Saturday, August 6, 2011

Downgrades, Debt, and More Delusion

So, Standard & Poors has downgraded the mighty U.S. Government bond to less than AAA status, and Paul Krugman is upset. Now, he is not upset that the government now has more than $14 trillion in debt, nor that government spending continues apace without the capability of this economy to create the kind of wealth needed to pay down this monstrosity.

No, Krugman is upset because he is of the belief that things were just going fine, at least debt-wise, until those mean, nasty Republicans engaged in debt-limit brinksmanship. In other words, his only beef is that the government is not taxing us enough. (Remember, he already has declared that the government "is not broke." Yes, according to Krugman, as long as the government can borrow money, its finances are in solid shape.

Krugman declares:
...there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency (Emphasis mine).
I really must admit to being dumbfounded here. Does he really believe that had some of the Republicans not demanded budget cuts, everything would have been just fine? Does he really believe that hitting the borrowing-and-spending accelerator somehow would magically have transformed this economy and federal budget and pushed us into the black? I'm sorry, but this is astounding.

One does not have to support the Republicans to know that things are in desperate shape. The government's insistence that everything is just fine, and that prosperity is just around the corner, and that all the sick patient needs is just another "fix" of cheap credit is utterly delusional.

Whether or not one can quibble with S&P for downgrading U.S. Government debt, one thing is for certain: the U.S. Government is not solvent, not by a long shot. It is able to pay back bonds by borrowing money, something that is ANY other entity were to do would be considered criminal fraud. Borrowing from Peter to pay Paul is not an economic program; it is a de facto admission of bankruptcy.

29 comments:

Lord Keynes said...

"Does he really believe that had some of the Republicans not demanded budget cuts, everything would have been just fine? "

No, he means that if it wasn't for deluded neoclassicals, mindless Republicnas, and other free markets hacks, the US could implement the necessary fiscal stimulus needed to return the economy to high employment.

"It is able to pay back bonds by borrowing money, something that is ANY other entity were to do would be considered criminal fraud."

People are freely lending to the US government, even to roll over debt - who are you to tell them what to do with their money?

Bob Roddis said...

1. Only the simple minded think money dilution and unpayable debt “stimulate” anything other than unsustainable waste. Where’s the stuff going to come from to satisfy the debt? That’s the issue always avoided by the statists.

2. [W]ho are you to tell them what to do with their money? Trick question, eh? We tell them what to do because they plan on coming after us to repay the money with taxes or, most likely, embezzlement via money dilution. Plus, they have no business spending the money they borrow in the first place.

3. LK claims that the period 1945-1973 is evidentiary proof that Keynesian policies work. I’ve been saying that the prosperity which came would have come anyway and was held back longer than necessary by the statists and their central bank-induced depressions and two world slaughter-fests. Blogger Ryan Murphy has an excellent twist on that theme:

While the West slowed down after 1970, it had never seen an extended period of growth that long before (i.e. from 1800 to The Great Depression, the West never had a 25 year period where it grew as fast). This is evidence against Cowen. And while the slowdown coincided with the rise of neoliberalism, countries that failed to embrace neoliberalism are doing worse than the ones that undertook reforms, contradicting Krugman. The question that needs to be answered is what made the fifties and the sixties special, and the answer certainly isn’t hydraulic Keynesianism.

What made it special was that it occurred immediately after The Great Depression and a world war. These events constituted sixteen years of private sector stagnation for the US and even greater than that for much of Europe. But at the same time, the private sector was no less inventive in the 1930s. There was enormous amounts of Schumpeterian entrepreneurship taking place at the time. We just weren’t getting any growth out of it. The PPF was continuously outward, but the economy wasn’t following it. The supernormal “growth” we saw after WWII was the result of reaching the PPF. We got rid of the worst of the economic policies during The Great Depression, and then it was only a matter of Kirznerian entrepreneurship for us to rapidly expand the economy. The low-hanging fruit in Cowen’s story were created by the Schumpeterian entrepreneurship that had not led to visible economic growth.


http://increasingmu.wordpress.com/2011/07/31/an-optimistic-conjecture/

LK hero Steve Keen also points out that private debt was extremely low by 1945. I assume that was because depression debt had either been paid off or it had expired via the statute of limitations during a 15 year depression.

Daniel Hewitt said...

LK,

The stimulus was $800B, but Krugman said it should have been $1.2T (correct me if these numbers are wrong) given the projected output gap. How much should it have been, in light of the new information about the magnitude of the downturn in '08?

