Friday, September 3, 2010

Krugman's Column and Comments: If Your Spend, Spend Boldly

One of Martin Luther's most famous sayings was, "If you sin, sin boldly." Now, Luther was not demanding that people commit sins, but rather was emphasizing what he saw was the grace of God. In a 1521 letter to Melanchthon, he wrote:
If you are a preacher of Grace, then preach a true, not a fictitious grace; if grace is true, you must bear a true and not a fictitious sin. God does not save people who are only fictitious sinners. Be a sinner and sin boldly, but believe and rejoice in Christ even more boldly.
No, this is not a theology lesson, but I see an analogy in Paul Krugman's latest statements, both in his latest column and on an appearance on Good Morning America.

He writes:
When Mr. Obama first proposed $800 billion in fiscal stimulus, there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons.

One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading The Wall Street Journal’s opinion pages in early 2009, you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation.

The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available. As I pointed out in February 2009, the Congressional Budget Office was predicting a $2.9 trillion hole in the economy over the next two years; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn’t up to the task of filling that hole.

Critics in the second camp were particularly worried about what would happen this year, since the stimulus would have its maximum effect on growth in late 2009 then gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010.
Since I am not in the Wall Street Journal Supply-Side/Neoconservative camp, I'm not going to comment on what the Journal editorialists have written, but I do have a problem with Krugman's analysis.

He claims that had the government appropriated nearly three times as much as it did, the economy would be doing fine now and we would be close to full employment. However, he fails to explain just how or why that would be the case. Yes, I am familiar with the diagrams included in an earlier posting, but Krugman seems to be implying that had the government run a three-trillion-dollar-plus deficit last year, that our economy would be in fine shape today.

But, WHY would it be in good shape? Would have that injection of spending -- And how and where would Congress appropriate that amount of money so quickly? -- have boosted long-term capital investment, which is missing today? Krugman doesn't say; he just looks at GDP charts, extrapolates, and then he is off writing columns.

Second, his attribution of bad motives to anyone who disagrees with his point really strikes me the wrong way. Republicans are just obstructionists and nothing more, and the markets are run by idiots, and President Obama is just listening to the wrong people, and that maybe Krugman should be the president's top economic (and political) adviser. Who knows?

I mean, if the Keynesian paradigm really is as good as Krugman says it is, then I would be happy to participate in a scheme in which all of us could spend ourselves into wealth. Since the Chartalists seem to believe that the official government monopoly on what government calls money is the source of creation of wealth and prosperity, all that is needed is for government to spend, spend, spend, and everything else will follow.

At one level, I wish Obama had followed Krugman's advice and just lavished the spending if for no other reason to demonstrate just how wrongheaded that entire Keynesian paradigm really is. (I'm sure that Krugman would add that one not only would need new spending, but one also would have to have a religious faith in government spending and government itself in order to make the whole thing work.)

So, Obama is going to try to do something, the economy will continue to tank, and Krugman will be claiming that all we need to do to get rich is spend a lot of money, and if our bank accounts are empty, then the government will fill them with "living water."

9 comments:

AP Lerner said...

“He claims that had the government appropriated nearly three times as much as it did,”

Could you provide a link to where Krugman claimed the stimulus should have been $2.4T? Roughly $1.2T is what I remember him thinking being about right.

http://krugman.blogs.nytimes.com/2009/10/05/the-story-of-the-stimulus/

“Since the Chartalists seem to believe that the official government monopoly on what government calls money is the source of creation of wealth and prosperity, all that is needed is for government to spend, spend, spend”

Please at least try and understand MMT before criticizing. At no point has anyone that understands MMT ever said all the government has to do is spend, spend, spend to create wealth. Not Mosler. Not Wray. Not Mitchel. Nobody. I know you like to make simplistic claims, but let’s stick to the facts.

MMT explains the sectoral balances and the relationships of those balances. MMT recognizes the relationship between the public, private, and external sectors. It is up to the private sector to create wealth, but the private sector can not create wealth if the public sector does not provide the surpluses when the external balance is in deficit. No theory. That’s operational fact in a monetary system such as the US’s.

“And how and where would Congress appropriate that amount of money so quickly? -- have boosted long-term capital investment, which is missing today?”

