Ryan Cooper and the Fallacy of the Single Cause

“the consequences of economic devastation are very real indeed (the Greek suicide rate, for example, just hit a 50-year high)”

Ryan Cooper of the Washington Monthly argues  that the national debt of the US is benign, that monetary stimulus will not create inflation and that more fiscal stimulus is needed to prevent economic devastation such as that which is occurring in Greece. Cooper is unconvincing, as he fails to address points that have been made regularly by opponents of Keynesianism and Monetarism. As such, he is preaching to the converted.

Recent articles on similar topics have tried to assign suspect moral motives to opponents of stimulus. However there are many rational unanswered arguments against stimulus on the record. Keynesians who seek to besmirch opponents run the risk of seeming unable to back up their arguments with unemotional facts and logic. Cooper seeks to calm things down with this article, but if he wishes to go further and convince opponents of his views, he needs to address their genuine concerns rather than continuing an avoidance strategy.

National Debt

Cooper’s main point here is that the national debt is not a problem because the cost of servicing that debt is low. This has an obvious problem – interest rates may spike without warning, and the cost of servicing would then become high. If the debt is allowed to grow merely on the basis that current servicing costs are low, it is possible that an increase in rates would pose a serious problem.  Cooper and other advocates of Keynesianism rarely address this. Monetarists sometimes counter that the central bank has control of the interest rate.  However, as we now see in Japan, this control has its limits.

As to how the national debt will be reduced, Cooper advocates that we wait until we get back to full employment. This has another obvious problem – what if we don’t? Where is it written that continual stimulus always returns an economy to full employment?  There are numerous examples in history of economies which hit a currency crisis, debt default or hyperinflation without ever reaching “full employment”.

Inflation

Here Cooper makes a good point – monetary stimulus has not, to date, generated inflation. So why should continued monetary stimulus worry us?

Cooper neglects two important factors that do create genuine worry and which have not been addressed by monetarists. The first of these is that the long term lasts a lot longer than the short term. Our foremost concern should be the long-term health of the economy. Low inflation now does not guarantee low inflation in the long term. The build-up of excess reserves in the banking system could generate very high inflation down the track, if the money multiplier increases from its very low level at present. Monetarists may counter that the Fed would act to keep this under control. However there are numerous cases throughout history of central banks that did not do this. We have to ask – why did they not, and could a similar set of incentives cause the Fed to act in the same way?

The second problem with Cooper’s argument is that he ignores the fact that since the financial crisis, monetary stimulus has been offsetting private credit contraction. In other words, a natural tendency to deflate has been offset by a roughly equivalent amount of artificial inflation. This masked inflation may very well have similar detrimental effects to “normal” inflation. There is certainly plenty of evidence to suggest that the created money benefits the wealthy first, and is creating a bigger divide between rich and poor, with all of the societal problems that this can bring.

Cognitive Bias

Overall, Cooper’s article goes over points covered by many other Keynesian writers, without adding anything new to assuage the concerns of opponents. Insight into the current mindset of Keynesians can be gained by examining this introductory statement by Cooper: “the consequences of economic devastation are very real indeed (the Greek suicide rate, for example, just hit a 50-year high)”.  Cooper is implying that cuts to government deficits cause suicides (and this in an article that claims to be “calm and reasonable”).  But the flaw is plain to see: he concentrates on the proximate cause without examining the ultimate cause. Opponents argue that if the Greek government had not been profligate in their spending over previous years (i.e. had not conducted continual stimulus), the Greek economy would be healthier, there would be no need for sharp spending cuts, and hence no suicides. From this perspective, the stimulus was the ultimate cause of the devastation, and the US risks going down the same path.

This favoring of a proximate cause is a common cognitive bias known as the “Fallacy of the single cause“.  As with many cognitive biases it requires objective and non-self-serving analysis to overcome – something that Keynesians and Monetarists are not known for.

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6 comments

  1. I think, as a matter of internet etiquette, that you should remove “nofollow” tags from comment links: Don’t Nofollow

    In no particular order:

    1. You may not have said “debt burden” but that was what the paragraph was about.

    2. Cooper’s article wasn’t meant as a primer on Keynesian economics. It was meant to counter Kinsley’s belief that inflation was right around corner.

    3. The Fed doesn’t buy debt as an investment. At this point, they simply write it off. They will not always do that because in a non-depressed economy it would create inflation. There is slack in the economy now, so doing so does not create inflation.

    4. When the economy improves, interest rates will go up. So will employment. So will tax revenues. What’s more, the cost of safety net programs will go down. I posted Cooper’s second graph in my article. That shows pretty much the normal state of things. Huge amounts of stimulus in an under performing market will not cause inflation.

    5. If interest rates suddenly went up, the government could affect their spending at that time. I’ve never understood the argument that we must cut today or else sometime in the future we may have to cut.

    6. The idea that the government is just going to spend more and more has no basis in our history. The increases in the deficit in the 2008-2009 fiscal year are generally blamed on Bush by liberals and Obama by conservatives. The fact is that it is neither. Most of those were automatic economic stabilizers. And as the economy improves, they too will decrease.

    7. It is not true that the long term is the best way look at the economy. That’s exactly the biggest problem with austerity: it hurts short-term growth and thus causes there to be more costs of and less revenue for the government.

    8. You are wrong about what’s going on in Japan. I fear who you are reading to come to that conclusion. And even if you were right, wouldn’t that be the fallacy of the single cause? Isn’t it really just that you want Abe’s stimulus to fail? You want it to prove that stimulus is dangerous? (Regardless, your argument has not been that stimulus is bad for business but rather that it causes inflation.)

