Economists and what they don't know

I have being muttering here for perhaps a couple of years now that it seems that there is some sort of unacknowledged crisis in macro economics in which economists (probably on both sides of politics, even though Laffer-ish Right wing economists have been wronger for longer) aren't really admitting to not understanding some fundamental things that are pretty damn important.      

See these two stories which back up my theory.  From Axios:

The world's debt-to-GDP ratio rose to 356% in 2020, a new report from the Institute of International Finance finds, up 35 percentage points from where it stood in 2019, as countries saw their economies shrink and issued an ocean of debt to stay afloat.

Why it matters: The increase brings numerous countries, including the U.S., to extreme debt levels, well beyond what economists have called untenable in the past.

• Nonfinancial private sector debt alone now makes up 165% of the entire world's economic output.

What they're saying: "The upswing was well beyond the rise seen during the 2008 global financial crisis," IIF economists said in the report.

• "Back in 2008 and 2009, the increase in global debt ratio was limited to 10 percentage points and 15 percentage points, respectively."

By the numbers: Global debt increased to $281 trillion last year, with total private and public sector debt rising by $24 trillion in the 61 countries IIF follows.....

Why the debt matters: While worries about significantly pushing up inflation and borrowing costs have not come to pass, slow growth and diminishing returns have, and the world's already high debt levels look to be inhibiting economic growth and threaten to hold back a full recovery from the pandemic in the long run.

• Further, almost all of the debt issued in 2020 was to deal with present circumstances rather than to invest in forward-looking projects or growth, making future investments in such projects more difficult and potentially more costly.

Where it stands: The CBO projected U.S. GDP growth over the next 10 years will be largely below 2% (with the notable exclusion of 2021), and that annual budget deficits will increase.

• The federal debt is set to exceed the size of the economy this year for only the second time since the end of World War II and grow to 107% of GDP by 2031.
• That projection was made without including President Biden's proposed $1.9 trillion stimulus package.

And this reminded me of Noah Smith's recent take on the question of economists and debt:

No one knows how much the government can borrow

Some extracts: 

Remember that some people thought that government borrowing and spending during the Great Recession, facilitated by quantitative easing (Fed bond-buying) to keep interest rates low, was going to lead to substantial inflation. But it didn’t.

Would it have led to inflation if the government borrowing and spending had been 10x what it was? 100x? 10000000000000000000000x? Where’s the cutoff?

We don’t know. David Andolfatto, writing at the St. Louis Fed blog, lays it out:

There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or inflation rate) and a given structure of interest rates. However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there…There is no way of knowing beforehand just how large the national debt can get before inflation becomes a concern.

So when the government borrows more and more from the Fed and spends the money, it’s like our country is walking down an infinite corridor towards an invisible pit. We know the pit is out there somewhere in front of us, but we just have no idea how far we have to walk before we fall in.

Noah then notes that there is far too inadequate research on the issue.  He lists some papers which might give some indication, but his conclusion is this:

Just because the U.S. hasn’t had inflation for a long time doesn’t mean borrowing constraints aren’t a pressing, even urgent research question. There are so many pieces of the puzzle that need investigating. Do deficits matter in the absolute sense, or does it just matter how much is financed by the central bank? Is the start of central bank financing of deficits what kicks off the inflation, or something else? Does it matter what government spends the money on? Are policy regime changes of the kind Sargent talks about actually detectable in the data? And if so, what do they look like? Why hasn’t Japan, with its debt of 240% of GDP, had even the tiniest glimmer of inflation?

And so on.

We need the top minds working on this now, not waiting until after disaster strikes and then analyzing it after the fact!

His take on the matter sounds very plausible to me.