Capital investment is missing today because the consumer is over levered. You can keep ignoring this graphic, but it’s not going away.

http://static.seekingalpha.com/uploads/2009/12/3/saupload_debttoincome.jpg

Lack of investment is not the problem. Debt is the problem. When this debt is eliminated, investment will return. More stimulus / lower taxes accelerates the deleveraging. This is a balance sheet recession, not an inventory driven / over investment / mal-investment recession. It’s not 2001, 1992, 1980…..

Ike said...

AP Lerner --

If what you write is correct, and Krugman only called for a $1.2-T stimulus, then his complaint today would be entirely different.

Today, Krugman is bemoaning that the stimulus wasn't higher. If you're right, then he would only be "wishing" for another $400-B.

If we're to believe that tax cuts were a significant part of that $800-B, and that much of it went unspent for so long, then Krugman's bigger beef should have been that the Obama Administration didn't get the money out the door quickly enough.

My gut tells me that Krugman is saying the same thing at $800-B that he would be saying if Stimulus had failed at $1.5-T... "It wasn't big enough."

When the water is so muddy and choppy that investors won't put their lines in the lake, you can't smooth out the waves by throwing huge boulders at them.

Anonymous said...

"It is up to the private sector to create wealth, but the private sector can not create wealth if the public sector does not provide the surpluses when the external balance is in deficit."

The private sector, as defined by my household, is to receive surpluses when my neighbors are in deficit? Yippee, show me the money.

N. G. Zax said...

The beauty of this reasoning is that you can never be wrong. Anytime it doesn't recover after you inject the money, you can just claim it wasn't big enough.

At the time this one passed, there were plenty of people who said it *was* big enough, unemployment would start coming down, &c. All conveniently forgotten.

Anonymous said...

@NG Zax:

I think Krugmans point is that he was one of more than a few that said it should have been bigger, right from the start.

I think he also said something about the relative stimulative value of the tax cuts contained in it in relation to the direct spending, so the overall effect of what was budgeted was not nearly as optimal as it could have been.

Much of the latter point are political rather than economic (though, I gather Austrians would disagree).

AP Lerner said...

"If what you write is correct, and Krugman only called for a $1.2-T stimulus, then his complaint today would be entirely different."

See the link from 2009 I provided where Krugman said $1.2T sounded about right. This is a far cry from the $2.4T Prof. Anderson claims Krugman was pushing for. Prof. Anderson should provide proof of his claim, or retract his statement as an error. Or is truth and facts optional on this blog?

Bob Roddis said...

How can a $1.2T "stimulus" debt bomb cure an alleged "$2.9 trillion hole in the economy over the next two years"?

BTW, we Austrians don't buy the concept of the "hole", so you need to start from scratch and prove the existence of the hole. I don't have the energy to quibble over "details" of what it might take to fill this imaginary "hole" based upon a "theory" that its advocates admit is not even a real theory* and is transparently a crock.

*"No theory. That’s operational fact"

Richard Moss said...

AP Lerner,

I think Dr. Anderson is drawing a conclusion based on what Krugman says in his post. He quotes him as saying there was 2.9T dollar hole in the economy and the 800B wasn't enough to fill the hole. I don't see how drawing the conclusion that Krugman is advocating an additional $2.1T in stimulus (nearly 3x 800B) is 'unproven' based on what he said.

To be more clear, maybe Krugman could have restated the specific amount of stimulus he advocated instead of leaving it to draw a conclusion based on his comments on filling CBO 'holes' with 'stimulus.' Or maybe he did it knowing that people would accuse him of advocating a 2.1T stimulus, after which he could zing them with a retort that his critics view facts as optional. I doubt it, though.

ruralcounsel said...

Reminds me of a neighbor who farms down the road from me...the local bank is in to him (or visa versa) to about 2 million.

He's not worried that they'll shut him down. As he puts it, there aren't any bankers who want to come out and feed and milk his cow herd at 4am.

All of the Krugman advice seems to be, get so deep into debt that your creditors don't dare call the loans. (The Keynsian argument that government spending with borrowed can help the economy seems idiotic to me. You can't bootstrap yourself out of a ever-deepening hole, especially if the bootstraps are being managed by government doing the digging.)

Unfortunately, at some point the lenders will cut their losses and quit lending you more. Which for the U.S. means "game over."