Monday, November 12, 2012

Krugman: Debt? What Debt?

On occasion, I find myself partially agreeing with Paul Krugman and his most recent column attacking Republicans (yeah, I know, that's a rare thing) on their "concern" about the federal budget deficit deserves at least one cheer. I am wearied of Republicans expressing concern about deficits at a time when they are calling for massive increases in military spending.

Now, Krugman does not mention that point at all in his column, instead claiming that the deficit hawks only want to starve the poor and elderly, deny them any medical care, and force them to sleep under bridges. He does not put things in quite that language, but that is the gist of what he is saying. But, then, this is someone who actually believes that government welfare programs increase wealth because they bring about instant spending, and everyone knows that saving money and investing in capital is evil and brings down the economy.

(Krugman's capital theory seems to be another rendition of "Capital Happens" in which capital magically appears in our economy.)

So, let us look at Krugman in his own words:
At a time of mass unemployment and record-low borrowing costs, a time when economic theory said we needed more, not less, deficit spending, the scolds convinced most of our political class that deficits rather than jobs should be our top economic priority.
 Keep in mind that in Wonderland, when the Federal Reserve System pushes down interest rates to artificially-low levels, that has ONLY good effects. After all, the Laws of Wonderland dictate what we should believe about economic growth and the economy in general:
  • Saving is evil and only suppresses economic growth
  • We should use all means to confiscate savings either through inflation or outright taxation because we need to spend everything we make in the present
  • Don't worry about capital formation because "Capital Happens"
  • Anything that encourages present spending is good, and anything that requires any present abstinence from spending right now is evil and must not be permitted
  • The only real benefit we might get from capital formation is in present spending for capital goods.
Given that Krugman already has called for the Fed to finance present government spending via Fed purchases of federal debt in the primary market, we know where this whole thing is headed. In fact, as Krugman says, our problem right now is that the federal debt needs to be greater, as we need to borrow trillions of dollars more:
And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.
 The last statement really should leave us in a quandary, for earlier in this column, Krugman attacked the "tax cuts for the wealthy" (or what we call Democratic talking points) as helping to create deficit conditions. However, given that we need larger deficits, why raise tax rates at all? If we can borrow at no appreciable opportunity cost -- And what self-respective Keynesian ever would think that government spending always trumps the Law of Scarcity? -- why should we worry if tax rates are "too low"?

As Krugman declares:
This wouldn’t be hard if they had been making a more honest case on the budget: the truth is that deficits are actually a good thing when the economy is deeply depressed, so deficit reduction should wait until the economy is stronger. As John Maynard Keynes said three-quarters of a century ago, “The boom, not the slump, is the right time for austerity.”
 So, Krugman seems to be operating at cross purposes with himself. Using his own logic, it would be stupid to raise income taxes on anyone or to jack up taxes on investment because deficits during a depression are "a good thing." But we have to remember that "Krugman Logic" is not based upon economics, but rather on left-wing politics.

14 comments:

KSB said...

"So, Krugman seems to be operating at cross purposes with himself. Using his own logic, it would be stupid to raise income taxes on anyone or to jack up taxes on investment because deficits during a depression are "a good thing." "

I can answer this. Krugman simply wants eat his cake and have it too.

Sure he can raise debt and borrow, but look at that evil rich person sitting over there on all that money. The state can spend it so much more wisely than the person who earned it. Why, if we combine the new debt with all that cash then we can do so much more!

I don't know if you have even seen gambling addiction up close, it isn't pretty. What I see is FEDGOV using the exact same logic and motivations.

Failure only pushes the addict on to try harder to get the big win (which is always just around the next corner). Blame is assigned to those that dare deny the addict revenue.

"Why'd you waste money on paying the rent ahead!? Why'd you throw away cash on groceries and food!? I could have taken that money and tripled it!"

Congratulations, America. You've put the economy in the hands of free wheeling gamblers. Except that these gamblers have the keys to the printing presses and are nuclear armed.

Mike said...

There is raging intellectual hypocrisy on both sides of the aisle on this issue. Neither have credibility but we are stuck with them. The adults are nowhere in the room discussing the problem.

Debt is killing and will kill this country and force a reset.

Yes, yes the “Bush Tax Cuts.” The root of all our ills economically according to the collectivists. Of course I fail to understand how a tax policy that has been in place for a decade is a “cut.” As if the tax structure in place before that was a permanent fixture with divine blessing.

Go ahead raise the taxes on the +$250K crowd. According to the Administration’s own OMB report you will raise about $83.4 billion. Big deal. That’s 6% of last year’s deficit. Then what? Confiscate all income over $250K? Then what?

I have stated here before, we have a math problem because of the debt, not a revenue, policy, political problem. We have crossed the Rubicon.

Dennis said...

