Krugman's Deficit Madness 28 comments
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It is sometimes sad to see some brilliant thinkers of our time advocate what amounts to be madness. That is exactly what Paul Krugman is pushing for in his latest NY Times OP-ED column... we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.
Once a government incurs significant incremental debt, it will never go back to to the levels of indebtedness it had earlier - it's a political impossibility. The debt levels become permanent and even if a government runs a surplus, it is unlikely the politicians will use much of that surplus to bring down debt.
What Mr. Krugman is proposing to the nations of the world is a bet on GDP growth. Go ahead and incur huge additional debt in hopes that the GDP growth will catch up to the new levels of debt, making debt to GDP ratio (the government leverage) tolerable. But that is an absolutely dangerous bet to make and is what got the private sector into trouble.
A great example is Japan. They effectively followed Paul Krugman's way of thinking and this is where their debt to GDP ratio is now:
Japan's GDP growth has been lagging their government deficits. Now the government is increasingly concerned about placing paper and is nervously looking for additional buyers.
From Bloomberg:
Japan is expanding efforts to attract buyers to the nation’s growing debt load, flooding the backs of taxi cabs for the first time with pamphlets in the hopes of getting retirees to invest more money in bonds.
“Government bonds are worth another look,” the Ministry of Finance says in its latest advertisement, which features a picture of 37-year-old Junko Kubo, a former anchor on Japan’s public broadcaster NHK.
Besides the issue of pushing current problems onto the next generation (who may end up with much lower GDP growth), there is a more dangerous precedent being set. It's a form of moral hazard at the national and even international levels, as financially reckless behavior is rewarded. It's OK to leverage up and borrow too much. Let's make more money now, let's buy what we can't afford, let's fight another war that may stretch us to the limit. Let's transfer debt from the private sector to the government the way Japan did. In the end the government can just issue more debt to rescue us.
Here is a good response to Krugman's proposal.
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On Aug 31 09:55 AM Michael Clark wrote:
> People in power are swimming in assets -- houses, property, stocks,
> bonds, etc. -- deflation threatens the value of these assets. Inflation
> keeps their assets relatively inflated (even as the value of the
> dollar underlying these assets corrodes). Most of these people are
> willing to do anything to try to keep their assets from deflating
> in value. They will inflate, inflate, inflate...if it means they
> won't have to face the demon of lost wealth. They'd rather have their
> children face this demon apparently.
Take a worn out philosophy, remove God, and let the pagans
glory in Babel.
On Aug 31 10:10 AM johnmorrison9 wrote:
> Darwin, Marx, and Krugman have one thing in common.
> Take a worn out philosophy, remove God, and let the pagans
> glory in Babel.
On Aug 31 10:20 AM TVWizard wrote:
> You forgot that under Clinton the debt did go down.
If printing money could bring true prosperity, then counterfeiting would be legal. Ben Bernanke could teach us how! This is fool's gold!
The entitlements we have promised will sink the economic ship. It's only a matter of time!
On Aug 31 10:20 AM TVWizard wrote:
> You forgot that under Clinton the debt did go down.
Those who can, do. Those who can't (like Krugman), teach!
We need to throw many of these brainless academics OUT! No babies with that bath water!
Why didn't he pick the US for an example? Because it would show the dems, Clinton did it in 93 with not a single repub vote!! And they did it with pay-go too.
Vs the repubs with their contract On America and far worse, Bush, congress of the last 8 yrs who goal was run the gov into the ground and let it die on the vine as Grover Norquist, many other repubs said.
And it wasn't Obama who bailed out the banks, AIG, big auto, it was Bush who hid his huge deficits off budget. At least Obama puts them on budget. Had Bush, repubs not left us heading into a depression he wouldn't be having deficit problems now.
Had Bush, repubs continued balancing the budget with the surplus he had we wouldn't be in the mess we are in now. In fact we'd be doing great.
As a fiscal conservative I'm ashamed of the republican party
and find them closer to traitors than anything else. Terrorists are small potato's compared to the damage the repubs have done to our country and the debt they left our children while not fixing any of our long term problems, but making them far worse.
But I guess it's not hard to see things this war when you feel financially covered for the living generations!
The grand kids can work it out!
I think it was Plato that said (Paraphrase)an unexamined life is not worth living!
Easy to say when you are financially set!
On Aug 31 12:57 PM Jimbo wrote:
> The only hope I see is for a constitutional amendment (I believe
> the courts nixed previous state laws) limiting Congress to a total
> of 12 years: 6 terms in the House or two terms in the Senate or any
> combination. Chris Cox of Connecticut is a good example of a lifetime
> in office leading to seniority , power and corruption. Congress has
> exempted itself from too many laws that effect the rest of us. Social
> Security is one and the proposed health care legislation is another.
> Congress always rides first class and the peasants go in cattle class.
This is what will eventually happen, of course, but only after a stupid exercise of trying to make banks solvent, and keeping the same numb skulls in place for another year.
www.treasurydirect.gov...
09/30/1992 4,064,620,655,521.66
09/30/1993 4,411,488,883,139.38
09/30/1994 4,692,749,910,013.32
09/29/1995 4,973,982,900,709.39
09/30/1996 5,224,810,939,135.73
09/30/1997 5,413,146,011,397.34
09/30/1998 5,526,193,008,897.62
09/30/1999 5,656,270,901,615.43
09/30/2000 5,674,178,209,886.86
09/30/2001 5,807,463,412,200.06
"Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump."
Yes and no. I agree, and it was amply documented in “The Forgotten Man” that our attempts to balance the budget caused the Depression of 1929-1932 to worsen. However, all the hype that the Stimulus package has “saved us” is just that, hype. About 15% of the money went into genuine stimulus which added to long term employment and GNP. The other 85% is pretty grey, filled with pork, and not sustainable in terms of long term employment as well as being spread over periods extending far beyond our so called “recovery” bottom recently announced by the economists.
