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Paul Krugman Still Believes That “teh Debt” Can Be a Problem for the U.S.

letsgetitdone's picture

The deficit is now down to under 3% of GDP, and in contemplating that fact, Paul Krugman asks why the deficit hawks aren't celebrating the precipitous fall from nearly 10% of GDP a few years ago. He then explains that:

Far from celebrating the deficit’s decline, the usual suspects — fiscal-scold think tanks, inside-the-Beltway pundits — seem annoyed by the news. It’s a “false victory,” they declare. “Trillion dollar deficits are coming back,” they warn. And they’re furious with President Obama for saying that it’s time to get past “mindless austerity” and “manufactured crises.” He’s declaring mission accomplished, they say, when he should be making another push for entitlement reform.

All of which demonstrates a truth that has been apparent for a while, if you have been paying close attention: Deficit scolds actually love big budget deficits, and hate it when those deficits get smaller. Why? Because fears of a fiscal crisis — fears that they feed assiduously — are their best hope of getting what they really want: big cuts in social programs.

So, he unmasks them and then goes on to say:

But isn’t the falling deficit just a short-term blip, with the long-run outlook as dire as ever? Actually, no. Falling deficits right now have a lot to do with a strengthening economy plus some of that “mindless austerity” the president condemned. But there has also been a dramatic slowdown in the growth of health spending — and if that continues, the long-run fiscal outlook is much better than anyone thought possible not long ago. Yes, current projections still show a rising ratio of debt to G.D.P. starting some years from now, and uncomfortable levels of debt a generation from now. But given all the clear and present dangers we face, it’s hard to see why dealing with that distant and uncertain prospect should be any kind of policy priority.

That is, Paul Krugman is saying that

-- he doesn't think it's necessary to deal with a possible long-term rising debt-to-GDP ratio now, because of the many other problems we still have to face; but he's also implying that if the projection of such a rise holds later, then we will have to deal with it at that time;

-- the lowered deficit now is due to both a strengthening economy and some austerity measures, thereby excluding the possibility that it is due to the recovering economy alone, in spite of the fiscal drag from reduced Government spending at the Federal level pulling in the opposite direction; and

-- “. . . uncomfortable levels of debt a generation from now” are a possibility, implying that high levels of debt, and debt-to-GDP ratios mean something to the fiscal sustainability of Government spending in the United States.

Also, what he is not saying is that the deficit is far too low for a full employment US economy that can drive up wages and drive down inequality, courtesy of both major parties and the Administration, who made deficit reduction a priority since the stimulus bill passed in 2009. So what does this tell us about the thinking of the “progressive” economist with the greatest name recognition among the public and the Democratic Party faithful?

Simply this:

-- Krugman evidently still is communicating to progressives and Democrats that levels of debt and the debt-to-GDP ratio matter for a nation like the United States with a non-convertible fiat currency, floating exchange rates and no debts in a foreign currency.

-- He 's still implying that it was good to cut the deficit using some austerity, even though we still have 25 million Americans wanting full-time jobs who can't find them.

-- He's still saying that higher debt levels can be a problem for future generations.

And by not saying that the deficit is too low for the economic context of the US in 2014 – 2015, he is also telling us that he still doesn't understand the significance of the Sectoral Financial Balances (SFB) Model, and in particular that if the deficit has been driven down to under 3% of GDP by the politicians, that implies that the sum of private sector savings and current account balance cannot exceed 3%, and further that if the current account balance is approaching 3% as I believe it is, then that must mean that aggregate savings for the private sector was close to 0% in 2014.

A bad year for the private sector by any standard, and the lowest aggregate savings figure for the private sector since the first quarter of 2008. That is not a good sign for the continued recovery of the economy, and judging from his column quoted earlier, Krugman doesn't appear to have a clue about the sheer fiscal irresponsibility of driving the government deficit down to a low enough level that there is no surplus available for the private sector to save. Now that's austerity. But Krugman's claiming that austerity is over.

In addition, the fact that his continued belief that the level of debt subject to the limit and the debt-to-GDP ratios can be a problem for our economy, means that if we listen to his advice we will one day have problems with our economy. This is true because sooner or later he is bound to conclude that the existing level of debt, or the debt-to-GDP ratio, is too high to allow the US to deficit spend very much to get to full employment, or create an economy that is fully recovered from a depression or serious recession.

Government fiscal policy should be targeted on public purpose outcomes such as full employment, price stability, Medicare for All, a strong safety net, renewed infrastructure, re-invented energy foundations, etc while the deficit, the debt, the debt-to-GDP ratio, and the current account balance are allowed to adjust to spending, as they will (to float). That is Real Fiscal Responsibility in fiscal policy. And there is no room in the process of implementing it to target arbitrary values of debts and deficits; because they are not important in themselves for a nation like the United States with a sovereign fiat currency. More on the idea of Real Fiscal Responsibility and an effort to spread the idea is here. Please help us do that.

(Cross-posted from New Economic Perspectives.)

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CMike's picture
Submitted by CMike on

a Three Musketeers, a ball point pen, one of the combs there, a pint of Old Harper, a couple of flashlight batteries, and beef jerky."

One of these things was not like the others. Busted.

