Paul Krugman: Deficits and the Future

Deficit hawks who are complaining about the stimulus package have it all wrong:

Deficits and the Future, by Paul Krugman, Commentary, NY Times: Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations.

But the deficit worriers have it all wrong...; strong fiscal expansion would actually enhance the economy’s long-run prospects.

The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that ... reduces the economy’s long-run rate of growth. Under normal circumstances there’s a lot to this argument.

But circumstances right now are anything but normal. Consider what would happen ... if the Obama administration gave in to the deficit hawks and scaled back its fiscal plans. ... Fiscal austerity ... would reduce, not increase, private investment...: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

The second episode took place ... in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

Just to be clear, I’m not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade...

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in ... a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same kind of trap today — which is why deficit worries are misplaced.

One more thing: Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run.

Should the government have ... permanent ... budget deficits? Of course not. Although public debt isn’t as bad a thing as many people believe — it’s basically money we owe to ourselves — in the long run the government, like private individuals, has to match its spending to its income.

But right now we have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses ... are cutting back on investment. That gap will eventually close, but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.

The bottom line, then, is that people who think that fiscal expansion today is bad for future generations have got it exactly wrong. The best course of action, both for today’s workers and for their children, is to do whatever it takes to get this economy on the road to recovery.

Comments

[gordon]

I'm really glad to see Prof. Krugman say: "Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run".

I was beginning to get worried about where all this "fiscal expansion" was going to go.

[Bruce Wilder]

Having watched ndk and Walt go round 'n round on this subject in another thread, I feel I have a much better grasp of just how critical a large Federal stimulus is, to stopping the spiral down the drain, and why. (The vowel-less knzn is educating me, as well.)

With regard to the shape of the stimulus as well as to the shape of the Fed/Treasury's numerous liquidity and bailout facilities, though, I fear too much determination to resurrect the status quo ante, too much conservatism (in the small "c" non-partisan sense). We should be facilitating change, not obstructing it or postponing it. The world as we knew it, could not go on in the same mode, the same habitual pattern.

My greatest fear, at the moment, is not that we will not act, but that we will take half measures. And, Krugman's and Stiglitz's emphatic emphasis on thinking big seems appropriate. But, my second greatest fear is the impulse to try to put Humpty Dumpty back together, to repair and restore the old system, with little attention paid to the extent to which it simply cannot function. We cannot go into the future consuming so much imported petroleum, or borrowing from China to buy manufactured stuff from China; we need to restructure the patterns and ambitions of American life in considered in its broadest frame.

[Qingdao]

ok, now comes the Ricardian equivalence debate?

[rapa]

Fiscal expansion is not a bad thing if the money goes to infrastructural development but if the additional liquidity from either the printing press or from taxpayers' pockets go to salvaging outfits that had make wrong commercial decisions and now flying in on their private jets to Washington to beg for a bailout or trying to save their bonuses, and the federal government so willing to bail them out by buying into the entities in questions, we are sabotaging the foundation of capitalism or even free economy by way of the federal government to socialize the companies in question in order to save them. Besides, with so much excessive liquidity littering on the economy, we are sowing the seed for deflation in the short term and subsequently stagnation and hyperinflation in the longer term. We must understand there is no free lunch for and if we are so keen to pump money into the financial system by way of using the printing press or by way of borrowing or debts from either the taxpayers or the central banks of the exporting economies from the East, we are either inviting hyperinflation and I am so sure Paul Volcker knows that very well. Otherwise, he did not need to raise the interest rate to 20% plus in the eighties of the last century. Otherwise, he did not need to risk economic downturn to raise the interest rate to such a magnitude.All in all, our current monetary order is based on the dollar standard which is not linked to gold or silver but just on trust, which is very shaky already and if we print and pump more dollar into the financial system, we are just killing the value of the dollar and to invite growing inflation worldwide.I do hope we could think seriously about fiscal expansion before we really work on it.

[ndk]

He does a good job explaining his position, but I still have all the same reservations I have had all along. It seems to me this could still be a solvency crisis in liquidity trap drag. Remember that we misdiagnosed the earlier market crises and financial institution woes in the same way.

Bruce, I think your second greatest fear is key, and it's my third greatest fear.

My first biggest fear is bankruptcy of the US government. The fiscal side of our house was already in very bad order. Kotlikoff from the St. Louis Fed summarizes work by OMB/Treasury that estimate a $65.9 cumulative current fiscal gap. He points out that government debt to GDP is a pretty useless metric when summarizing the solvency of a country, which was a great realization for me. A lot of that fiscal gap is implicitly or explicitly indexed, such as government pay, Medicare, Social Security, and so on. There are real upper bounds to how much seigniorage you can wrench out of a currency without blowing it up. Buiter puts it at 40% of GDP with perfect inflation policies. Remember that we have very large off-balance-sheet obligations, too: FDIC, PBGC, FNM, FRE, AIG, the Fed's lending programs, etc. If you put those numbers next to our current assets, it doesn't look great. I maintain that the default risk this creates, combined with portfolio crowding out that can occur depending on your modeling, raise real interest rates for the rest of the economy. I see no other way to explain Treasury CDS at 60 for 10 years and the gap between yields on TIPS and Treasuries, unless there's a ridiculously large liquidity premium being caused by a totally broken market and specific derivative contractual clauses, which I don't rule out entirely. Real yields are high and rising for all.

My second greatest fear is that we do succeed and it causes an inflationary spiral. The Fed's balance sheet is in very bad shape, and an outbreak of inflation would place further strain on banks that hold long-duration, fixed-rate assets. That would make it difficult to put any of our repo's back to the banks without re-detonating them. The Fed will have great difficulties combatting any such inflation, but there are some things we could do.

The third greatest fear is Bruce's second: that we succeed and create another round of disinflationary pressures. That would be great for asset pricing in the short term and give us another breath of life, but as China fails to appreciate the yuan, the pressures that gave rise to our overconsumption and underinvestment and our deficits will persist. That seems to just set us up for a harder fall.

