Wednesday, August 26, 2009

Krugman on Deficits

Paul Krugman on his blog yesterday shows once again how he has stopped becoming a serious economics. First Kruggie from 2004, when the budget deficit was a mere $413 billion:

PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there.It's comparable to the worst we've ever seen in this country.

It's biggest than Argentina in 2001.

Which is not cyclical, there's only a little bit that's because the economy is depressed.

Mostly it's because, fundamentally, the Government isn't taking in enough money to pay for the programs and we have no strategy of dealing with it.

So, if you take a look, the only thing that sustains the US right now is the fact that people say, "Well America's a mature, advanced country and mature, advanced countries always, you know, get their financial house in order," but there's not a hint that that's on the political horizon, so I think we're looking for a collapse of confidence some time in the not-too-distant future.

Now from his blog, when it was announced that the deficit will total over $9 trillion, over the next decade, more than double the worst deficit under Bush, for 10 straight years!

It turns out that I was a little over-pessimistic in my assessment, mainly because the $9 trillion includes this year’s deficit, so we start from debt at 40% of GDP, not 50%. Overall, the OMB puts debt in 2019 at 76.5% of GDP; that figure is slightly exaggerated, however, because various financial rescues get counted as additions to the deficit even though taxpayers end up with additional assets. Net of these assets, the debt in 2019 is 68.9% of GDP.

As I’ve pointed out, that’s bad, but it’s not horrific either by historical or international standards. On a comparable basis, federal debt hit
109 percent of GDP at the end of World War II, and hit a second peak of 49 percent at the end of the Reagan-Bush years. And a number of European countries have hit substantially higher debt levels without crisis.


Lonnie Bruner said...

Krugman's response:

"The irresponsibility of the Bush years has left us poorly positioned to deal with the current crisis, turning what should have been an easily financed economic rescue into a more difficult, anxiety-producing process."

James B. said...

Oh please, Obama is increasing spending at an astronomical rate, and then blaming Bush for the programs that he himself is proposing. Is Bush really responsible for the mind boggling projected deficit in 2019? Does this mean we can blame the 2008 deficit on Bill Clinton?

Lonnie Bruner said...

The point is that Bush frittered away the nation's money and put us in a bad financial position during the good times -- massive tax cuts to the rich and nearly a trillion on a war. Those were times we could have been building up reserves and cutting the deficit. Now, when we really need to run massive deficits (all economists agree, outside the libertarian fringe), it's tougher because we're unprepared.

But on the other hand, I guess it doesn't help any of us if each side is blaming the other for putting our house in bad financial order.

The point is that our level of debt needs to be looked at vis a vis our GDP. When you do that, it's entirely sustainable and not out of what many countries have been able to handle.

James B. said...

Huh? After listening to 8 years of the Democrats explaining how we were sinking into poverty and unemployment, now the Bush years were suddenly the golden age when we should have been squirreling away our surpluses? Give me a break.

And not all economists agree that we should be blowing through deficits like Paris Hilton at a coke party. This massive spending is not stimulating the economy, it is scaring the ^#$% out of every investor, who is now terrified of putting their money any any venture more risky than a bank account in the Cayman Islands. Massive deficits can have a short term, read "short" term stimulus effect, but in the long term the dissuade investment in actual productive ventures. Buying thousands of road signs to put up alongside the highway telling people how you are blowing through their money is not productive.

Lonnie Bruner said...

"Democrats explaining how we were sinking into poverty and unemployment" -- well, that's inaccurate. Their main criticism was what I said: huge tax cuts for the rich and an unnecessary war. Also, "golden age" is not what I said; it was stable, FAR from what we're going through now -- a deep recession, not seen in a generation.

Well, the Dow isn't doing so bad, so the investors can't be too scared. If they are scared, perhaps it's because of the Great Recession? Hello? Remember from 1/20/09 until about March when all the wingers were citing the tanking Dow as the "Obama economy"? Now that it's surging, you don't hear that anymore. Funny how that works.

It's too early to tell about the stimulus. The wingers' argument reminds me of that Jim Gaffigan joke when he's so used to fast food that he goes to a regular restaurant, orders a burger, then one second later turns to the waiter and asks, "well, where is it?"

