Posted by Edmund L. Andrews
Brad Delong says I still have a bad habit from my years at the New York Times -- “balance,’’ or striving for a fictional objectivity by giving equal weight to two opposing viewpoints. Delong is steamed about my post yesterday, which criticized dueling op-ed pieces by both Alan Greenspan and Paul Krugman on how to deal with soaring deficits. He can’t understand why I criticize Krugman for being too glib about deficits, when I seem to agree with him about a lot. Here’s Brad:
I think what is going on here is that Edmund Andrews acquired bad habits working for the New York Times that he has not yet managed to shed.
Andrews thinks that he is not a serious person if he writes…[that] Paul Krugman is quite right in his urging more fiscal expansion….That wouldn’t be neutral, that wouldn’t be balanced. … So, Andrews thinks, if he is going to agree with Krugman on everything substantive--which he is--he must first kick Krugman in the teeth.
If there’s one thing I hate, it’s being accused of balance. So at the risk of proving that I’m unbalanced, I’ll focus on why Krugman troubles me on this topic. I actually wrote about this here at Capital Gains and Games back in March,
As I said back then, I do agree with Krugman’s broader arguments about a) the need for high deficits right now and b) the hypocrisy and dubious agenda of Republican latter-day converts to fiscal discipline.
But I think Krugman does us all a big disservice by being too glib about how we should stop worrying and learn to love the debt. Krugman gives lip-service to the dangers of long-term deficits (they’re “problematic,’’) and to the need for a long-term plan. But there are times when he sounds perilously similar to Dick Cheney, who reportedly remarked that “Reagan proved deficits don’t matter.” Delong says I’m being hypocritical because Krugman supports exactly the kind of credible long-term deficit-reduction plan I described in my post. And he quotes a Krugman column from February, thusly: So once the economic crisis is past, the U.S. government will have to increase its revenue and control its costs. And in the long run there’s no way to make the budget math work unless something is done about health care costs...
At this point, I feel like a Talmudic scholar, parsing lines of sacred text. But I have to point out that Delong drops the sentences that Krugman wrote next:
But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.
Do I agree with Krugman about that? No way, Jose. He thinks we can wait til 2020 to take active measures against the deficit. He even suggests we don’t need to start planning until close to 2020. Either way, I think that would be catastrophic failure. I think the existence of a credible plan with a credible political commitment would be a huge relief to bond markets, well ahead of us actually doing anything. It's the same thing the Federal Reserve does in persuanding markets that it will take a tough line on inflation in the future even if it is printing money right now like there's no tomorrow. I've never heard Krugman offer more than lip-service to this idea.
I also object to gimmicky arguments, like declaring that annual interest on the debt would only amount to a measly 3.5 percent of GDP and “how scary is that?”
As it happens, it’s plenty scary – and that projection is probably too optimistic. Under Bush 41, interest on the debt spiked at 3.5 percent of GDP just as the US was crawling out from the back-to-back recessions of 1990 and 1991.
By contrast, the interest-expense projections here are for 2020 and are based on the assumption that we will have enjoyed TEN YEARS of steady economic expansion. That’s exactly when you’re not supposed to have high deficits or interest-expense burdens.
Krugman later made another dubious comparison on his blog, throwing up a chart showing that the United Kingdom’s public debt shot up to 250 percent of GDP during World War II and then plunged back to normal levels after 1950. As I wrote in March:
If it worked for the Brits, it ought to be fine for us too, right? No. In 1950, the British economy had been bombed almost to oblivion. By definition, the debt-GDP ratio was incredibly high because GDP was incredibly low. With the war over, GDP had nowhere to go but straight up. It was the absolute perfect moment to have high debt. The United States is in almost the opposite situation.”
Our debt is now almost 60 percent of GDP and it could hit 100 percent by 2020. But again, that would be after 10 years of steady growth. By 2020, we would be about due for another cyclical downturn, and another cyclical run-up in the deficit.
The risk here, which I believe Krugman disingenuously discounts, is that the financial markets will turn on us. He complains that the German deficit hawks offer no evidence of such a meltdown. There’s no reason to think they should have such evidence. We’re dealing in part with psychology; the markets are with you until they’re not – just as they were during the housing bubble.
Bookmark/Search this post with
DeLong is correct
You are not critiquing Krugman's argument in favor of counter-cyclical fiscal policy. You are critiquing some version of fiscal policy that has no support from anyone.
Countercyclical fiscal policy runs deficits during periods of high unemployment/ low private sector demand and runs surplus during periods of low unemployment / high demand. Countercyclical fiscal policy applies stimulus when the economy is sluggish and applies the brakes as the economy overheats. The countercyclical policy reduces deficit spending once the economy has sustainable growth, job creation and demand. Because of the weak and timid fiscal policy that Obama has managed to pass and the ability of key Republicans to divert job creating stimulus into "trickle down" tax cuts, it may well be 2020 before our economy returns to full employment.
President Clinton NEVER set out to run a budget surplus. Bill Clinton pursued those policies that would create jobs so that everyone who wanted to work could find a job. Bill Clinton pursued policies that boosted the earnings of the lowest paid workers through EITC, child care credits, education credits and other programs that made work pay. When unemployment hit 4 percent, the Federal budget was UNEXPECTEDLY in surplus. Bill Clinton PROVED that the way to fix the federal deficit is to put everyone to work. Bush did absolutely nothing to promote job growth and he ran ever higher deficits. Some of the Bush deficit was due to doubling military spending and shoving a Trillion Dollars down the Iraq rat hole. However, most of the Bush deficits were revenue lost to high unemployment, a weak economy and revenue lost to non-stimulatory trickle down tax cuts for the wealthy. The high unemployment and low growth of 2008 and 2009 caused government revenue to tank. Bush proved that FAILURE to create enough jobs will lead to high budget deficits.
Long term budget deficits depend on getting control of the runaway defense spending and runaway health care costs. If those costs are contained and we return to full employment, the budget deficit will take care of itself. Our economy is NOT ZERO SUM as you are arguing. We need to grow our economy to grow our way out of unemployment and the deficit that having 10 percent unemployment creates. Growing the economy and lowering unemployment will automatically increase government revenue, decrease some spending and lower the deficit. We cannot cut spending and balance our budget with 10 percent unemployment. Spending cuts increase the numbers of unemployed. States will toss thousands of teachers into the streets this year because of their budget shortfalls. What will that do to unemployment? What will that do to local economies when those teachers no longer have money to spend, when contractors who repair our schools are out of work and janitors and cafeteria ladies are on welfare? If unemployment stays high, then those people who are unemployed will have to be supported by higher tax rates by those who still have jobs. We will all be poorer. It is a downward spiral. The spiral will only reverse when people are back to work. You need to quit thinking of our economy as zero sum and understand that it works on upward and downward spirals. We are in a huge downward spiral and need a very large corrective to make it reverse.
You are making a ZERO SUM argument in favor of Herbert Hoover policies.
History doesn't repeat but it does rhyme
Take the time to read Liaquat Ahamed's 2010 Pulitzer Prize winning "Lords of Finance: The Bankers Who Broke the World". Fiscal and monetary authorities more concerned with "sound money" and "the markets" than jobs and growth are about to find out just how rhyming history can be.
And if
I were better looking, I'd be an actor.
Take a look at the President's budget. Trillion dollar deficits with a full employment low inflation economy. We are not going to grow our way out of the problem.
IMHO you are entirely correct
IMHO you are entirely correct - except for the part where you agree with Krugman at the beginning ;-)