I've got my testable hypotheses that will be proven right or wrong by the events of the next five years. It's going to be fascinating to watch.

[ndk]

I forgot to mention that quantitative easing via repurchasing long T-bonds shortens the term structure of the government's own liabilities and makes our fiscal house more vulnerable, as well.

ok, now comes the Ricardian equivalence debate?

I'm trying so hard to resist the temptation to bring that one up, Qingdao. It's even more a "how many Feds can stand on the head of a pin?" question than my discussion with Walt and others on the earlier thread about how much money the Fed can really print without blowing everything up. :D

[ndk]

That would be $65.9 trillion, not the price of dinner for four at an average restaurant, of course, and the 40% of GDP is the NPV of the cumulative seigniorage.

[a]

"the belief that government borrowing “crowds out” private investment "

Isn't this exactly what we are seeing already, but under a different guise? Nobody wants to lend to a private business; they only want to lend to the government?

"One more thing: Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run."

Maybe. Building roads if oil hits 200 dollars next year, would be a bad investment. Developing new technologies which nobody uses would be a bad investment. The devil is in the details, and the macro-economists' models don't care about the details.

[anon]

It's not just how much the Fed can print before the dollar blows up - it's also the misallocation of resources that printing causes up to that point as you have people (bankers first) showing up with money they didn't have to do anything productive to earn. It's that misallocation that hurts the economy along the way, even if it's small enough to not cause outright large bubbles or a currency collapse.

I also find it remarkable that in all of the talk about the need for "stimulus", short shrift is given to the importance of it being *productive* spending. While infrastructure is obviously a good thing, bridges to nowhere are not.

Most of our leaders are so busy keeping their rich friends from going bust (with our money, of course) that I don't see how another trillion dollars in their hands. Of course, if they don't get it through the front door, the Fed will create it out of thin air in the back. It will take a change in leadership to fix things (maybe change you can *really* believe in next time. :D)

[ndk]

I also find it remarkable that in all of the talk about the need for "stimulus", short shrift is given to the importance of it being *productive* spending.

Not just short shrift: knzn attempts to make a case that useless projects are better than useful ones.

[Lafayette]

About Kotlikoff: He points out that government debt to GDP is a pretty useless metric when summarizing the solvency of a country, which was a great realization for me.

A bit startling, that notion.

Solvency is essentially the ability of a country to maintain its debt, which it does from Tax Base Revenues. Which is further obtained from either Income Taxation or Value-Added-Taxation (VAT).

This latter (a consumption tax) does not exist in the US, except in the form of state Sales Taxes. VAT-revenues are, however, the major portion of national tax revenues elsewhere, notably Europe. (In France, given the amount of tax credits to families with children, only one in two pays Income Tax.)

It may well be a more reliable a generator of Tax Revenues than the Income Tax. Regardless of whether employment evolves or not, companies may still produce by using automated means (enhanced productivity) thereby obviating wages and therefore impacting Income Tax Revenues. Consumers will nonetheless consume.

A VAT is laid upon each transformation step within a manufacturing or service process (from company to company onward in the process) that ends in a final good/service. But it is the Consumer who pays it finally as a consumption tax. So, it is directly linked to GDP via Consumption -- not Income.

GDP is therefore a key element in understanding a country's ability to pay its debt, at least in those countries using a Consumption Tax.

The world is lining up to buy T-notes, admittedly, not because of America’s Taxation System – but because of its proven economic resilience. They know therefore that our debt is good debt. (Thank God, or we’d surely be in a sorry state of affairs.)

[a]

knzn: "All things considered, I will also tend to prefer useful projects over useless ones, but there really is a respectable case to be made for deliberately wasting the government’s money (recognizing, of course, that under the current circumstances, the government can create the money out of thin air, so the only real cost is opportunity cost)."

Respectable case? Hah! Substitute "resources" for "money". Resources *cannot* be created out of thin air - they are finite, and they need to be managed wisely. And before anyone goes Krugman and says that the resources we are talking about is unemployed labor and so free, please remember that for all these infrastructure projects, other resources besides labor need to be marshalled.

[anon]

Ah, yes. The "broken window" theory. You want to pick up the economy? Just hire a bunch of thugs to go around breaking things. Never mind standard of living or quality of life, as long as we're working, we'll be happy, like hamsters making the wheel go round and round. Sheesh, with such an intelligentsia, no wonder we're having such difficulties.

[anon]

Further, for millenia many people endlessly toiled just to survive while the aristocracy lived large off the rents. So is this where these "enlightened" economists want to take us? No wonder Keynes had to refer to economics as difficult to understand because it is technical and complex (paraphrasing Krugman) - when you want people to believe in nonsense you have to resort to such a device.

Want to prosper? Just endlessly dig holes and fill them up. You'll get paid with printed money and we'll all get rich. Never mind about making anything useful to anybody. Technical and complex, indeed! This Keynes fetish is seeming ever more bizzare. (There, I said it - the Emperor has no clothes.)

says...

Given how stupid the broken window comment is, it's true that the " intelligentsia" (of which you are clearly not a member) has lots of work to do. Sheesh indeed.

a - you say prety much the same wrong thing every single day (you do realize, don't you, how wrong you've been? You don't? Why am I not surprised by that?). Will the broken record playing the nonsensical sentence over and over and over and over ever stop? Probably not, but it does get old.

says...

I didn't think you could follow up up with an even less informed comment. Congratulations.

And go read Keynes before you make an even bigger idiot out of yourself.

[Massimo GIANNINI]

Professor Krugman felt the need to make the case for a fiscal stimulus stronger. Basically a fiscal stimulus is good under the classic condition to have high expected return of public spending (whatever form it takes), at least in the long run. It is suggested that "large part of the expansion takes the form of public investment". We better not leave to politicians and lawmakers to much leeway in choosing from the list of investments to be made as investments must be, all-included, high yielding (to repay the debt) in the long run. Building roads and repairing bridges are not necessarily high yielding nor environmental friendly... Education, new technologies and alternative energies are more productive investments. Military expenditures are less productive. Everyone will appreciate the effort to match any spending to income and repay the debt in the future. Financial markets may not be happy if they do not see that plan. And the fiscal stimulus is to be made under another condition, that other countries continue to lend to the United States.

