"Deficit Hawk Down," Financial Delusion Up

Yes, readers, I do agree with Paul Krugman when he says that the federal budget deficit is not the central fiscal issue that the U.S. Government and the U.S. economy face today. However (and you KNEW there would be a "however" coming), we disagree for opposing reasons.

In his latest column, Krugman attacks what he calls the "deficit hawks" (thus, the clever title for the column) who he says have always been wrong on the real effects of federal budget deficits:

Mr. Obama’s clearly deliberate neglect of Washington’s favorite obsession was just the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing. Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.

His reasons are as follows:

• A true Greece-style meltdown has not happened; therefore, it cannot happen here;
• Deficit spending as a share of GDP supposedly has started to decline, and the "deficit hawks" had predicted a reverse secular trend, i.e. recent deficits have become slightly smaller than previous years;
• Advocates of government "austerity" are wrong because "austerity" did not immediately bring about full economic recovery where it was practiced;
• The anti-deficit agenda really was a not-so-secret attempt by Evil Republicans to impose an unrelated evil political agenda.

 There is what I would call a "fifth reason" that Krugman says is a reason why the deficit hawks should not worry: the deficit is a good thing, not bad:

...it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging as the housing bubble popped and cash-strapped families cut back, the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression.

Whether or not one believes that the government's bank bailouts and subsequent "stimulus" spending prevented a return to 1933 is not answerable because one would have to prove a negative. What we are supposed to believe, however, is that "trickle-down" economics works when the government is in charge.

What happens? The government gives money or financial credits to politically-connected financial institutions and everyone pretends that the market values of the assets of those institutions are higher than what everyone understands is the case. (If you try to do this in private, the government will charge you with "fraud." However, if it is done by the government, it is called "saving the economy.")

Under outright stimulus, the government directly issues funds to politically-favored groups and the individuals then spend the money with the idea being that the good effects will "trickle down" to the rest of us who do not have the same political connections. Somehow, after we spend what money is left over, the effects will be such that the economy will magically have "traction" and it will move forth on its own.

Moreover, as Krugman argues, since the Fed has managed to push interest rates for U.S. securities to near-zero, then there is almost no opportunity cost for borrowing (and more borrowing). As he declared in a blog post a while back, it is "free money." Because the Fed and the Social Security Administration own the largest single blocs of U.S. debt, we "owe it to ourselves" which apparently means that there are no problems associated with the high debt of the U.S. Government.

What puts the USA in the "catbird's seat" (as opposed to other countries like Greece) is that this country has its own currency, which means that the government essentially can pay its bills with printed money, and since the U.S. Dollar effectively has been the "world currency" for a long time, we can get away with it, while countries like Zimbabwe could not. Unlike Greece, which is on the euro, we can print and devalue forever, and the rest of the world simply has to take it.

The federal deficit is not the problem in and of itself; instead, it is a symptom of a much larger fiscal problem, and that is that the U.S. Government is spending at rates that impose huge burdens on everyone else. In Krugman's Wonderland, government spending always is a net plus, especially when the economy is down.

(Yes, I know that Krugman calls for "austerity" during a boom, but in reality, politicians spend even more if they think the funds are available. Furthermore, I don't recall hearing Krugman call for massive cuts in government spending during the last few years of the Clinton Stock Bubble or during the Bush Housing Bubble.)

Furthermore, in Wonderland, those who are productive are the real "takers," entrepreneurs are irrelevant to a growing economy, the most desired industries are those that receive massive subsidies, and it is the people receiving direct government benefits that are most likely to take the entrepreneurial risks that our economy needs to grow. (Face it, that was the gist of Barack Obama's "Progressive" inauguration speech, and Krugman himself declared that there was "a lot for progressives to like" in that speech.

So, if the government spends enough money, if enough people can receive new benefits that they will spend quickly, if the spending "trickles down" to those not receiving the direct benefits, if the government continues to massively subsidize politically-favored "green energy" firms and "green" research, if the Fed continues to keep interest rates low, if the government continues to print money, if the "Inflation Fairy" does its magic, and if everyone just believes in the Greatness of Barack Obama, we someday will have real prosperity. That is the financial delusion that apparently rules in "elite" academic and political economics these days.