Anonymous said...

The more I read this blog the more I am convinced that Anderson is just jealous of Paul Krugman's job.

This has got to be one of the worst postings I have ever seen here - full of red herrings, straw men, and really strange logical connections.

"No, Krugman is upset because he is of the belief that things were just going fine, at least debt-wise, until those mean, nasty Republicans engaged in debt-limit brinksmanship. In other words, his only beef is that the government is not taxing us enough."

How on earth do you go from the conclusion that Krugman is upset with the negotiation on the debt ceiling to that his ONLY beef is taxation?

"It is able to pay back bonds by borrowing money, something that is ANY other entity were to do would be considered criminal fraud." If only the US government was like any other entity. AND that is simply not true. The US borrows money to pay for a lot of things and it also collects taxes to pay for many of these things.

If you truly were following Krugman as closely as you claim (instead of just being envious) you would recognize his consistency on a number of issues -

1) Krugman has always claimed that deficits DO matter, just not during a recession.
2) Krugman has never claimed that government spending will lead to PROSPERITY.
3) Krugman has been consistent in stating that the solutions to the long-term deficits of the United States have to do with a) entitlements and especially health care COSTS; b)taxation of all income levels; c) war spending. The debt ceiling debate only actually addresses the latter while also cutting from measures in discretionary spending that will hurt the economy in the short and long run.

ayassos said...

Actually, today's howler from Krugman is in his "arithmetic of debt" post, where he presumes that all U.S. deficits and future rollover debt can be financed (or refinanced)at today's 30-year rates. This is either (a) dishonest (most generous appraisal) or (b) imbecilic. With no Fed currently backstopping purchases through POMO operations, Krugman nevertheless believes that Direct, Indirect (foreign CBs) and Primary Dealers will line up to buy as much 30-year paper as the Treasury will issue, simply so that Krugman's rosy scenario of an easy-to-manage debt service to GDP ratio can be maintained - for the next ten years. I don't think Prof. Anderson needs to be jealous of this kind of delusion. Sure hope not.

Bob Roddis said...

Krugman has never claimed that government spending will lead to PROSPERITY

Krugman claims that government spending causes "TRACTION" which leads to prosperity.

Krugman has always claimed that deficits DO matter, just not during a recession

Deficits also matter during recessions because economies don't have or lack "traction" and deficits don't provide "traction" in any event. Deficits merely mis-direct resources from a sickly patient. A healthy person is more likely to recover from a crack binge than a sickly one. A healthy economy is more likely to heal from a dose of deficits than a sick economy.

Haven't we explained this to these hopeless statists about 55,000 times already?

Old Mexican said...

Re: Lord Keynes,
No, he means that if it wasn't for deluded neoclassicals, mindless Republicnas, and other free markets hacks, the US could implement the necessary fiscal stimulus needed to return the economy to high employment.

Ditch digging, LK?

People are freely lending to the US government, even to roll over debt - who are you to tell them what to do with their money?

So were Madoff's victims. They freely invested their money on his scheme. But a scheme it was, just as the government's is a scheme. You very conveniently forget this. The only difference between Madoff and the government is that one can get away with it; that was Bill's point.

Discount Tax Corporation said...

It is funny reading the arguments between the Keynesians and the Austrians on this blog. Overall it seems that each side is wrong some of the time and correct some of the time.

Basically both of your economic theories are not able to discribe the convoluded, complicated and corrupt system that we have created to reward the political favorites in this country.

If you throw together all the economic theories today you will get the answers to half of our economic problems. This leaves most the important questions left unanswered unfortunately.

Anonymous said...

@ayassos - your doing exactly what Anderson does here - just creating red herrings and strawmen arguments.

Where did Krugman say that ALL future deficits could be financed through issuing 30-year bonds? He was talking about the cost of issuing $1 trillion of debt over 10 years to make his argument that for the near and mid-term the difference between S&P's $4 trillion reduction recommendation and the actual $2.2 trillion reduction is minimal as a % of GDP.

Moreover, countries and corporations are still buying 30-year bonds from the United States. The United States can still borrow at very low interest (well, as of yesterday).

He then goes on to say - "America does have a long-run fiscal problem, driven by the combination of rising health costs, an aging population, and the unwillingness to raise taxes to pay for the programs we already have. If we don’t come to grips with that problem, BAD THINGS WILL HAPPEN (Emphasis added)"

It might be beneficial to actually read what you criticize first.