[anon]

Look up the "parable of the broken window", for example in Wikipedia, if you're interested in the subject. That line of thinking is related to what knzn was writing about (sure, we all prefer productive investment, but it doesn't really matter. Or does it?)

I did read Keynes and his acolyte Krugman. Recall that the smartest minds were once quite certain that the earth was flat and the center of the universe. I find it helpful to remove the proverbial fancy clothes that intellectuals sometimes put on nonsense in order to understand what they are really talking about. You can make anything highly technical. While that can sometimes be useful to gain understanding, it can just as easily obscure.

[a]

"I didn't think you could follow up up with an even less informed comment. Congratulations."

Congratulations. You make comments which no one can understand.

"Why am I not surprised by that?" How should I know? Surprise is a psychological state, and I know nothing of your psychology. Still, I can guess you are an economist because:
1/ You condescend without giving any arguments
2/ You refer someone to "read Keynes" because you can't give an argument

[Beezer]

Moving on, what infrastructure spending would we agree on?

And why not government investment in private manufacturing? Redirecting auto and truck mfg to diesel (supplemented by biodiesel) could be a good "first step" in transitioning away from fossil fuels with all the obvious benefits such a transition would bring.

A national train system project would also bring significant economic benefits in the intermediate to long term.

Growing base electric production would have many benefits as the transmission system would need to be strengthened, and our national security would also improve with a robust system.

Exploration for gas and oil is necessary. We're going to need a lot of this stuff, even if we are eventually successful in energy reformation.

These are just a few areas that cry out for government policy support, legislatively as well as fiscally. There are no lack of projects that would be productive. I'm surprised the discussion about productive investment even exists.

[Leigh Caldwell]

Very interesting stuff. Why indeed does crowding out not happen, when (neo)classical theory indicates that it should? I have tried to answer that question in an article here.

[prostratedragon]

Notwithstanding my having spent the evening with Romer's review of IS-LM models, mention of crowding out made me giddy enough to find some thread music:

Deja vu from Dionne Warwick and Isaac Hayes.

[anon]

Beezer - I agree that there is no shortage of opportunities for productive investments, public or private, and there probably never will be. The concern, as I see it, is that the powers that be are more preoccupied with sustaining that which ought not be sustained, if it's even sustainable (now there's a mouthful.:D)

The cheerleaders for stimulus (e.g. Krugman and knzn mentioned here) appear more interested in throwing money around than what's done with it (not withstanding the lip service.) This echos Keynes writings on idle productive capacity which neglects the fact that said capacity may be idle for good reason (e.g. luxury housing in bubble areas.)

In his General Theory, Keynes did write "...Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better." Given his many acolytes advocating same, this discussion seems quite relevant.

Imagine that, a war as a stimulus program. Maybe the Iraq war was a good thing after all. Of course, for those close to power, it was quite good.

[Lafayette]

LC: Due to less money being available, this pushes up the price of borrowing for businesses and means some otherwise-viable investments will not happen.

This is, one gathers, a take on the Quantity of Labor theory? Which is just as fallacious. (The Quantity of Labor theory has it that there is a fixed quantity of work, so if one reduces the work week, then employers must be forced to hire more employees. Which is the sort of idiocy by which French Socialists explained lowering the work week from 39 to 35 hours.)

There are no hard and fast boundary limits to Investment Money in a global economy such as ours. Except when a systemic failure of the Credit Mechanism occurs and banks refuse to lend funds on their books. If governments print money, the sole consequence is inflation - providing by economic reflation they maintain debt payment.

So, which should anyone prefer to contend with, long-term unemployment or inflation? I know my answer ...

Which is why economies are reflated by government expenditures after periods of serious deflation (which, btw, is presently occurring).

Besides, companies find the investment money (on their books) when they feel that it is worth penetrating new markets or expanding old ones. But, there, we are confronted with the riddle of "the chicken and the egg". (The companies hurt the most are those without such reserves, meaning the small and medium sized operations. They are absolutely dependent upon borrowing to subsist.)

And such, I suggest, is the present circumstance. So, we are anticipating that the Federal government starts laying eggs. I'd be watching the small-to-medium sized companies that employ most of the people working in the US. When they started hurting and could not borrow further, unemployment spiked upwards. They too are waiting for order bookings to start blossoming once again.

[a]

"Imagine that, a war as a stimulus program."

How about World War II? After all Krugman cites WW II as the "public works project" which got the U.S. out of depression. And it did admittedly work, because World War II was the one great example of military spending as productive and an economic investment - by blowing up the competition's factories, the U.S. ended up with the ability to sell to the world.

(BTW, this is not to belittle another great investment feature of WWII - keeping liberal democracies alive.)

[Arthur James]

My plea to Paul Krugman -

I totally agree with your argument about the need in some circumstances, such as now, to run a deficit to stimulate the economy.

But I am still trying to work out why (in effect) you argue in the "New York Review of Books" for an international or global approach to the crisis, but in your NYT articles and blog you don't ever seem to mention this international dimension.

Afficionados of your writings will recognise that your magnificent piece in the December NYRB not only restates your belief in the importance of Keynes’s economic insights, and of the need for fiscal stimulus today, but does there what you too often do not do - that is, emphasize the importance of an international approach to the current crisis.

You talk in the NYRB of “the world” needing “a rescue operation”, of what “policymakers around the world need to do”, of the need for “a global rescue for developing countries”, and of what must surely be an international response to the dangers you identify in “financial globalization”.