"The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity."
Not exactly. What we have is a FED which has added $2 trillion to its balance sheet, with no explanations to Congress as to how much and where the money went, how much more will be needed, where it is going to come from, and what are the repayment terms. The General Auditor of the FED, before a congressional committee, testified that she had no idea where the money was. Now it will be the job of “politicians” to save us from our debts, while an entirely independent agency is spending the taxpayer’s money. I certainly agree that an independent FED is a good idea, but there has to be come coordination between the actions of the FED and Congress, the body responsible for taxing, cutting expenses, or otherwise paying back the debt and generating the funds to pay the interest. So far, Bernanke has provided one explanation for how the FED can mop up the excess supply, and that is by raising rates on the security deposits required by Federal Banks to keep at the FED. The reality is that higher interest rates on these deposits may encourage banks to keep more money in federal deposits than lend it out to consumers, but that simply enriches the banks by reducing their risk and operations costs by trading “lending to consumers cost” for far cheaper “bookkeeping costs” with the Federal government. It does not bring the taxpayers money back to the government. And obviously this option reduces the credit available to drive the economy.
"The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden."
Krugman is talking about the interest only, making the assumption that we continue to turn over the actual debt forever, rather than paying it off. Also, his calculations are based upon an average 3.5% into perpetuity. This is crazy. One does not dump trillions of dollars into the world economy and assume steady state interest rates when we are losing our global markets to countries with modern manufacturing equipment, lower labor costs, dramatically increased productivity, and enormous domestic markets to absorb what used to be export trade to the US.
"This assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency."
In addition to the above comments, there is a lot of discussion in the financial blogosphere that the current Treasury sales may be part of a “shell” game. There is an article by Chris Martenson in Seeking Alpha which has been confirmed with several Wall Street bond traders. The entire article is named "How the Fed is Monetizing Debt", but the bottom line is that China and others may actually be selling more US paper than they buy, but are doing so by trading agency debt (GNMA and FNMA) for Treasury Bonds. This is a bookkeeping swap, but shows up in the Treasury reports as China “buying” more Treasury bills at current yields, which holds down the yield and supports the bond price.
"In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis."
I believe if you asked the average Belgian or Italian, they would say they have been in continual financial crisis since this period. Secondly, comparing the Italy and Belgium economies with the United States is about as far away as one can reach. For instance, Italy, with a declining aging population, and unemployment of 8.9% officially (and twice that unofficially) has a GNP of $2 trillion as opposed to ours at $14 trillion.
"The U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending."
In 2008, growth in national health expenditures was about 6.1 percent, as health spending increases from $2.2 trillion in 2007 to $2.4 trillion in 2008. (Can’t find later numbers) May I argue that a $200 billion growth in health care spending, although enormous and spurred on by the recession, is child’s play when compared to an increase in the US Budget (from OMB) from $2.98 trillion in 2008 to an anticipated $3.56 trillion in 2009 (August 25th review) to $3.76 trillion in 2010. (All new numbers vastly understated, and will be revised upwards. For instance, the FDIC will be at the Treasury door within a month for several hundred billion more as the 400 some banks currently on the watch list fail.) Further, the public $200 billion number of incremental expense for Obamacare (completely discredited by CBO as far under actual costs) appears to be going the opposite direction from Krugman’s plan for getting our fiscal house in order by attacking Medicare and Medicaid.
"And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.".
One more time, we cannot have an independent body, opaque even to Congress, (see the Bloomberg Freedom of Information Lawsuit against the FED) obligating the taxpayers for trillions, and at the same time blame Congress or “politics” for not solving whatever problems the FED creates in its narrow support for AIG, Goldman Sachs Bank of America, and Morgan Stanley plus their creditors, while allowing 83 smaller banks to go under and maintaining a watch list on another 411. The FED must work with Congress with a plan to put our house in order and can certainly do so without giving up their “independence.” Throw away lines, like simply raising the interest rate on Federal Bank deposits to sop of excess currency is not “a plan” since it gives no direction to Congress and would clearly shut down a good segment of our major future employment base, which are small private enterprise companies with a continual need for access to credit markets.
Finally, the rather flippant attitude of Krugman in this and earlier articles (this is such an easy problem to solve, why worry?) really gives me pause. What happens if we actually come to believe that we can spend any amount of money, and simply roll over the debt to third parties assuming that we can grow the economy enough to pay the 3.5% in incremental interest rates? We have now created the perpetual motion machine, and everyone, both elected and members of independent or quasi-independent bodies (GNMA, FDIC, FNMA, FHA, FUTA, PBGC, Obama’s czars, and the next ten alphabet soup organizations) now will have the keys to the Treasury, and there will be no incentive to fiscal responsibility. How long will our creditors go along with this shell game?
.
On Aug 31 02:52 PM RoadtoSerfdom wrote:
> The national debt under Clinton. Available at:
>
> www.treasurydirect.gov...
>
>
> 09/30/1992 4,064,620,655,521.66
> 09/30/1993 4,411,488,883,139.38
> 09/30/1994 4,692,749,910,013.32
> 09/29/1995 4,973,982,900,709.39
> 09/30/1996 5,224,810,939,135.73
> 09/30/1997 5,413,146,011,397.34
> 09/30/1998 5,526,193,008,897.62
> 09/30/1999 5,656,270,901,615.43
> 09/30/2000 5,674,178,209,886.86
> 09/30/2001 5,807,463,412,200.06
time! I'd hate to be the person who has to take over after
obama is done trying to implement his agenda? I hope we
can make it another three years.