Anyway, it may not work; time will tell. We do see that countries that had stimulus packages bigger (relative to their GDPs) than ours are recovering much faster.

James B. said...

Not true, Germany and France already have a growing economy, even though they largely rejected the whole stimulus concept as push by Brown and Obama.

While the Dow has been hopeful recently, it had nowhere to go but up. It is largely a dead cat bounce.

Lonnie Bruner said...

Back to Kruggie.

"there’s a dissonance between what Germany says and what it does: the Finance minister denounces Keynesianism, but at least according to the IMF Germany’s actual stimulus package is quite substantial — comparable to that of the United States!

Meanwhile, France has suffered a smaller slump, 3.1% over the past year. Not too surprising, given that France didn’t have a big housing bubble and isn’t as dependent on durable manufactured exports as Germany."

Even so, France DID adopt a stimulus plan.

James B. said...

We are running a $1.9 trillion deficit, from a Keynesian standpoint it doesn't get any more stimulative than that. Geez, do you want to go for $3 trillion? You can't even begin to compare a $33 billion dollar French plan to that. That won't even pay next quarters interest on the deficit.

Lonnie Bruner said...

Well, ok, then you, me, and Paul Krugman agree that the deficits are a big concern. But about what we'd expect from a recession this bad -- back to Krugman's original point.

Lonnie Bruner said...

See the bottom graph. Reminds me -- Warren Buffet was on TV tonight saying this needs to be treated like a war, saving the economy. In that sense, we've got a way to go.

James B. said...

If it ended there, you might have a point, but the administration says the recession will end later this year, but yet they still predict deficits twice as large as anything Bush ever had until 2012. At no point in the next 10 years do they even come close to as good as Bush's worst year.

And even that is only by increasing taxes by letting Bush's tax cuts expire, and if they do not pass new spending, such as Obama's trillion dollar plus health care bill.

James B. said...

That is a bad analogy. In a war, you take resources from one sector, the economy, and transfer them to another sector, the military, in order to achieve some sort of strategic goal.

In this case what you are doing is taking resources from some disfavored sector of the economy, say rich people who invest in tech companies, and transferring it to some more politically favored sector of the economy, such as the UAW or companies that work in road construction. There is no strategic goal or victory involved. It is all politics.

Lonnie Bruner said...

You forgot to say "Obama's trillion dollar plus over 10 years health care bill".

Well, I think that last statement about taking from the rich and giving to UAW workers is a bit of an oversimplification. Take a look at the actual stimulus, and recall the 40% of it that went to tax cuts -- just to satisfy the Republicans -- that ended up being saved.

James B. said...

Not a single Republican voted for the stimulus in the House, don't blame them for it.

Lonnie Bruner said...

There's no way they could've gotten 60 votes in the Senate without appeasing the 3 Republican Senators who voted for it without 40% of it being tax cuts. With that 40%, it would not have passed.

Also, James, some more nice graphs here.

Lonnie Bruner said...

I meant withOUT that 40%.

JG said...

The point is that our level of debt needs to be looked at vis a vis our GDP. When you do that, it's entirely sustainable and not out of what many countries have been able to handle.

Ha! To beleive that you must ignore the $62 trillion "off the books" debt for Social Security, Medicare, etc.

Krugman totally disagrees with you, and puts you straight on that one!...

"I'm terrified ... we're looking at a fiscal crisis that will drive interest rates sky-high ... what's really scary, what makes a fixed-rate mortgage seem like such a good idea, is the looming threat to the federal government's solvency...

"because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest...

"... the conclusion is inescapable ... The accident, the fiscal train wreck, is already under way.

"How will the train wreck play itself out? ... my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar...

"... investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic...."

Of course, that was with the Republicans running Congress.

Now that the Democrats are in, suddenly Krugman does ignore "the future liabilities of Social Security and Medicare, [making] the true budget picture much worse than the conventional deficit numbers suggest".

Now only the conventional numbers matter. Well, that's Krugman for you!

Krugman versus Krugman.

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