Major_Freedom said...

LK:

No, he means that if it wasn't for deluded neoclassicals, mindless Republicnas, and other free markets hacks, the US could implement the necessary fiscal stimulus needed to return the economy to high employment.

In other words, Krugman doesn't understand economics.

Old Mexican said...

Re: Discount Tax Corporation,

"Basically both [Austrian and Keynesian] economic theories are not able to d[e]scribe the convoluded, complicated and corrupt system that we have created to reward the political favorites in this country."

That only means that you haven't even bothered to read any Austrian author. You can begin with A Theory Of Socialism And Capitalism by Hans-Hermann Hoppe, who explains precisely what you allege that Austrian economic analysis cannot describe.

http://mises.org/etexts/SocCap.pdf

Old Mexican said...

Re: Anonymous,

"If only the US government was like any other entity. AND that is simply not true. The US borrows money to pay for a lot of things and it also collects taxes to pay for many of these things."

How does this makes it different from any other entity? Unless you are comparing it to entities that do not resort to stealing to support themselves; in that case, the government is an entity like no other.

"1) Krugman has always claimed that deficits DO matter, just not during a recession."

You seem not to question this, which explains why you would think this statement makes Krugman's economics "consistent."

Deficits matter all the time because the government takes capital away from the producers in order to pay for them, be it through borrowing, be it through taxation, be it through inflation (monetary expansion.)

2) Krugman has never claimed that government spending will lead to PROSPERITY.

He IMPLIES as much when asserting that the supposed "austerity" of FDR's government in 1937 brought a new great depression. Just for starters. He also implies it here:

http://krugman.blogs.nytimes.com/2010/06/15/magical-foreigners-austerity-edition/

"3) Krugman has been consistent in stating that the solutions to the long-term deficits of the United States have to do with a) entitlements and especially health care COSTS; b)taxation of all income levels; c) war spending."

Well, in one thing you're right: He HAS been advocating for more taxation. That much is true.

Discount Tax Corporation said...

I am sorry Old Mexican. Your comment is exactly like a scientologist saying that I must take a certain scientology class to understand religion.

Religion, politics and economics are argued in the same fashion. The fact is that people need politics and religion. We don't need economics. We would be better off without the static.

I will state again. Austrians are correct some of the time and Keynesians are correct some of the time.

You should work together to find out what you agree upon instead of forever arguing minutia.

Woody said...

Krugman: "...if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency."

Response: ...Then why didn't the President or his Party that controls the Senate ever put in writing such a proposal that could have been fully analyzed by America's legislators as well as scored by the Congressional Budget Office?

Link

Woody said...

Oops.

No risk' the US will lose its top credit rating, says Treasury's Geithner 04/19/11

American Patriot said...

You could tax all the millionaires at 100% (an impossibility), even then you'd have insufficient revenues.

LK:
I think you missed the Chinese, who said good ole days of borrowing are over. Dream on.

Progressives are so pathetic!

Anonymous said...

O Woody you've been spending too much time in the right-wing echo chamber.

http://www.cbo.gov/ftpdocs/123xx/doc12338/SenateBudgetControlAct.pdf

William L. Anderson said...

From 2009 to 2011, the Democrats had a huge majority in the House and a filibuster-proof majority in the Senate. So, if they wanted to raise taxes, why didn't they do it when they had the numbers?

Krugman and his followers want us to think of Republicans like the Big Brother tried to present Goldstein. The Democrats had the numbers and they had their chance, and Krugman had his Nobel and was at the height of his popularity.

So, if raising taxes is such a great idea, why didn't these guys do it then?

Old Mexican said...

Re: Discount Tax Corporation,
"I am sorry Old Mexican. Your comment is exactly like a scientologist saying that I must take a certain scientology class to understand religion."

Should I remind you of what you alleged, DTC?

"Basically both [Austrian and Keynesian] economic theories are not able to d[e]scribe the convoluded, complicated and corrupt system that we have created to reward the political favorites in this country."

That's a statement of fact from your part. It is clear you totally ignore the existence of Austrian explanations and theoretical description for this "complicated, corrupt system."

Instead of throwing red herrings, you should do well to read Prof. Hoppe book on socialism and capitalism, which perfectly describes the system you allude to and provides the theoretical framework to explain the reasons of its existence.

"Austrians are correct some of the time and Keynesians are correct some of the time."

