John Irons's Blog


Economic News, Data and Analysis

Long-term Effects of Budget Deficits

Most people think that running a temporary deficit in a recession is necessary and/or unavoidable. Without the credit line of treasury debt, the federal government would be in the same position as many states: it would have to either raise taxes or lower spending at exactly the wrong time.
In the long run, however, deficits are not good. Government deficits tend to lower national savings, which can then lead to a lower level of investment.
So here’s the causal chain from econ101: government savings decreases –> national savings decreases –> interest rates rise –> investment falls –> national income lower than it would have been.
But wait; doesn’t the Fed and Alan Greenspan control interest rates? In other words, the Fed has the power to break the link between deficits and interest rates, and thus deficits and GDP, right?
Not quite. It turns out that investment is dependent upon long-term interest rates, since firms care more about 10 year rates than 3 month rates. The Fed, while it can control short-term rates rather well, has less influence on the longer-term rates. Furthermore, empirically, it does seem like deficits do have an impact on interest rates.
W. Gale and P. Orszag at Brookings lay out these arguments, examine some empirical evidence, and do some not-quite-back-of-the-envelope calculations on the impact of returning to long-run deficits.
If you ever plan on using the phrase “fiscal discipline,” you need to read this.

The Economic Effects of Long-Term Fiscal Discipline
Over the past two years, the long-term budget outlook has deteriorated markedly. Although many policy-makers and economists have expressed concern that this fiscal deterioration will reduce future national income and raise interest rates, Bush Administration officials and others have publicly denied the existence of such adverse effects. This paper examines the relationship between long-term fiscal discipline and economic performance, with two main results. First, as almost all economic research and standard textbooks suggest, declines in budget surpluses (or increases in budget deficits) reduce national saving and therefore reduce future national income, regardless of their effect on interest rates.
Second, simple correlations, careful empirical research, macro-econometric models, and the views of leading economists and policymakers all indicate that increases in expected future deficits raise long-term interest rates. Based on the literature, a reasonable estimate is that a reduction in the projected budget surplus (or increase in the projected budget deficit) of one percent of GDP will raise long-term interest rates by between 50 and 100 basis points. These findings suggest that the costs of increased deficits are significant over the long run, and need to be compared carefully to the potential benefits of the tax and spending programs that result in larger long-term deficits.

Filed under: Economics


The articles archive section in part contains modified versions of articles that initially appeared at my former site. These articles are dated 2.2002 and earlier. I will be posting more as time permits. For current articles, click here.

Note: As of (at least) 12.15.02, my articles from have been removed from the site.

My initial contract with granted to them
an exclusive online license to use the original material in exchange for certain
compensation. Since the end of February 2002; however, I have
not been paid the monies due to me as laid out in the
agreement (and there is no sign that I will). In addition, my name has
been removed from the pages that contain my writings.

If you’re curious, or if you’re a lawyer who would like to give me some free advice, the guide contract is posted on
the web, as is the lawsuit filed against and
its parent Primedia. I would urge you to boycott, but the more visits the site gets, the greater the damages from any legal action.


Some of the articles are old, so not all links will be current. In addition, while I have modified the formatting from the original, there may still be some glitches – let me know if you see any major problems.

Filed under: Website

Recession: When did it end?

The NBER (as of Dec. 7) needs more time to declare the end of the recession. When they do decide, the trough will likely be April 2002.

The behavior of the economy this year indicates that the decline in activity that began last year may have come to an end. But recent data show that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year. The NBER’s Business Cycle Dating Committee will determine the date of a trough in activity when it concludes that a hypothetical subsequent downturn would be a separate recession, not a continuation of the past one.

