Are Deficits Irrelevant if We're Unaware?

Paul Krugman, always a believer in stimulus packages and deficits, now presents a new and different argument on why on-going deficits don’t matter. In a nutshell, it is that we are ignorant about when the federal government is running a deficit and when it isn’t.

As the following table indicates, the ignorance problem runs across party lines:

American Political Science Association

As indicated, a majority believed the deficit increased, when in fact there was a successful push to balance the budget and eliminate the deficit. Whether this is an optimal approach to determining the public’s knowledge remains to be seen.

Another example Krugman cites is the following:

Right now, Meg Whitman is campaigning for Governor of California on the claim that ‘state spending has exploded over the last decade’ — when the fact is that it has fallen drastically in real per capita terms.

Whether her ignorance on this score will impair her electability remains to be seen. Charisma can override a great deal, but I am not suggesting whether she is or is not particularly charismatic.

If we don’t know what is going on regarding the federal budget, the argument then becomes, according to Krugman, it makes more sense for politicians to “focus on providing real improvements in peoples’ lives, rather than seeking deficit reductions the public won’t even hear about.” This argument is an economically feeble one for running on-going and large deficits. I explain.

This is a well enough reasoned argument based on political expediency and ambition, but is it economically sound? I suggest not, especially coming from a renowned economist.

First off, since when has political expediency ever been the test for determining what is economically sound and sensible?

Secondly, if the questions were put to the public in a different way or using a different time, context or event reference, the public’s answers might be much better. Who among us can say whether the deficit was increasing or decreasing during the second year of President X’s term and always be right?

Thirdly, even if the public is somewhat ignorant on whether the deficit is increasing or decreasing at any particular point in the past, federal administrators are not relieved of their obligation to act reasonably and sensibly, in economic terms, in light of the true facts. Otherwise, any governmental official can point to some idiot’s off-the-wall views to justify doing almost anything wrong.

But the key here is to recognize that what is politically expedient is not necessarily or even likely to be economically sound. In fact, rarely do the two notions coincide; usually, they are in conflict. It is particularly noteworthy that Krugman has to make recourse to a political argument to justify his economic views here. That in itself is most telling.

Ironically, Krugman missed the argument that is economically relevant. It is that if the public is ignorant of governmental deficits, then how large or cummulative they are is not a matter that should impair the public's (and perhaps foreign nation's) confidence in our government or its financial status.

But is that believeable? I think not. Disbelief here suggests that at some level the public does know enough to have deficits matter. No surprise.

Disclosure: no positions yet

Comments

[TradingHelp...:]

Deficits are a problem. Ignorance of deficits is just as big a problem. You can't solve it if you can't understand it.

China has a surplus of $2,000bn. The US has a deficit of $11,000bn.

That discrepency will mean US citizens will become tax-slaves for a decade, squeezing US economic growth potential. (2/3rds of US economic growth previously came from consumer spending).

The incompetence of US politicians and the greed and poor risk controls of Wall St "Masters of the Universe", has accelerated the trend and advantage China and Asia already had over the US (and the UK where I have the economic misfortune of being based).

www.dukascopy.com/iben...

Nov 01 05:01 AM

[Dave Wrixon:]

“focus on providing real improvements in peoples’ lives, rather than seeking deficit reductions the public won’t even hear about.”

That is a political perspective rather than an economics one. It simply proves that American economics is driven by short-term political considerations. A recipe for disaster if ever there was one!

Nov 01 06:50 AM

[davidbdc:]

Our representatives are supposed to "lead". They are complete and utter failures and have only been successful at telling people whatever they want to hear and how much they are "giving" to them......whether any of it is in the country's best interest is irrelevant.....all that matter is that they stay in power.

What has happened this past decade is similar to what happened to USC the past couple of years......Oregon and the other teams realized that they are "good" but no longer great. And Oregon went out and whipped them. Now USC either has to raise the level of its game or it just becomes another above average team. Pretty similar to the USA, either we find some leaders to raise their game and we start taking our medicine and dig out of this mess......or we just become another 7-4 Pac Ten team.

Sadly I think a slight majority of our citizens will settle for 7-4, 6-5....even 4-7........... as long as everyone gets an award at the end of the season so that they "feel" good.

Nov 01 08:13 AM

[chap08:]

davidbdc, you are right about the lack of leadership - but don't blame the leaders. What you should blame is the political system.

