The Buchanan Rule: Every Person -- Except Buchanan -- Who Propose Simplistic Rules Is a Hack or (and?) a Fraud
Although the chaotic news cycle moves inexorably forward, the sheer cruelty of the Trump budget law that congressional Republicans are celebrating deserves our continued attention. It is not as though the effects of the bill's many depravities are all behind us, because it has been the law for less than a week and will continue to inflict gratuitous harm on people -- including tens of millions of people who do not think of themselves as vulnerable or even "dependent" on the government -- for decades to come.
In my column yesterday, I called out the non-Republican commentators who are opportunistically (at best) or ignorantly (at worst) pushing the narrative that the budget bill is bad because "it increases the debt by $3.3 trillion over the next ten years." As I pointed out, the bill could have been debt-neutral but even more harmful than it is. After all, if one buys into -- or merely accepts as a matter of political reality -- the Republicans' continued belief that taxes must never go up, especially for the wealthy, then the only way to undo the supposed damage of those three-plus trillions in borrowing would be to savage spending even more than they have already done.
If next year the Republicans do just that, then the question will be whether non-Republicans should feel proud of themselves for reinforcing a political dynamic that, say, ends up eliminating food and medical assistance entirely, reducing federal employment by an additional million people, and so on. Good job, guys!
But what about the always-threatened debt crisis, wherein the US becomes "Greece, Greece I tell you"? As I noted yesterday, the issue is not the number of dollars of debt owed by any entity (government or otherwise) but whether the entity possesses or will gain the wherewithal to handle that debt. In national economic accounting, that is measured by the debt-to-GDP ratio. I also noted that the Trump budget bill and other Republican priorities embody an extra level of insanity by reducing the denominator of that ratio (making the US economy smaller through spending cuts, loss of investment, sicker people, fewer workers, and so on). All of which means that those who are worried about debt crises should not look only at the new debt but at the shrinking GDP, where the latter can be large enough to swamp a constant or even a falling numerator.
Yet in the face of all of this, the debt panic crowd never changes its tune. At the Cambridge conference that I mentioned in yesterday's column, a participant challenged me about my argument that a debt crisis was unlikely. This was a bit odd, because I had stated only moments before that I am for the first time in fact worried about a debt crisis.
Huh? During one discussion, I had noted that Paul Krugman and I are probably the biggest deficit doves in the world (other than the usual cranks who think that the government can simply create money to pay for everything), but he and I are now worried. Why the change? On his substack last week, Krugman argued that the reason some countries can run very large deficits for very long stretches of time without facing "the wrath of the financial markets" is that those countries are run by serious people working within stable political systems. Japan's debt-to-GDP ratio went above 100 percent in 1997 and above 200 percent in 2009 and has stayed well above 200 percent for the ensuing decade-and-a-half. The UK has had two long stretches in its history with debt-to-GDP at similarly high levels.
Both of those countries are/were treated with respect by financial markets, as the US has been throughout the period that the debt scaremongers have been dominating the headlines. Now, however, the US is run by a cult of personality with no guiding principles about public finance (or much of anything), all the while twisting the political and legal system into something that financiers cannot possibly trust to act responsibly. Because of those changes, the US suddenly does look like a candidate for a drubbing in the markets. No one knows that it will definitely happen, and certainly not when it might happen, but it is no longer out of the question.
The point that I emphasized at the conference, however, was that this change was not the result of debt having crossed some magical barrier or tipping point. The markets will not look at the projected debt-to-GDP ratio for the US and say, "Aha, it'll cross the dreaded xxx percent mark in yy years. Abandon all hope!" So again, the issue is not the level of debt in trillions of dollars, nor is it even the specific level of the debt-to-GDP, because as I argued last month, that is not how this works.
Unfortunately for me, the person who was pressing me on these issues is the dreaded "live troll" -- that is, the kind of person who uses online-trolling-style non-arguments in live conversations with real people. As it happens, I wrote about this person after a similar experience (on a very different topic) a few years ago. To give a sense of the level of sophistication here, when I pointed out that Japan has not faced a debt crisis after decades of supposedly sky-high borrowing, the troll smiled smugly and said, "... yet!!"
Sure, why not? The debt scaremongers were saying that Obama-era fiscal policies were going to cause the debasement of the US dollar and hyperinflation, and none of that has happened ... yet. And my ska band has never had a Billboard Top-10 hit ... yet. Anything can happen between now and when the sun becomes a red giant.
But to return to the question of tipping points, the world is unfortunately full of people who offer strange and vacuous "rules," especially when it comes to fiscal policy. Back in the 2010's, then-Speaker of the House John Boehner offered "the so-called 'Boehner rule,' which demands that any increase in the debt limit be accompanied by equal or larger reductions in spending." This had the advantage of being utterly incomprehensible, because (among other things) spending happens over time whereas the debt ceiling is a fixed number. (For math geeks, this is the difference between a "flow variable" and a "stock variable.") There is no sensible reason to connect the two, certainly not with a simple rule.
Slightly more defensible was the so-called Reinhart-Rogoff rule from about a decade ago, which purported to prove that if a country's debt-to-GDP ratio goes above 90 percent, the economy will be ruined. The US went above 90 percent about 15 years ago, and nothing happened. (Yet!?) What is especially ridiculous about such non-rules is that they tend to be based on theory-free data cherry-picking, such as the "expansionary austerity" craze of the 2010 era. As I wrote at the time:
As pointed out here, the empirical analysis (based on fiscal policy changes in the 21 OECD countries from the 1970s onward) simply doesn't support the conclusion that a country in a deep recession with near-zero interest rates (like the U.S. today) can expand by contracting; or as Paul Krugman put it: "Here’s a comprehensive list of [cases where austerity led to growth]: Ireland 1987."