This, as some of us have argued, is exactly the sort of cooperative international approach that your intellectual hero, John Maynard Keynes, took in his own time. This is evident in works on Keynes such as, for example, Markwell’s John Maynard Keynes and International Relations.

Part of why it is important for YOU to stress this international approach is that the United States today (or at least after 20 January 2009) needs to provide leadership in this cooperative international approach to the economic crisis - just as, Markwell points out, Keynes desperately wanted it to do at various times from 1919 to his death in 1946.

The case must be made persuasively today for such US leadership - and YOU can help to make it.

Somehow this seems even more important on the day that the Obama foreign policy team is to be formally announced... Please seize the day!

[anon]

Wars of choice are dangerous. Sure it's great when you win, but even the greatest powers in history have lost.

We fought WWII because we had to. Absent the threat, all those tanks and planes would have been useless. There's an example of productive capacity that is best kept idle.

It's amazing that we are having policy debates on the basis of events where it does appear that widespread madness ruled.

I suppose we could put Krugman's theory to the test. Let's build many thousands of tanks and fighter planes and then let's see what happens to our standard of living and quality of life. Careful what you wish for.

[OhNoNotAgain]

"The cheerleaders for stimulus (e.g. Krugman and knzn mentioned here) appear more interested in throwing money around than what's done with it (not withstanding the lip service.)"

You're putting words in Krugman's mouth here, and it's a very dishonest tactic. It's the same tactic used against Obama by the Republicans - don't believe what he says, he's actually a terrorist-loving Muslim that will destroy America. These type of accusations rot our discourse to the core, especially when those that are throwing around the accusations are taking or advocating actions that *actually are harming our country*.

Keep one thing in mind here:

The private markets got us into this mess. The government wouldn't have to do anything if those running our corporations had done the right thing. So, you're constant harping on what the government may *possibly* do wrong should be tempered against what the private markets have *already* done to our economy. One thing is for sure, this problem is not going to get resolved without government intervention. That much you can be assured of.

[a]

"One thing is for sure, this problem is not going to get resolved without government intervention."

Yes, but surely the government cannot intervene in any old way and resolve the problem. How it intervenes, is important. Hence the discussion.

[Massimo GIANNINI]

I still contend that fiscal stimulus arguments are cogent only under one maintained assumption-that public investments be productive, that means passing a cost-benefit analysis as always should be the case. The latter should not be in the hands of lawmakers or politicians.
On the other hand, and in order to avoid past mistakes in government spending, due consideration should be paid to any unproductive past spending (which is likely to include military expenditures and or tax cuts) and investments which brought the present situation and debt. Unfortunately there are no alternatives to fiscal policy and monetary policy is ineffective anyway. Of course plans should be made to repay the private and public debts in due course and get some international cooperation because somebody will hopefully continue to lend money to the United States (if there are some returns).

[Realista]

One Million jobs Lost in last 4 months!

Former Treasury Secretary Paul O'Neill was told "deficits don't matter" when he warned of a looming fiscal crisis.

O'Neill, fired in a shakeup of Bush's economic team in December 2002, raised objections to a new round of tax cuts and said the president balked at his more aggressive plan to combat corporate crime after a string of accounting scandals because of opposition from "the corporate crowd," a key constituency.

O'Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. "You know, Paul, Reagan proved deficits don't matter," he said, according to excerpts. Cheney continued: "We won the midterms (congressional elections). This is our due." A month later, Cheney told the Treasury secretary he was fired.

Bush-Cheney $ 5 Bil per month "War of Choice" Occupation for Big Oil Profits, Deregulation of Banking and Finance, ...
So Bush Gives $ 4.5 Trillion Welfare to Wall Street Crooks, AIG, Citi and most deposit banks, Freddie Mac and Fannie May, But ZERO For HOMEOWNERS?

[swells]

Re: Krugman's "It's money we owe ourselves." I think the problem here is just this. Owing ourselves money isn't the issue that is troubling to me. Kicking the can down the line so that our descendants will do the paying is what troubles me. If the money is spent on productive endeavors from which our descendants will reap benefits congruent with the costs they will pay, then I guess that's okay. Fair value then for fair value now. But, if we simply chunk the money into useless stuff for the sake of stimulus, then there is a moral problem with asking people who come later in line to absorb our costs of existing now.

[paine]

typical soft soap:
"The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment,...."
here comes the bull shit foot in the bucket dog lather:

" ..Under normal circumstances there’s a lot to this argument. "

no it doesn't
normal conditions in our system requires
non crowding out conditions just to be ...normal

normal in a private corporations for profit free pricing system
requires
chronic slack
and varaiable levels of credit and job rationing

if there's a fear of crowding out
its wages crowding out profits

normal conditions mean
real actual physical production capacity limits
are never even near the reached point
never its the capacity wall

the system "pulls back" well before that point
and why??
well
because stable prices and profits are threatened

unless top down credit rationing enforces
an increae in the unemployment draft
to pre empt job markets tighten
the fear is a wage spiral ...

this is the conventional wisdom reigning since the late 70's

ie
long before
job markets could possibly be considered "cleared"
physical capacity top ended
ie long before there's no room to activate added production capacity to meet added uncle sam deficit financed demand

the system contracts its rate of job expansion

[Leigh Caldwell]

Lafayette - true enough. For clarity, the line you quoted from me was from my summary of the crowding-out argument, and not a statement that I particularly agree with.

Having said that, if the statement is modified to talk about the use of productive resources rather than money, there is some truth in it. Not in the lump-of-labour sense that the amount of resources are fixed, but in the sense that greater demand increases their price and makes marginal projects less likely to happen.

The Keynesian point (with which I broadly concur) is that the supposedly crowded-out private investment is not happening anyway, so that alleged downside of government borrowing is not real.

swells - also an interesting point. In terms of the productive capacity of the economy, investment today should increase the amount of resources available for our grandchildren to consume. The question is whether we then insist on being allowed to sit back on our pensions while they share the resources with us in return for what we did today; or if we write off the investment that we are now making, and accept a smaller share of consumption in the future.

