caserta, May 29, 2013 7:05
I thought Greece was trying this, although the politics of the Germans or Russians buying large chunks of land or whole islands just does not feel right. Maybe they could sell uncollected tax debts? Has there been a history of this? England's privatizations?

Plus you have the issue of net debt, and the sometimes fluid division between private and public debt (Ireland)

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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.

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