(Side note: Ireland!) The larger point, again, is that these supposed rules are invented out of whole cloth, with no explanation as to why they might work. To be sure, this goes at least as far back to Milton Friedman's "quantity theory of money," which relied on the assumption that the "velocity of money" (or its rate of growth, depending on your preferred flavor of the theory) would remain constant but offered no reason to believe that it would do so. It did not.
And now, we must unfortunately return to my persistent troll. He began the conversation by asking if I had heard about the Ferguson Rule. I groaned and said that I had unfortunately heard about that thing but that there was nothing to say about it other than that it is utterly dishonest and useless, so if the conversation was going to continue, then we would have to talk about something else. Naturally, the troll then spent several minutes talking about the Ferguson Rule.
OK, so what is this latest silliness? Back in February, a historian named Niall Ferguson placed an op-ed in The Wall Street Journal's notorious editorial page arguing that there is a rule to be derived from comparing a country's defense spending to the interest payments on its debt. (I will not direct clicks to the WSJ, but determined readers can easily track this down. Please don't.) This has more than a whiff of Boehner-like non sequitur, but whatever. I considered writing something in response at the time, but this was just too ridiculous to bother. Moreover, I knew that some good economist out there would find the time to do the job, most likely better than I could. I was not disappointed, as we shall see below.
Before getting there, however, I should address readers who might be thinking, "Wait, isn't Ferguson a repeat offender on this stuff?" Indeed he is. Back in the early 2010's, Ferguson was caught making dishonest arguments in service of debt scaremongering, with his response being, "But I didn't actually lie. My facts were correct." I will allow readers to take a look at a nice summary by Matthew O'Brien in 2012, who repeatedly notes that "there are all facts here" is not the same as "there's no deception here."
Ferguson's moves are analogous to the weird State of the Union response in 2024 by Republican Senator Katie Britt, which I described at the time as follows:
Britt tried to tie a horrific story of sex trafficking to President Biden by placing accurate statements in succession that added up to a monstrous lie. Indeed, she told a story about a real victim of trafficking but made it appear that the events happened while Biden has been President -- indeed because Biden is President.
So yes, Ferguson is already well known to be a piece of work. But what of his new rule? The economist who found the time to shred the WSJ piece was Dean Baker, who published "Elite Historian Niall Ferguson Wants to Bring Back Tax Farming" on the Center for Economic and Policy Research website. (Aside: When an economist calls a non-economist social scientist or humanist "elite," it is almost always ironic, equivalent to saying "deep lightweight" or "impressive simpleton."). Baker summarizes Ferguson as follows:
In this piece Ferguson tells us that when a nation spends more on interest than it does on defense, then it faces ruin as a great power. The US is now passing into this ruin territory, as interest payments are now around 3.2 percent of GDP, roughly equal to current defense spending. If interest payments rise in the years ahead, as currently projected, then by Ferguson’s view, collapse is imminent.
The Ferguson Rule here makes about as much sense as the groundhog’s shadow as a weather forecast, but lots of people have fun with Groundhog Day. There’s no reason we can’t have a bit of fun with the Ferguson Rule.
Baker's point is not merely that the "rule" is based on nothing at all but that taking it seriously as a guide for action cannot be taken seriously. His key insight is that it is possible to stay on the supposed good side of the Ferguson Rule not by reducing debt but by increasing defense spending. Want to borrow another trillion? Spend more on defense! He also notes that there are real questions about what counts as defense spending, giving us no way of even knowing what we are comparing.
Baker also points out that there are insane ways to reduce debt, one of which is the "tax farming" noted in the title of his piece. Consider this thought experiment:
The import taxes (tariffs) Donald Trump is imposing are great targets for tax farming. We’re currently looking at around $300 billion a year in annual revenue from Trump’s taxes on imports from Canada, Mexico, and China, but the total may end up much higher.
Suppose we were to sell off the rights to collect these taxes at the nation’s customs’ posts. The interest rate on 10-year inflation-indexed Treasury bonds is currently just under 2.0 percent. (Inflation-indexed bonds are the appropriate benchmark, since the tax collections should rise roughly in step with nominal economic growth.)
This means that we should be able to sell off the rights to collect Donald Trump’s import taxes for around $15 trillion. This would cut the debt not held by the Federal Reserve Board (the Fed owns roughly $5 trillion in debt) in half. That would cut our interest payment by around 1.6 percent of GDP, leaving them at 1.6 percent of GDP, well under the Ferguson Rule cutoff. America would be safe as great power long into the future!
Baker then adds: "To be clear, this would be nutty policy. Tax farming is corrupt and inefficient ... . But if we need a way to satisfy the Ferguson Rule, and save our great power status, it is a simple way to do it."
So even though debt crises can happen, and the US's status as a crisis-immune power might be changing, the important thing to remember is that the debt scaremongers have been wrong all along. Moreover, solving any of these supposed problems based on simplistic rules is never as obvious as it seems. Reducing spending and borrowing can make things worse, especially the way Republicans do it. Keeping interest payments lower than defense spending can make things worse, depending on how one responds (and there are so, SO many different ways to make things worse).
My conclusion is therefore that I have not heard of a simple rule that makes fiscal decisions transparent and improves policy making. Yet.
- Neil H. Buchanan