[2]

Counter cyclical spending can smooth economic cycles. However, if spending isn't trimmed back during boom times, the deficit can grow to unsupportable levels. Spending was not trimmed back during the recent boom times, so additional borrowing is adding to an already large debt.

Beyond this, there is another factor this time, and it is a very large factor. In addition to borrowing from overseas to stimulate the domestic economy, the public sector is guaranteeing a vast quantity of private debt. The combined direct deficit and guarantees are creating an unprecedented public liability. There is no exit plan in place. That is, guarantees of private debt are simply being made with no organized plan to restore the private sector's credit rating in a timely fashion.

There is an unprecedented risk in this course of action.

[reason]

I'll chime in again to say once more, I see no reason to issue debt to pay for anti debt deflation measures. Just print the money. We need a reduction of debt and if we can substitute monetary base for debt so much the better.

[reason]

And I do really think that was the big mistake Japan made (and are still paying for).

[paine]

conventional feed their ignorance soft soap part II

"Should the government have ... permanent ... budget deficits? Of course not. Although public debt isn’t as bad a thing as many people believe — it’s basically money we owe to ourselves — in the long run the government, like private individuals, has to match its spending to its income. "

god
this idiotic pandering...

its clear krug gets it by this insert
" — it’s basically money we owe to ourselves — "

but still he confirms the wisdom
of our chattering class's corporate culture stuffed
mental knot holes

the globe has a closed market system economy
my debt burden is someone elses default risk
but its still
an internal transfer
a sub system --wholey within the system--
between two classes creditors and debtors
owers and owed
if its uncle mediated
its held in and paid out of his
very own limitless dollar mine
ie
its all payable in full
ie default is impossible
the security is riskless to owed

burdens to owers on the other hand
are determined
by the thru time pathway of tax bases

thru time with an emphasis
on the here and now
is better then on the could be of future democratic tax shifts

[paine]

"the deficit can grow to unsupportable levels"
okay 2

then

what is unsupportable

throw me the number
throw me the number

[paine]

" I see no reason to issue debt to pay for anti debt deflation measures. Just print the money"

reason sees no reason

but dealing with the hi fi crisis your way in the end
if it comes to that
is precisely what gentle ben is prepared to do
he may signal this to the insider counter party crowd
in rotary club proof
new speak
where a means z and z means a
not unlike krug above on the fiscal deficit

but
his x trillion in pledged uncle sucker back up
if needed will get "printed"

the fear is not payment to the tower queens
its fiscal thrust enough to power
a jobs recovery swift full and robust

[paine]

"Kicking the can down the line so that our descendants will do the paying is what troubles me"

swells in your parallel universe
the deficit oughta be replaced with taxes ???
what if taxes crowd out expenditures not just gobble up
excess savings

why not service debt out of a wealth tax
and let the ricardian silk hats
decide trade offs among themselves
"lend now service later "

the key may be this uncle has sterling crdit in his own currency
he can borrow on our behalf where we as households can't borrow
he has no credit constraint like us job-ables
if credit markets are too tight to lend us the excess savings of the scrooges
uncle has to borrow it or we have sub maximal
gross economy outputs

[2]

"...what is unsupportable..."

The point where overseas entities will not loan any more surplus production to the public sector. We are not there yet. This situation must be monitored closely, as the change tends to come all at once. The quantity of foreign loans to the private sector went from very large to almost nothing in a very short period of time. When the change comes, there will not be time to react in a sensible manner.

[paine]

"only under one maintained assumption-that public investments be productive"

not if there's slack padre
we need to tighten production first
before we switch to toal
uncle the infra builder mode

tighten the corporate production system
and keep it tight
that
so long as we lid
the price level rate of increase
at some point or other
full capacity utilization
will induce
investment in more capacity

[paine]

"The point where overseas entities will not loan any more surplus production to the public sector"

i like your phrasing but we aren't argentina

you correctly open the can called amerika
but
inside the bigger can called earth

hey we loan in dollars to that bigger can around us
right ???
and uncle has this limitless dollar mine ...
after a few more moves you arrive at
no big whoop ...qed

ironically or just hysterically
we are the one nation on earth
that
can prolly poo poo
the consideration of externally held debt
its potential level have and hit
with nat debt above gdp already
--- that's just a deeper argrument
we as americans need not enter ---

if you are the imperial currency's home nation
u can become maybe even like
a bizentium
where your constantinople
can rain riches on itself for a millenium
out of your entre pot/ "coinage "
center slot

[OhNoNotAgain]

"Yes, but surely the government cannot intervene in any old way and resolve the problem. How it intervenes, is important. Hence the discussion."

Absolutely, and I agree. But, anon implied that Krugman thinks that what the money is spent on doesn't matter, when Krugman clearly said in the piece:

"Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run."

So, clearly he is advocating the opposite of what anon is claiming. Specifically with the words "large part", "public investment", and "new technologies".

And, really, I'm not trying to be the language police here (my apologies if it appears so). I just think that it is important that we don't attribute ideas where they don't belong. It is important to understand who is advocating for steps that will improve the situation and who is advocating for doing nothing and letting the chips fall where they may. We have an opportunity to turn around many years of bad decision-making here with some sound investments, and it is important that the "voices for good" be heard.

[paine]

leigh seems to demonstrate enough
evidence of knowing it all
to remain complacent

i like that

a cat sunning on a warm stone

"The question is whether we then insist on being allowed to sit back on our pensions while they share the resources with us "

the intergenerational transfer system
revealed in its nakedness

"in return for what we did today "

today's us and we gets split into
those doing the lending now
and those receiving the procceeds now
whether by transfers by uncle
or expenditures of uncle

and the pair of we uses tomorrow
--or actually over an indefinite run of tomorrows--
which are tax payers and lenders of tomorrow vs
transfer recipients of tomorrow

" if we write off the investment
that we are now making,
and accept a smaller share of consumption
in the future "

your implict violation
of phelps golden rule between generations
doesn't pick between us our class
as tax payers and/or recipients
that cross cuts the generational divide

example we jobbler majoritarians
can get uncle to pay us out of borrowings
from the big boys today
and our jobbler majority descendents
can make their descendents
pay the servicing costs

[paine]

"We should be facilitating change, not obstructing it or postponing it. "

exactly right

dark cloud

"The vowel-less knzn is educating me"

god bruce
i hope only by cautionary example

[2]

"...uncle has this limitless dollar mine..."