Lets writes:

Government fiscal policy should be targeted on public purpose outcomes such as full employment, price stability, Medicare for All, a strong safety net, renewed infrastructure, re-invented energy foundations, etc while the deficit, the debt, the debt-to-GDP ratio, and the current account balance are allowed to adjust to spending, as they will (to float).

One among these things, also, is not like the others.

Now I only have the embed for how things worked out with the first list but picture there being some similar roadblock for the "price stability" item in second list whenever there is full employment and then some sudden need for more of a government supplied good or service or a sudden shortage in a critical commodity along with a general public unwillingness to volunteer for the reality that there will be a reduction in the standard of living for a lot of somebodies at that point. (And if you're wondering how often that might come up, keep in mind that the idea an economy should always be operating at full employment is one of the basic organizing principles behind MMT.)

Submitted by lambert on

Can you give a worked example, assuming as you aver, that let's set of items has at least one item that should not be there, even though one might think they are all policy goals?

CMike's picture
Submitted by CMike on

The nation decides it has to go on a crash aircraft carrier building program. The government starts directing labor and other resources towards building aircraft carriers by spending on them. Whatever is being made in the private sector becomes more expensive to make. Consumers, who spend the money labor makes, want to continue purchasing the same amount of private sector goods and services, actually more of them if paychecks are bigger. The prices for private sector goods and services rise as suppliers pass their increased labor and commodity costs on- that translates to price instability. If the costs aren't passed on, consumers will bid them up anyway because of the increased income labor is earning- that translates to price instability.

Fiscal policy can only create price stability in this scenario by reducing consumer purchasing power through taxes thus lowering the standard of living. If businesses are taxed enough to slow their purchases it slows their output and with less supply there is additional pressure on prices to rise. If businesses are taxed and it doesn't slow their output then you haven't accomplished anything on the inflation front- you're just capturing idle savings which may address inequality but it won't address price instability in the short run.

Example # 2: You're at full employment

An international cartel forms, one which can control a substantial amount of a strategic resource, like say oil, and which, obviously, is outside the control of the WTO. It drives up the cost of the commodity it controls. Until you can break the cartel or develop a substitute for that commodity your society will not be able to maintain its standard of living.

Automatic wage increases to maintain worker purchasing power creates inflation in other goods because people decide to use their extra dollars not to buy the same proportion of goods and services that make up the basket of goods that the Consumer Price Index tracks. As people spend their increased nominal income which they are earning from their automatically adjusted for inflation minimum or other level wages, from their guaranteed or from their not-guaranteed job, to buy more of other things than the commodity now in shortage and the things made from it, that tends to drive up the price of those other things.

If they maintain the same consumption pattern they encourage the cartel to charge even more than its all ready inflated price. In fact, it really doesn't matter if you start with a fully employed economy or one all ready suffering with high unemployment, if an essential commodity for which there is no substitute suddenly becomes more expensive you'll find yourself trapped in this spiral.

CMike's picture
Submitted by CMike on

people all ready working for the government at their floor wage job at the job bank into the public or private sector for aircraft carrier building either you're going to have the government paying high skilled labor the economy's floor wage or you're going to have higher paid workers expecting to be able to buy more consumer goods than they did when they were working at the job bank. And this added demand would be without the economy producing more consumer goods in the aggregate which would create inflationary pressure on the prices of consumer goods for everyone.

CMike's picture
Submitted by CMike on

what's different about government spending that makes most people, or a least a lot of people better off without making many people worse off, spending on things like energy R&D or single payer health care, like more generous social safety net benefits or a full employment jobs program, like building better infrastructure or health care for all VERSUS imposing new taxes that fall broadly on consumers to maintain price stability if a government were to undertake new expenditures when the state's economy is at full employment (instead of slowing down the private sector economy with monetary policy which is the double whammy of a cost borne broadly and a windfall for creditors of public and private debt)?

letsgetitdone's picture
Submitted by letsgetitdone on

is that full employment be maintained all the time and that price stability also be maintained all the time. But no one said that the private sector had to be the sector creating full employment all the time. Randy Wray expects that once the economy is fully recovered and stabilized with the proper financial controls to contain bubbles, then economic cycles will see swings between 8 million in the JG program when the economy is working well and 12 million in the program when the economy is down. So, looking at it from the point of view of the problem you're concerned with it seems that there will be plenty of JG workers to fill that need.

Going further, I think you're raising the problem of what happens when we find ourselves in national emergencies where the Government needs labor for some urgent national need, and its need exceeds the supply of JG labor and requires the Government to divert labor from private sector markets. Well, I don't think it's a mystery about what happens in the situation. After all it happened in WWII. One has a command economy w/ wage and price controls, high taxes, full employment AND price stability, and people earn less and work harder than they would in a peacetime or non-crisis-mode market economy. So, what? Why is this a problem for my post or for MMT?

BruceMcF's picture
Submitted by BruceMcF on

... then we have a target for the increased taxation that will not undermine the ability of a single American to meet their basic needs, which is serious progressive income tax rates on the top 10%, and top 1%, and most importantly the top 0.1%, together with taxes on the levels of death windfall income that perpetuate a permanent financial wealth aristocracy.

letsgetitdone's picture
Submitted by letsgetitdone on

Right now we have a REAL national emergency which people don't perceive as that. The emergency is the overthrow of democracy by plutocratic oligarchy, along with the total failure of the political system to meet a whole range of serious problems, including impartial law enforcement, and an environmental/climate change emergency.