You raise some very good points as usual Bill. If deficits are great, then why not eliminate taxes altogether and conjure up the mother of all stimulus packages? I suppose the Keynesians would reply that if the wealthy didn't pay taxes they'd save way too much and put the economy back into depression. What Keynesianism really boils down to it that the productive among us must be punished for the sin of, well, being productive.

Mike said...

Picking up further on Dennis’ point. Why have taxes at all to pay for the Federal government services? Why not just print the money outright. It would be cheaper as there would be no imputed interest to have to carry or pay back. When you consider that a sizable portion (I’ve seen 40-50%) of the accumulated debt is interest, why not. It’s not going to be paid back anyway. It will be rolled over again and again until it collapses.

Oh but the parasitic bankers will be harmed, I fogot.

Politics Debunked said...

Krugman seems to have major difficulty with the concept there aren't unlimited funds available to borrow, and money $X loaned to the federal government can't also be loaned to a private business. Check out graphs showing that as government borrowing rises, private borrowing falls, and vice versa, here on a page talking about the problem of the debt (including the negative effects of low interest rates), and the problem that Obama spent since the State of the Union claiming he would "pay down our debt" when of course his budget proposal adds to it.

http://www.politicsdebunked.com/article-list/obama-lied-about-paying-down-the-debt

Mike said...

Politics Debunked
The concept of the government being subjected to limited funds is so 19th century. All you have to do now is wave the magic Krugman wand and PRESTO the stuff government needs just comes into existence without work, pain or negative ramifications.

I mean come on. Next thing you know you will be insisting the government follow an “18th century colonial era document” called the Constitution. That’s just unenlightened crazy talk man. (sarc off)

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Kevin Kuruc said...

Krugman isn't ignoring the debt. Nor does he hate saving/think that "Capital Happens". He is concerned about it over the long haul. What he has been proposing is that in a depression we encourage spending to return us to our long run aggregate supply curve (full-employment). Things change depending on how the economy is functioning and when in a depression we need to encourage spending, and not worry about the debt. Before the recession Krugman was concerned about an unfunded war bringing about a large deficit. In fact Keynsian logic says you pay off debts in good times and run it up in depressions. He is simply following that logic. He was concerned about the debt in a flourishing economy and is not concerned about it in a depressed one.

Mike said...

Kevin,
That’s all well and good, and while some of us may disagree on the philosophy, the flaw in the theory is the debt is never paid off in the “good” times and because of compounding interest we have reached a point it never will be. He may not be concerned about the debt but at some inflection point, the debt and currency markets will be concerned and behave in an unmerciless fashion.

Zachriel said...

Mike: That’s all well and good, and while some of us may disagree on the philosophy, the flaw in the theory is the debt is never paid off in the “good” times and because of compounding interest we have reached a point it never will be.

The U.S. had a larger debt as a percentage of GDP at the end of WWII, and not only reduced that percentage, but prospered while doing so. Furthermore, the U.S. was running cash surpluses just over a decade ago. The U.S. has a $15 trillion economy, vast natural resources, and a highly educated and motivated workforce. The debt is well within their means to repay.

Mike said...

I see the intellectual fraud is back amongst us.

“The U.S. had a larger debt as a percentage of GDP at the end of WWII,”

The economic structure of the US was materially different; the world economic structure was radically different as was the US relationship with it. Not comparable.

“the U.S. was running cash surpluses just over a decade ago”

Nice sleight of hand. There is a difference between cash and accrual accounting. The Treasury received a cash dump heavily from cap gains during the credit induced equity bull market. On a GAAP basis it was negative.

“The U.S. has a $15 trillion economy”

If your intent is to confiscate most of the economy from the people, then I guess you can take some solace in that figure
“ The debt is well within their means to repay”

At the present run rate the debt is slated to hit $20 T in the next five years excluding the present value of unfunded entitlement obligations. Return to long term normalized cost of funds for the Treasury puts annual interest cost at $1 T. Feel free to do the math on what that consumes of receipts.

Your analysis is flawed.

I had another question …. Oh yeah… What do you do for a living Zac?

Zachriel said...

Mike: The economic structure of the US was materially different; the world economic structure was radically different as was the US relationship with it. Not comparable.

Comparable in some ways, not in others. Certainly there is at least one example of a country with high debt, working to reduce that debt and still prospering.

Mike: There is a difference between cash and accrual accounting.

Yes, cash surpluses allow the retirement of publicly-held debt. Continuing on that fiscal path would have reduced the publicly-held debt significantly. The total budget was in near balance, meaning the debt-to-GDP ratio was decreasing.

Mike: If your intent is to confiscate most of the economy from the people, then I guess you can take some solace in that figure “ The debt is well within their means to repay”

Reducing the debt can be accomplished with modest tax increases, prudent cuts in spending, and moderate economic growth.

macroman said...

Mike, what do you mean the debt is never paid off? WWII debt was paid down over 20 years or so (at least debt/GDP) Why can't that happen again?

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