And again I am telling YOU: You haven't even bothered to read Austrian works; that much is clear from that absurd statement. So far, Keynesian theory has been proven WRONG many times (the failure of economic stimulus, the stagflation phenomenon they said it could never happen, the recessions that never came after government's reduction of spending, et cetera.) Instead, Austrian Business Cycle Theory perfectly describes and PREDICTS the bubbles and following recessions created by monetary expansion.

"You should work together to find out what you agree upon instead of forever arguing minutia."

That's an absurd statement, like asking chemists to agree with alchemists and dismissing the clear BIG differences as "minutiae."

Anonymous said...

Why should anyone believe the Austrians? They are the same as puritanical chaste old maids. Their message is the equivalent of don't drink, don't smoke, and don't have sex if you want to avoid liver disease, lung cancer and STDs, which is fine and sage advice to prevent a problem but next to useless once there is already a problem.

The Great Depression began with the collapse of an Austrian bank.

William L. Anderson said...

I like this last comment, and would paraphrase it as:

"Don't listen to the Austrians, as they can give both cause AND effect. Who wants to be told that when we can go on deluding ourselves, and especially since the delusion makes us feel good."

Bob Roddis said...

Why should anyone believe the Austrians? They are the same as puritanical chaste old maids. Their message is the equivalent of don't drink, don't smoke, and don't have sex

And we're simulateously libertarians! Are these cement-head statists perplexed or what?

Anonymous said...

Yes the Austrian model gives a cause and effect but once in the middle of deep doo-doo, it does not prescribe a cure except to wait it out.

For some maladies that is enough, but for the more serious afflictions it isn't. For those Keynesianism was developed.

It's true also that Austrians are libertarians, that's why when they see commission of excess they wag their fingers and tut-tut but refrain from intervening. When the **** hits the fan they are ready to go "I told you so"—but when asked for help will they give a helping hand or will they also say "one is responsible for one's own actions"?

Woody said...

Anonymous, your link was a deadend, but my reference is correct in that neither Obama nor the Senate put forth a proposal to insure long-term solvency.

Bob Roddis said...

The Austrian prescription is not "to do nothing". People need to work hard and save. They need to get rid of the Kleptocrats. That's "doing something". The prescription is for the SWAT teams and Kleptocrats to do nothing since they are the ones that caused the problems in the first place.

Anonymous said...

Had we "done nothing" these last couple years we would be in far better shape than after QE1 and QE2. They nonsense Krugman "solutions" only lead to more problems.

As Daniel Hewett pointed out in the other thread, Krugman specifically said that the only way commodity prices would increase would be if demand was created from QE2. He has also said that demand was not stimulated, yet commodity prices drastically increased.

If someone so wrong time after time like Krugman is giving "solutions" like this, then give me nothing any day. Remember the Depression of 1920? Oh, that's right, nothing was done in response to the stock market crashing, which is why we did not have a depression, unlike in 1929.

I understand why the krugman types of the world are lashing out and attacking austrians now, because it is a similar time to the 1970s when things they flatly predicted or stated were not possible are taking place. Who wants to be reminded of being so wrong like Krugman was on QE2, especially when his solution is to spend even more?

Anonymous said...

That was a different Anonymous Woody.

TARP made money. The financial institutions were saved. The auto industry was saved. The markets went up granting some a reprieve. Yup QE2 was a total failure. Blame Milton Friedman for being the brains behind it.

Mule Rider said...

"it does not prescribe a cure except to wait it out."

And thus highlights the statist/Krugmaneysian position, which is at the root of the problem - the persistent need to "do something" - something that, in the long-run, always hurts more than it helps.


One note about the downgrade of US debt from AAA to AA+....so many people, mostly Krugman and other Keynesian hacks, are playing a "shoot the messenger" role and attacking S&P and its "terrible track record." Now I'm no defender of S&P and acknowledge their many mistakes in assessing the creditworthiness of countries, institutions, and debt instruments, but for their lack of accuracy, they've at least been precise - i.e. they've consistently OVER-stated the creditworthiness and UNDER-stated the risk in their debt scoring. That said, is it too much of a stretch to think they might be "wrong" again and that a AA+ rating is far too generous given our present situation and outlook?

Just throwing it out there...

Bob Roddis said...

Why it's a waste of time to debate LK on his anecdotes:

1. Keynesian-type policies will probably induce economic activity in the short run, however unsustainable.

2. Ending those policies will invariably cause liquidation, unemployment and pain in the short run.

We know this already. But without #1, we would never be in the position to need #2.