John Taylor’s disingenuousness
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?