Look at it in economic terms. Your leaders are only responding intelligently to the incentives in the system. The incentives mean that the best plan is to keep the dumb voters happy via deficit spending. Don't spend too much time telling them the truth, or telling them about the long term costs - there aren't so many votes in it. Just keep those campaign contributions rolling in. The best tactic is to steal from the future, because future voters can't vote today. I won't call it a system based on lies and corruption because I am feeling mellow right now.

If you think you'll change the outcome by changing the leaders - dream on. You will always get some true outsiders who don't respond to the system's incentives, but theses are the exceptions. The majority will keep right on responding in the same old way. You will only really change the outcome by changing the system. That means recognizing that our democratic system has problems. It is not the ultimate in systems of government. It needs to be changed.


On Nov 01 08:13 AM davidbdc wrote:

> Our representatives are supposed to "lead". They are complete and
> utter failures and have only been successful at telling people whatever
> they want to hear and how much they are "giving" to them......whether
> any of it is in the country's best interest is irrelevant.....all
> that matter is that they stay in power.
>
> What has happened this past decade is similar to what happened to
> USC the past couple of years......Oregon and the other teams realized
> that they are "good" but no longer great. And Oregon went out and
> whipped them. Now USC either has to raise the level of its game
> or it just becomes another above average team. Pretty similar to
> the USA, either we find some leaders to raise their game and we start
> taking our medicine and dig out of this mess......or we just become
> another 7-4 Pac Ten team.
>
> Sadly I think a slight majority of our citizens will settle for 7-4,
> 6-5....even 4-7........... as long as everyone gets an award at the
> end of the season so that they "feel" good.

Nov 01 12:19 PM

[Kimball Corson:]

I just posted the following three comments on Paul Krugman's blog under his article Stimulating Thoughts: Third Quarter Edition in which he argues for ever bigger stimulus programs. My comments:

I. In fact, consumer spending could clearly be better because in truth it tumbled 1.5% in September, as vehicle sales plunged, following a 1.4% gain in August (previously 1.3%). The saving rate rose to 3.3% as consumers returned to saving after buying cars to get clunker monies in August. Real spending dropped 0.6%.

Like too many government programs, including the stimulus program, the effects are too transient and the programs are too expensive. Too little bang per buck and too little impact on the real economy.

The answer is not therefore, as you suggest, to then just make the (stimulus) programs bigger.

___ Kimball Corson

II. The Chicago Fed´s National Activity Index indeed rose for the last quarter, but it is interesting that many of the non-averaged components have been falling for the last two months after a July peak. The Chicago Fed summarized the data:

"Thirty-two of the 85 individual indicators made positive contributions to the index in September, while 53 made negative contributions. Thirty-nine indicators improved from August to September, while 46 indicators deteriorated."

The bad news in this data is that much monthly data has been falling for the last 2 months. If this trend continues, next month this index will likely fall. This would be significant evidence that the recovery is now stalling, after the effects of the government's bump-up programs have passed.

We must face and address our structural problems of the trade deficit, the maldistribution of income, the dysfunctional banking sector and the decline of employment in the manufacturing sector if we want GDP to grow on a solid footing. Until we do this our prospects are poor.

The problem is none of the Keynesian policy makers even recognized these problems or take them seriously enough or believe they really matter. We are barking up the wrong tree, as I keep saying.

___ Kimball Corson

III. What we should be doing is addressing our structural problems of the trade deficit, the maldistribution of income, the dysfunctional banking sector and the decline of employment in the manufacturing sector and we could do that as follows:

The Trade Deficit: adopt an auctioned quota certificate system allowed by the WTO for persistent deficit countries and develop tax employment incentives for the more labor intensive companies in the US engaged in export. Put a surtax on gasoline and use the money to press for the development and use of smaller vehicles that use less or no gas. Provide tax incentives for their purchase. Put a luxury tax on gas guzzlers. We need a big and serious push here, politics be damned.

The Maldistribution of Income: use the tax system and a negative income tax if necessary to quickly redistribute income and raise the marginal propensity to consume. Now, those earning over $85,000 a year get half of all income and dump too much of it into secondary financial markets to create bubbles and messes.

The Dysfunctional Banking System: Run the money center banks through one or another type of FDIC insolvency proceeding to correct incentives, repair debt damage and pass financial reform with less opposition from those banks, while at the same time getting better supervision over them in the interim. We need to get serious here.

