Felix Salmon

John Taylor’s disingenuousness

By Felix Salmon
May 27, 2009

John Taylor is a genuinely eminent economist who has a fundamentally sensible point to make — that a step-change in the US debt-to-GDP ratio from about 40% to about 80% is not a good thing and is something with systemic consequences.

I don’t understand, then, why he has to lard his comment with stuff like this:

A 100 per cent increase in the price level means about 10 per cent inflation for 10 years…

100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce.

The first statement is simply false: a 100% increase in the price level means about 7% inflation for 10 years. One would expect that John Taylor, of all people, understands the concept of compound interest.

But the “of course” in the second statement is even weirder. The connection between inflation and depreciation is far from clear; it depends very much on the country’s balance of trade, and even more on the amount of inflation which has gone on in other countries. Does Taylor really expect 0% inflation over the next decade in both the Euro zone and Japan? And does he really think that real gold prices have ever stayed remotely constant?

As Mark Thoma points out, though, the most disingenuous part of the entire column is something Taylor doesn’t mention at all — that he was very recently calling for permanent tax cuts to stimulate the economy. It’s pretty much impossible to square that with this:

While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible.

Or maybe deficits caused by permanent tax cuts are somehow to be preferred to deficits caused by temporary stimulus spending?

11 comments so far | RSS Comments RSS

Tax cuts have a much lower multiplier effect on the economy — which I would assume means less inflationary effect. So yes, if you’re not really concerned about growth of the real economy and only concerned about investment returns for the ruling class, it’s perfectly consistent.

Less money for 90%+ of the population, less pressure on wages, less inflation, better relative returns for bond holders, and better after-tax returns for investors.

That’s what you get for big tax cuts vs. stimulative spending. And if you’re a ruling class suck like so many economists, that’s just fine by you.

Posted by Slaney Black | Report as abusive

that’s just fine by you

By “you” of course, I don’t mean *you*, Felix. I mean “one”.

Posted by Slaney Black | Report as abusive

Anyone who is calling for tax cuts isn’t an eminent economist, that would just make him/her a clueless Republican.

100% depreciation of the dollar would mean it is worthless, I think he means a 50% depreciation. But eminent economists are allowed to exagerate and make things up, like Taylor’s predictions about inflation.

Posted by KenG | Report as abusive

Also, Americans would be paying $2.80 for a euro with incomes twice as large as now. Ditto their ounce of gold.

Posted by Matthew | Report as abusive

I have a hard time believing anything this John Taylor says when he makes such elementary mistakes as not compounding interest (10 * 10% = 100%) and thinking a 100% depreciation of something means its price has halved. If he had made these mistakes in a live debate somewhere, that could be forgiven, but this is a column published in the freaking Financial Times of London. What the hell?

Posted by Hans | Report as abusive

Short-run deficits can help to end recession. Doesn’t it matter, how the government spend the borrowed money? For instance for financing investments in better infrastructure, sustainable environment and human capital etc. On the long-run “smart” investments of government the GDP (denominator) go up faster than the debt (numerator) in the ratio.


The GDP to Federal budget deficit ratio is unsustainable. This will get corrected.

Three routes

1. Massive inflation will make the real size of government shrink.(Taylor’s argument)


2.Official will cut spending


3.The Government will go bankrupt

I see no other options do you?

PS The Soviets tried a government led command economy, it failed. And the Russians are smart people.

Posted by Kevin | Report as abusive

John Taylor knows perfectly well about compounding; I would guess he thinks that many FT readers don’t, and doesn’t want to explain it. (“About” is presumably his sop to correctness.) In any case, he’s talking qualitative more than quantitative here, so that it doesn’t matter.

My guess is he underestimates the FT readership, but that this would have been a good communication strategy if he were writing for USA Today.


What about his whopper concerning the Debt/GDP ratio? He claims that:
“The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office.”

But this is not true. In 1988 when Reagan left office it was about 51%, up from 32% when he took office. In 2008 it was about 70%, up from 57% when he took office. That seems like a real whopper to me. You can check it out in the Economic Report of the President, page 378 (Bush’s last report).

Of course, what Taylor is referring to is Gross Federal Debt held by the public. So he is ignoring all the debt held by the social security system. I think that is what you need to do to make Bush look like a fiscal hawk.


The fact that Mr. Taylor made an error in his calculation does not change the fact that his main argument is correct. It appears that Mr Salmon lost perspective of Taylor’s main point purposely to attack him, instead of debating his message. He goes further and brings another of Taylor’s idea that is not included in this specific article to strengthen his attack. The question is, does Mr. Salmon has something personal against Mr. Taylor or lacks rational arguments to debate?

Posted by Cajagora | Report as abusive

Spending cuts not a logical option? Or logic not an option?


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