    I have a general problem with your argument. You take it as given that inflation is coming (or that we should be gravely concerned that it is), but you provide no real mechanism for it. I understand the impulse to think that pumping money in the economy will be inflationary, but that isn’t the case in our current situation. (But note: it *is* the case in most situations!) It’s okay to be for a balanced federal budget but not for the reason that inflation is just around the corner. There is no reason to believe that. And “Greece!” is not a reason; we are in a totally different situation.

    Nice chatting with you.

    1. (Re: nofollow – it’s just a wordpress default – I’ll change it, thanks for the heads up)

      “You may not have said “debt burden” but that was what the paragraph was about”

      Which paragraph? I’m happy to discuss, but would like to know what exact point you are rebutting, and what the rebuttal is.

      “Cooper’s article wasn’t meant as a primer on Keynesian economics. It was meant to counter Kinsley’s belief that inflation was right around corner.”

      You are right. In doing so it makes a number of claims. Do you think the fact that it’s not a primer, and that he is countering Kinsley makes these claims more correct than they otherwise would be?

      “The Fed doesn’t buy debt as an investment. At this point, they simply write it off.”

      This is incorrect. The Fed is required by law to maintain a balance sheet, and its purchases are recorded as assets on that balance sheet. If at any point liabilities on the balance sheet exceeds assets, the Fed is required to be recapitalized by the Federal Government.

      “When the economy improves, interest rates will go up. So will employment.”

      So you believe that continual stimulus is guaranteed to improve the economy enough to achieve full employment. You think that there is not even a small chance that there will be a currency crisis or debt default before full employment is achieved. Is that correct?

      “If interest rates suddenly went up, the government could affect their spending at that time.”

      They could, but will they? In Japan interest rates are suddenly going up right now – do you see the government scrambling to cut spending?

      “The idea that the government is just going to spend more and more has no basis in our history.”

      Correct, because US economic history is second to none. This has been due to a certain level of fiscal constraint. Do you think that the US is immune to what has happened to many other countries at many other times, even if it veers away from fiscal constraint? If so, what makes the US immune?

      “It is not true that the long term is the best way look at the economy”

      Why not? Surely the long term affects many more people for many more years. Do you disagree with this?

      “You are wrong about what’s going on in Japan. I fear who you are reading to come to that conclusion. And even if you were right, wouldn’t that be the fallacy of the single cause?”

      The fallacy of the single cause doesn’t mean that nothing ever has a main cause. It means we shouldn’t just leap to a conclusion that the last thing to happen prior to the event was the cause of the event. We should stop and analyze rationally whether our initial knee-jerk conclusion is reasonable or not. Rational analysis has led me to conclude that continual monetary stimulus must at some point cause control of interest rates to be lost. Empirical evidence from many economies over history supports this.

      “I have a general problem with your argument. You take it as given that inflation is coming (or that we should be gravely concerned that it is), but you provide no real mechanism for it.”

      The mechanism is as follows: Once private debt has dropped to a low enough level that consumers and businesses develop an appetite for borrowing once again, the high levels of excess reserves in the system will allow financial institutions to rapidly expand the quantity of M2 money (because current M2 deposits are well below those allowed by reserve ratios). This higher quantity of M2 money in the hands of businesses and consumers (as opposed to the current high level of base money in the hands only of large corporates) will cause inflation to rise.

  2. First, there is little evidence from history that debts are allowed to grow just because rates are low. Quite the opposite in fact, the tendency almost always is to pull back fiscal support too quickly, like in 1937. Right now, the deficit is falling fast.

    As to inflation, now we’re just arguing counterfactuals. Yeah, the Fed might not act to restrain inflation. But I say they won’t, and if they let inflation rise past 5% or so I’d say they should stop.

    So what do you suggest we ought to do? Raise interest rates, cut spending, purge the system of rottenness?

    1. “there is little evidence from history that debts are allowed to grow just because rates are low”

      I’m not clear on which of my points you are responding to here – can you please clarify?

      “As to inflation, now we’re just arguing counterfactuals. Yeah, the Fed might not act to restrain inflation. But I say they won’t, and if they let inflation rise past 5% or so I’d say they should stop.”

      OK – so you admit they might not act, which means that inflation might be a problem yes? So Kinsley might have a point. Why pretend that he is flat out wrong?

      “So what do you suggest we ought to do? Raise interest rates, cut spending, purge the system of rottenness?”

      I don’t pretend to have the answers. I am pointing out the flaws in the Keynesian and Monetarist “answers” that have failed us so badly, have clear logical flaws, and yet are still pushed far and wide by economists and journalists. I’m also pointing out that voices like Kinsley’s are not be to so quickly ignored, or worse (by others, not you), ridiculed.

  3. I’m not going to go through your whole article, but two points. First, Cooper isn’t an economist and he is speaking only to Kinsley’s recent article. Second, you are wrong that debt service can suddenly spike. Most of the federal debt is in long term bonds.

    1. There are plenty of non-economists making these points, and it is in the interests of readers to know why they may be wrong, whether they are made by economists or not. Similar points are made by Keynesian economists frequently – Ryan’s version of them does not differ substantially in content.

      “Second, you are wrong that debt service can suddenly spike”

      I didn’t say that debt service can suddenly spike. I said that interest rates can suddenly spike.

      However, while servicing costs won’t exactly spike, they will become a problem in short order, a few months to a couple of years.

      Average maturity of federal debt at the end of 2012 was five years and two months. So on average one fifth of the debt needs to be rolled over, at market rates, each year.

      Add to this the fact that the Fed owns around 30% of this debt, meaning the government effectively pays 0% at the moment, but the minute the Fed sells this back, which it may be forced to do in order to control inflation, debt servicing costs will increase from 0% to the coupon rate, on the bonds sold back into the market.

      Add to this the fact that if rates have spiked, the Fed will take huge losses on these bonds, meaning that the government will need to recapitalize it by taking on new debt, at market rates.

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