Krugman And Deficits: An Alternative View To Ian Bezek's

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Summary

SA superstar Ian Bezek finds some inconsistency in Paul Krugman's recent views on deficits.

I think investors can relax. Krugman has been consistent and remains an oracle on the macro.

Careful reading of the articles cited by Mr. Bezek shows a strong and consistent thread in Krugman's deficit-related thought.

I am a big fan of Ian Bezek's work, and he certainly gave an interesting analysis of recent statements by Paul Krugman today. However, my own take on what Krugman said is a little more generous to the great economist.

Do read Ian's piece on this subject first so you see his argument in his own words. I think Ian's view is very clearly put, and hope the following summary does it justice.

1. Before Trump was elected (October and August), Krugman was urging Hillary Clinton, on the assumption she would be elected in November, to borrow and spend on infrastructure.

2. Now, with Trump approaching inauguration, Krugman has reversed. He says deficits matter now, and cites apparent full or near-full employment as the reason. The risk, according to Krugman, is that significant deficit financed investment spending now could crowd out the private sector and therefore be less positive for overall growth.

Ian notes that part of Krugman's view embraces the House Republicans:

"The second critique is that - contrary to Trump's stated intentions - Krugman thinks Congress will use its powers to cut taxes on the wealthy rather than build infrastructure."

3. Given that employment has only increased 0.2% since the "pre" and "Post" Trump opinions on deficits, Krugman is basing his view of employment on small incremental change . Ian asks:

"Anyone else feeling the whiplash?

As someone with an economics degree myself, this is simply nonsensical."

Strong stuff. Krugman, the Nobel prize-winning economics professor, is failing to make sense to Ian Bezek, armed as he is with an economics degree!

Where I depart from Ian's view is in "part 2" of the argument as I stated it above.

Krugman does indeed say that he thinks the Republicans will cut taxes "rather than build infrastructure". But not only do I think this is important, I think it's the entire point of his piece about potential budget deficits under Trump.

The key to my view is the following paragraph that links the above points about crowding out tax cuts for the wealthy. I quote it below with the follow-through to Krugman's view of tax cuts:

"Now, government borrowing can still be justified if it serves an important purpose: Interest rates are still very low, and borrowing at those low rates to invest in much-needed infrastructure is still a very good idea, both because it would raise productivity and because it would provide a bit of insurance against future downturns. But while candidate Trump talked about increasing public investment, there's no sign that congressional Republicans are going to make such investment a priority.

No, they're going to blow up the deficit mainly by cutting taxes on the wealthy. And that won't do anything significant to boost the economy or create jobs."

Krugman therefore still sees state-backed investment spending as worth it - and acknowledges that Trump has talked about it - because it will help cement the strengthening economic recovery. Indeed, he calls it a "very good idea". So Krugman, in saying deficits matter more now, isn't saying that Trump shouldn't run one. I think the thrust of what he is saying is that he doesn't think we're going to get the deficit we would like. We're going to get one based on tax cuts, and that's not the same thing as an "infra deficit" in terms of its support for the economy.

OK. What about the idea that Krugman was all for deficits under Clinton, but not Trump? Obviously, I think it's a misreading to say he doesn't want a deficit under Trump. But, more importantly, if we dig into what he said back in August, we can see many of the same ideas we saw in his post-Trump piece on this subject. To my mind, he isn't changing his mind because his preferred candidate didn't win, and certainty not engaging in "rank political hypocrisy", as Ian thinks.

Have a look again at the Krugman quote above. Here's the part I highlighted:

"because it would provide a bit of insurance against future downturns..."

The tweet Krugman offered in October, in which he said it was still time to "borrow and spend", had a link to an article he wrote in August, in which he set out his reasons in more detail. He said pretty much the same thing as he did in his post-Trump piece - that we are closer to full employment and the need for deficit funded infrastructure has reduced, but:

"Suppose we were to launch a program of deficit-financed public investment, which would play out over the next few years. The truth is that we don't know what the macro environment would be when the spending took place. We might be more or less at full employment, which means that the spending would cause higher interest rates and crowd out some private investment. But we also might be in a depressed state, either because of a slump in some part of domestic demand or because we're importing secular stagnation from abroad, in which case fiscal stimulus would be just what the doctor ordered."

To me this looks like a very consistent view of the subject. Back in August, Krugman said there was less need for deficit-financed stimulus, but it would help make sure of the recovery. And now he's saying that again.

Conclusion

Krugman, of course, is human, and being a passionate liberal, he will be prone to strong feelings at this time, especially given the amount of economic gobbledygook emanating from the President-elect and his team. But he isn't being inconsistent or hypocritical.

As it happens, I do think Krugman is making a politically influenced error, or at least a potential one.

Quite simply, I think he is writing off the chances of an infrastructure program too early. I think a lot of people entertain doubts about what Trump will be able to secure in terms of fiscal space from his own party, but it seems premature to say it won't happen. Where Krugman might be mildly embarrassed is a scenario in which a convincing infrastructure program does go ahead.

Overall, I think Krugman has made more sense than most public economists about the issues facing global policymakers since the crisis, and I would expect him to continue in this vein. I'll leave you with an endorsement from none other than Charlie Munger:

"I've always read Paul Krugman because he's the smartest leftist I've ever read, and he uses the King's English very well."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.