Uncle can print paper, but can't make people want the colorful paper. At some point in the printing process, paper is no longer in demand as payment for overseas goods/services. Foreign goods/services producers are not like captive domestic producers. Foreign producers can simply pick up their marbles and leave at any time.

[jimbo]

"Solvency is essentially the ability of a country to maintain its debt, which it does from Tax Base Revenues."

Only if it has a fixed exchange rate or some other commodoty standard. In our floating rate world, solvency is not an issue because operationally, money is spent first, then taxed or "borrowed" (money is not really borrowed by a sovereign currency issuer; the only need for bond sales are to maintain non-zero interest rates.

Repeat this to yourself everyday 10 times, like a mantra: a sovereign has no solvency issues! Government deficit = non government surplus! Net Private savings require (as an accounting identity) government deficits!

After you do that for a few months, you may achieve financial enlightenment.

[paine]

"We cannot go into the future.. borrowing from China to buy manufactured stuff from China"

even though this forex folly
is my speciality
at this point
i see it as decidedly second tier bruce

lets get everyone possible
here in the states
fully jobbed up first
end the objective basis
for immmigration and foreign comp fears first
then i'd hit
the health sector
get that sucker properly harnessed and uncle sam saddled

and by then the green domestic sustainable
production campaign
oughta be well into implementation phase
and will prolly need a forex boost
that's when we can crack open
the balance trade dollar bit

[vorpal]

I'm thinking rat hole.

Throwing money at something will not solve the problem. We have repeatedly throuwn money at similar problems this decade and it just comes back worse than ever.

There is a $700 billion hole in the economy. As long as that hole exists, pumping more money will only cause it to grow and send more money out with it.

Given that this hole exists, and the money is just going to be wasted, that invites politicians to waste the money even more because they figure they should at least get their piece of the action.

There's a hole in the economy dear liza, dear liza, theyres a hole in the US economy dear liza, a $700 billion hole.

[anon]

OhNoNotAgain - Krugman did cite Keynes recently about this. I provided the quote above from Keynes. knzn echoed that as well.

Rather than put words in others' mouths, I try to rephrase what they advocate, either directly or by implication, in plain language. For example, Krugman's reference to WWII being the greatest public works program (or something to that effect) does carry implications. Combine that with his frequent citations of Keynes and the quote above and I think my characterization is fair.

By the way, the same people you mention that got us into this mess (in the financial industry) are the primary beneficiaries of trillions of dollars expended or promised as guarantees. Those are taxpayers dollars (either directly or indirectly via the dilutive effect of printing) doled out by our elected and/or appointed officials. The same officials that we are told we should look to for salvation.

I agree the government will have to be part of the solution. I just don't see that happening with the current cast of characters. While I do hope Obama acts for all of us, most of the people he appointed so far have done the opposite. We'll just have to see.

[ndk]

I'll chime in again to say once more, I see no reason to issue debt to pay for anti debt deflation measures. Just print the money. We need a reduction of debt and if we can substitute monetary base for debt so much the better.

This doesn't help if it's a solvency problem and not a liquidity problem. The Fed and Treasury have only two ways to cure a solvency problem, which are direct taxation and seigniorage. Either one, if pushed too hard, will cause too much damage to the economy itself and reduce the take of the government overall.

The Fed has to buy or repo something to get the money into the system. It can buy Treasury debt, which essentially retires that debt and places money into the system. But that money itself is a liability of the Fed, and the government's overall fiscal position isn't changed at all beyond it paying a fixed rate of interest to itself. Now it pays a floating rate of interest to someone else. It can buy other debt too, but that's not profitable in the estimation of the private sector where $600b of excess reserves lay fallow, so it would probably not be profitable for the government either.

Again, government debt outstanding is irrelevant to its solvency. It still needs to take in enough revenue in all present and future periods to pay all present and future obligations. Kotlikoff presents a neat model where a society goes bankrupt without using the word debt once.

I really believe the market's anticipating this, but not in the form we're all used to. 10-years down to 2.82% today. Treasury CDS hit 68.4 today. That's worse than many private corporations. TIPS are underperforming again.

[paine]

2
"Uncle can print paper, but can't make people want the colorful paper"

no but they want real stuff and to get to all our real stuff
you pass thru the dollar

"At some point in the printing process, paper is no longer in demand as payment for overseas goods/services. "
this runs the circle backwards

"..foreign goods/services producers .. can simply
pick up their marbles and leave at any time "

review the circuit of your own points
and you'll recognize
you may be swallowing your own tail

the objective is a full employment economy
able to sustain itself
and increase its output per hour of input ..right ???

since
existing dollar debtors have no other obligation
then to repay those debts in dollars
its only new borrowings
that perhaps come at higher rates
and or repayment costs
ie with the real burden of exchanging
more real domestic output
for less foreign output

as the forex game runs against us

but is that a bad ???

closing the trade gap is a good

i welcome the thought of a diving dollar
so long as the attempt to arrest its fall is left to the rest of the world and not uncle
who should play it
laissez allez all the way down

its good to be hegemon

[paine]

"I'm thinking rat hole"
that's wall street's counter party gig for sure

but dollars cost uncle zero so ...

but money created to buy stuff with
real stuff we can use
is just activating slack capacity
more like
creating wine out of a pool of water

[ndk]

Repeat this to yourself everyday 10 times, like a mantra: a sovereign has no solvency issues! Government deficit = non government surplus! Net Private savings require (as an accounting identity) government deficits!