Employment in the Manufacturing Sector: We need to subsidize and support employment in this sector and companies with higher labor to capital ratios engaged in exporting a high percentage of what they make. All kinds of programs should be considered to do this.

We need to focus in on our problems and adopt some real fixes if we want to see more sustainable real economic improvements, not just throw more money at the priming pump of aggregate demand and getting temporary increases in aggregate demand that do not last.

We are on the wrong track. Stimulus programs alone won't do it.

___ Kimball Corson

Nov 01 03:24 PM

[untrusting ...:]

You are correct, major changes to the system need to be made. Incentives always drive the directions that are taken. However, it will take new leaders to change that system. Where are they going to come from? Certainly not from either the Democratic or Republican party machine. They have both been exploiting the system for many decades now to enhance themselves and will continue to do so for as long as they can get away with it. So where are the "new leaders" going to emerge from?


On Nov 01 12:19 PM chap08 wrote:

> davidbdc, you are right about the lack of leadership - but don't
> blame the leaders. What you should blame is the political system.
>
>
> Look at it in economic terms. Your leaders are only responding intelligently
> to the incentives in the system. The incentives mean that the best
> plan is to keep the dumb voters happy via deficit spending. Don't
> spend too much time telling them the truth, or telling them about
> the long term costs - there aren't so many votes in it. Just keep
> those campaign contributions rolling in. The best tactic is to steal
> from the future, because future voters can't vote today. I won't
> call it a system based on lies and corruption because I am feeling
> mellow right now.
>
> If you think you'll change the outcome by changing the leaders -
> dream on. You will always get some true outsiders who don't respond
> to the system's incentives, but theses are the exceptions. The majority
> will keep right on responding in the same old way. You will only
> really change the outcome by changing the system. That means recognizing
> that our democratic system has problems. It is not the ultimate in
> systems of government. It needs to be changed.

Nov 01 07:41 PM

[Denis Gould:]

Is anybody really trying to promote the argument that running a huge budget deficit doesn't matter because people didn't realise the fiscal improvements made under Clinton?

Nov 01 09:03 PM

[lucky lenny:]

Denis,

• Under Clinton, national debt went up big time. As proof, go to treasurydirect.gov - you’ll see that on 9/30/92, before Slick Willie took office, the national debt stood at $4.1 trillion. When Slick Willie left office in 2000, the national debt stood at $5.7 trillion. Every year Slick Willie was in office, the national debt went higher. When the Republicans wanted to cut spending, Clinton caused a gov’t shutdown. Now his left leaning supporters in the media are repeating the lie that Clinton reduced the national debt. As you can see from the web site, its just not true. Here’s all the years of the national debt: www.treasurydirect.gov... - this is from the treasury itself.


On Nov 01 09:03 PM Denis Gould wrote:

> Is anybody really trying to promote the argument that running a huge
> budget deficit doesn't matter because people didn't realise the fiscal
> improvements made under Clinton?

Nov 02 07:37 AM

[lucky lenny:]

All this deficit spending may be risky for the U.S. economy, however, the trillions of debt the Democrats are racking up will make Barack Hussein Obama tremendously popular at re-election time. The Democrats are buying people cars, health care, buying car companies and winning lots of friedns with the unions and company mgnt, handing out trllions of dollars in deficit spending, nice raises in pay for the soldiers in the military, tons of money for local school boards to win over the teachers, etc.. etc... Now think about someone such as Gov. Palin. Gov Palin wants to balance the federal budget. In the process, it will be like taking away a child’s allowance. Hence, I predict Barack Hussein Obama will easily win re-election before allowing the US$ to go the way of the Aregentinian Peso.

Nov 02 07:39 AM

[W.E. Heasley:]

Mr. Corson:

Another excellent article. Friedman was right, you should have stayed in Economics.

“…since when has political expediency ever been the test for determining what is economically sound and sensible?”

You are exactly right and Krugman is exactly wrong.

Plus Krugman always makes the argument for Bigger Stimulus. Krugman’s argument is “Size Matters”.

Sorry Paul, “Design Matters” as well. If size is the only important component then the $800 Billion Spruce Goose of a Stimulus Plan would have worked. The reason the Spruce Goose of all stimulus plans ever concocted never got off the ground was “design”.

Nov 03 07:22 PM