Filed under: Economics

Bush’s New Economic Team

The new economic team is set:
* Treasury Secretary: John W. Snow, railroad executive (CSX)
* Economic Advisor: Stephen Friedman, investment banking exec (Goldman Sachs)
Bush Picks CSX Corp. Chief for Treasury
New Team To Sell Policy on Economy

Filed under: Economics, Policy, Politics

Veil of Ignorance: Rawls vs. Expected Utility

Article in Slate about Rawls’ Theory of Justice.
John Rawls’ Unrisky Business – Did he rig one of political philosophy’s great thought experiments? By JimĀ Holt

Filed under: Economics

O’Neill and Lindsey Resign

Treasury Secretary Paul O’Neil and economic advisor Larry Lindsey both resigned today. It looks like a changing of the economic guard at the Whitehouse.
Anyone want to speculate on new appointees?
* John Taylor (but thought to be first in line for Greenspan’s job)
* Martin Feldstein (if I remember right CEA head under Reagan, but does he want the Job?)
* The Texas duo of Dick Armey and Phil Gramm have been mentioned (want to see wall street flip out? appoint one of these to treasury)
* Don Evans (currently at the Commerce Dept, but likely wants a more prominent economic role)
* Steve Forbes (he seems to like money)
Wild cards:
* Robert Rubin (widely viewed as a very good Treasury Secretary – but would Bush want a Dem?)
Text: Treasury Secretary O’Neill’s Resignation Letter (

Filed under: Economics, Policy, Politics

Were the 1990s an economic bubble?

I’ve recently heard several people refer to the 1990s’ economy as a “bubble.” The latest being Lester Holt on CNN this morning. I think this is a bad misuse language.
Financial markets can probably be described as a bubble, which then burst. However, the real economy showed no real “popping” of a bubble. Real GDP might have slightly declined with the mild 2001-02 recession; but, there was no major decline as you’d expect to see with a bubble.
I think better language would be that the high growth rates of the late 1990s were at most “unsustainable.” (Although the sustainability of the 1990s boom is debatable as well.)
Below are graphs of real GDP as well as the NASDAQ composite index from 1990 to the present. The NASDAQ shows what a bubble looks like. The GDP graph clearly shows the recessions of the early 1990s and the 2001-02 recession – but it looks nothing like a bubble.
source: NIPA Data

Filed under: Data, Economics, Economy

Missing the Point on Productivity

In the Associated Press story on the recent productivity growth numbers, Yahoo! News – U.S. Productivity Grows 5.1 Percent in 3Q, they include a paragraph on the relevance of productivity growth.
“Gains in productivity are a crucial ingredient to the economy’s long-term vitality. Healthy productivity increases allow the economy to grow faster without triggering inflation. Businesses are able to pay workers more without raising prices, which would eat up those wage gains. Strong productivity also helps lift companies’ profits.”
While all of this is likely true, it misses the main point about why labor productivity growth is important.
Simply put, the greater the rate of productivity growth, the higher our standards of living will be. By definition, higher productivity means more stuff produced (and hence consumed) with the same labor input.
In the long run, productivity growth is not just a “crucial ingredient,” it’s the whole shebang.
In addition, they have some of the logic backwards: we don’t want productivity so as to get low inflation and high profits, we want high productivity so we can consume more. Low inflation is important only because it may help productivity. Corporate profits are only good to the extent that they increase productivity.

Filed under: Economics

Productivity growth high

Some good economic news: productivity growth for 2002q3 was 5.1 percent.

Productivity and Costs, Third Quarter 2002, Revised
The Bureau of Labor Statistics of the U.S. Department of Labor today reported revised productivity data–as measured by output per hour of all persons–for the third quarter of 2002. The seasonally adjusted annual rates of productivity growth in the third quarter were:
5.4 percent in the business sector, and
5.1 percent in the nonfarm business sector.
In both sectors, upward revisions to productivity were primarily due to increases in output larger than originally reported.
In manufacturing, revised productivity increases in the third quarter were:
5.5 percent in manufacturing,
8.8 percent in durable goods manufacturing, and
1.3 percent in nondurable goods manufacturing.

Filed under: Economics

United to Jet Blue

Robert Hall looks at the transition from United Air to Jet-Blue. Seems to be a good example of competition finally having an impact on the airline industry.
The Revolution in Air Travel by Robert E. Hall

Filed under: Economics