Kotlikoff, the market, and history all seem to disagree with your mantra.

[paine]

"The Fed and Treasury have only two ways to cure a solvency problem, which are direct taxation and seigniorage. "

but that tiles the whole surface...eh ??

universal potential tax range
and limitless borrowing

which means the below dour warning is
100% bogus :

"Either one, if pushed too hard, will cause too much damage to the economy itself and reduce the take of the government overall"

properly utilized in combo
the two gub measures are their own mutual
side effect cure here

so long as one instrument
is geared properly to the other
there is no serious economic damage
regardless of level

only incomplete or misguided instrument management
hurts the real system
ala volcker 79-82
and greenspan 96-04
you hardly need a hyperinflation
or
a depression to make that true

do you exist
in a none numbered world ????

sky hooking your policy conclusions
to these exists type notions
is a rope a dope game

where there's slack there's a potential uncooked meal

[Patrick]

"only under one maintained assumption-that public investments be productive"

Private investment is highly prone to waste and failure. It's so prevalent that society invented special laws and courts to clean-up after it.

In any case, many of the candidate projects for fiscal stimulus are necessary public works required to keep an advanced civilization functioning. They tend to be either natural monopolies (energy infrastructure/utilities) or already government run (schools, education, roads) that have been neglected because of the ideological canard about private investment being always and forever more productive.

[ndk]

universal potential tax range
and limitless borrowing

which means the below dour warning is
100% bogus :

No, it's not. Check out the curve in Buiter's paper to see the limits to seigniorage. Even Keynes himself pointed out in the General Theory we've all lionized there's a limit to the amount of direct taxation the Government can pull in.

Many governments throughout history have gone bankrupt. It can happen here too, and the market is actively betting the odds are increasing.

[vorpal]

"I'm thinking rat hole"
that's wall street's counter party gig for sure

Are you saying I'm a Wall Street patsy? If not, what's the point of this comment?

The Nazi's said that pissing in the toilet is better than pissing on the floor, does that mean I should piss on the floor?

Cut it out.

[Lafayette]

O ye of little faith.

Krugman did not get his Nobel Prize by opining in a blog. Keynes is not an economic idol because he misinterpreted disinflation and suggested deficit spending. FDR did not start WW2 as a Public Works project.

The gloom 'n doom crowd around here are having a field day. Nothing better to do? Apparently ...

Go out and buy something. Anything. It'll make you feel a LOT better and you will have done your bit for the economy.

[ndk]

but dollars cost uncle zero so ...

No, they don't. They yield 0.65% right now, which isn't much, but it's not free. We can of course lower that back to zero again, increasing seigniorage, but then money market funds start running at a loss. The Fed already owns 18% of all CP outstanding. I don't want to see that number increase.

I fail to see how "we can always blow out of any divot into hyperinflation" is an appealing argument.

[ndk]

O ye of little faith.

Krugman did not get his Nobel Prize by opining in a blog. Keynes is not an economic idol because he misinterpreted disinflation and suggested deficit spending. FDR did not start WW2 as a Public Works project.

This is a place for discussion, Lafayette. We are here to discuss the content of the article, not to fawn over our infallible leaders. I don't dispute at all that they're brilliant, and I love their work. I believe they're misdiagnosing the problem, working in the wrong framework, and inadvertently making our troubles worse. If you disagree, by all means, point out the flaws in my argument.

[vorpal]

I think that given the recent history of the US economy, a reexamination of the system is due. We tried this type of policy before....our deficit has ballooned this decade, this fact alone could be characterized as 'stimulus.' Why aren't we better off for it? We stimulated the economy with monetary policy as much as we can, where has that left us?

Giving a blood transfusion does not make sense when blood is streaming out of somebody's leg. It may help the patient briefly, but it may be smart to quickly stem the wound.

Maybe, this is the case for the US, maybe it isn't, but I just don't see more of the same 'but done better' will get us far. We need to acknowledge that something is wrong, and it will keep coming back until we fix it...whatever 'it' is.

[paine]

"Kotlikoff, the market, and history

now there's an odd cast of heros

mr k as what zeus of the dismal olympus ???

" a sovereign has no solvency issues!"

indeed so long as the obligations are in
the sovereign's costless legal tender

" Government deficit = non government surplus!"

we of course
never conflate the hi fi balance sheets
with the real production system

on a real level
uncle's limitless ability to pay
dollar obligations square's circle

"Net Private savings require (as an accounting identity) government deficits!"

there are no net savings
in a closed system

yes uncle to avoid lost out put
needs to fully soak up
any and all excess private savings
that exceed private borrowings
(productive and consumptive alike)
cross border and internal alike
ie soak it up
for real expenditures
and/or transfers
back into the private sector

private savings out of productive income
left to idle away
will
drive down system wide output demand

if you mean in an open system
all is more complex
well
forex enters to close the gaps
and restore full employment

[2]

"...no but they want real stuff and to get to all our real stuff you pass thru the dollar..."

This hasn't been the case to any degree. Imports have been far higher than exports in recent years, so foreigners don't really want or need our stuff. Exports are falling now, so they want US stuff even less now. Foreigners have been loaning their stuff, not trading for US stuff.

[Bruce Wilder]

If you're Argentina or Italy, fiscal capacity (really the limits on the ability to collect domestic taxes combined with the necessity of borrowing in someone else's currency) can be an issue. It's never been a problem -- at least not since George Washington mounted his horse to put down the Whiskey Rebellion -- for the United States. And, Federal taxes are low enough, as a percent of GDP that fiscal capacity is not going to become a problem, even adding two or three trillion to the national debt. If the U.S. starts issuing Yuan bonds, then we can worry.

Vorpal, the economy has a hole. We can fill the hole with Federal spending. We should fill the hole, before it swallows us up in a spiral down the drain. That's Krugman's whole column in three sentences.

