May 11, 2010
Armed with textbooks and formulas, economists attack a problem by drawing lines, forming equations and trying to fit data to the real world. Niall Ferguson, a historian by training, thinks you can learn more simply by analyzing what has already happened. So what’s a historian’s take on the current crisis? Ferguson says it has yet to run its course.
“They always last much longer than you want them to last,” Ferguson told investors last month.
Naming the crisis “the Great Recession,” as others have, understates its severity, according to Ferguson. A more appropriate name is the Slight Depression, one which, at least so far, has not reached the proportions its “Great” predecessor.
Ferguson is a British-born professor at the Harvard Business School and author of The Ascent of Money, a best-selling book that was turned into a television series. He spoke on April 24 at the Strategic Investment Conference in San Diego. That conference was sponsored by Altegris Investments and Millennium Wave Investments.
“US fiscal policy is on a completely unsustainable course, putting us on a path where we will never have a balanced budget,” he said. “That cannot happen.”
What will happen? Ferguson said he is optimistic about the US in the long run, particularly about what brought him here from his native Britain – our entrepreneurship, our capacity for technological innovation, and the character of Americans in general.
But we can head in the wrong direction, he said – and that was the focus of his talk.
Misguided fiscal policy has been a constant theme in Ferguson’s work, and he used data from the Congressional Budget Office (CBO) to underscore the dangers of deficit spending. The CBO has published two projections – its baseline scenario, where the debt-to-GDP ratio goes to 300% over the next 50 years, and its more conservative-growth scenario, where that ratio rises to 700% over the same period.
“Neither can happen,” Ferguson said, calling such outcomes “historical impossibilities.”
Either scenario would imply unending trillion-dollar deficits, he said – and never again a balanced budget. “That just can’t be right,” he said. By 2040, he explained, all tax revenue would go to pay interest on the national debt, and half of that will be paid to foreigners.
The administration projects a temporary reduction in the deficit over the next several years, but expects it to rise starting in 2013. The problem, which constitutes Ferguson’s primary criticism of policy-makers, is that there is “never any plan for fiscal stabilization,” and that troubles bond investors.
Ferguson has been critical of economist Paul Krugman on this topic, and the two debated in a highly publicized forum sponsored by the New York Review in April of 2009. Krugman has been a vocal proponent of fiscal stimulus measures to counteract the weak economy. “Only Paul Krugman,” Ferguson said, “believes there should be no end to deficits.”The US is becoming a “welfare state,” Ferguson said, following a policy experiment that failed the last time it was tried – in Europe. We are headed toward permanently high unemployment, with a generation that will never work. “That is the ultimate destination of a two-term Obama administration,” he said.
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