[vorpal]

Aristotle, Isaac Newton, Albert Einstein, Gen. McCarthur, J.F.K. ... all smart, yet all wrong at one time or another...and not in a small way.. in a big way.

Smart people are not free from cultural prejudices and assumptions.

As Eric Clapton wrote, "it's in the way that you use it."
It's a darn good adage to live by.

[2]

"...the objective is a full employment economy..."

This is assuredly not the goal of foreigners. They don't care one whit what the US employment rate is. Foreigners definitely don't loan stuff to the US to keep the US employment rate up.

[2]

"...i welcome the thought of a diving dollar..."

I am glad you find the thought of $20 per gallon gasoline so enticing. Foreigners don't want or need our stuff, but the US needs oil and other natural resources from overseas.

[paine]

"but then money market funds start running at a loss"

is this
" a negative real rate of interest is bad"
type argument ???

vorpal u miss my point
which is generally my fault

i was trying to draw a distinction between pure social balance sheet number shifts
and the reak production system

the 8 trillion in obligation assumption...by itself
only bails out certain parties that are owed certain moneys

the effect on the real economy is only thru
balance sheet shifts effect
on credit flows into the real economy
for real expenditures by firm and household

the production system's demand for credit
is obviously based
on real demand expectations
which are themselves effected
by projected fiscal deficit transfers and spending

[ndk]

If the U.S. starts issuing Yuan bonds, then we can worry.

It's plenty possible for a government to go bankrupt without doing that. Kotlikoff demonstrates a fully closed system with no debt where it occurs. Recent history provides examples too: Russia went down due to domestic turmoil and an artificially high exchange rate. We too have an artificially high exchange rate -- not our doing, but that of Asian mercantilists.

Guys, our Comptroller General, David Walker, resigned in frustration at our policies even prior to this crisis. Why do you hold out such disbelief that bankruptcy can happen to us, too?

[vorpal]

Vorpal, the economy has a hole. We can fill the hole with Federal spending. We should fill the hole, before it swallows us up in a spiral down the drain. That's Krugman's whole column in three sentences.

My point is that we have de facto tried this already and it has not worked. The hole has only grown. Maybe on paper, Krugman's notion has merit. But quite frankly, I have seen economic "models" in research papers...and they suck! Compare the virtually any economic model with the models used to analyse global climate change(another highly interactive, nonlinear system). They are tinker toys.

Given this fact, we only have recent empirical facts to guide us, and my observation of the recent empirical facts is that something is wrong, and simply spending money won't fix it.

[ndk]

"but then money market funds start running at a loss"

is this
" a negative real rate of interest is bad"
type argument ???

No, paine, it has nothing to do with the real rate of interest, which is quite positive and high right now. It means their expense ratio will be higher than the yield they can pay out, which effectively shuts them down.

[paine]

2

what we import and what we export
is forex dependent

yes necessary imports might cost us more
real output
but what if by the workings of the system
we will be producing thatextra exported out put
out of an addition to
not subtraction from
our current output

again slack always recall the slack
the real slack in real factors of production

mission:
get us to full utilization and keep us there
with all the attendent structural and institutional morphs that entails

do that
and then we can see
who among us is better
or worse off
then under today's crumbling status quo

[paine]

ndk

"No...it has nothing to do with the real rate of interest"

glad to here that i'm a great proponent of negative real rates long or short
but as to this
are short rates
".. quite positive and high right now" ??
i don't bother with such quibblings
among the capital class

"It means their expense ratio will be higher than the yield they can pay out, which effectively shuts them down "
and if so ... so .?????

ways of paying for the depository systems real costs
have morphed over time and with vagaries of ingenuity

institutions that correspond well
to certain historical and systemic conditions
can lose that profitable functionality
with the change of system and conditions

what is god sent and eternal
about our present arrangements ??

do you fear a crisis ??
an out stampede ??

as i recall reaching back to my callow days
the whole bit
with these money markets
goes back to the volcker dammerung

[2]

"...its only new borrowings
that perhaps come at higher rates
and or repayment costs
ie with the real burden of exchanging
more real domestic output
for less foreign output..."

There is the rub. The US is completely and totally addicted to borrowing ever more stuff from overseas. Current loans of stuff are mostly short term, so they have to be constantly rolled over. Virtually everything the US owes to foreigners will require borrowing more stuff from foreigners to replace the loans coming due. On top of it, the total debt (more borrowed stuff) keeps getting larger.

Eliminating future borrowing of stuff from overseas is not an option without catastrophic consequences. When homeowners couldn't borrow ever more stuff from overseas to buy homes, the housing market collapsed. Many companies are currently unable to borrow more stuff from overseas to pay their employees, so unemployment is rising.

If Uncle messes up and foreigners won't lend any more to him either, its game over. The current plan to borrow trillions from overseas to build infrastructure while rolling over current loans is toast. The current plan to guarantee Fannie and Freddie mortgages so foreigners will lend to homeowners is toast. The entire economy has been set up to work only if ever more stuff can be borrowed from overseas. It is a silly system that can't continue indefinitely.

[paine]

2

i think you see discrete states here
a brake in the line
an on off switch point
where trade by the USA
with emerging asia
and or the energy exportes
fails to continue

but is there one ??

and if not ??

i don't think there can be one
not at all....

if i might be so vague:

here continuity alone insures
there are no necessary ...note necessary
crises
along the road ahead
the fate of american prosperity
unlike say .. nepal
is in our own hands

in international economics
---where both sides of a trading relationship
operate with only self interest at heart---
if fully enlightened
will always find the best move
is to continue the dance ....

small reminder
the larger the stock of debt
the more signifigant the impact of its decline
in value on the creditor

that decline may have
a foreign ceiling
but it has a foreign bottom too

[2]

"...what we import and what we export
is forex dependent..."

It is borrowing dependent. Importing more than exporting means the same thing as borrowing stuff from overseas. The US borrows stuff from overseas because citizens won't loan stuff to each other.

[OhNoNotAgain]

"Rather than put words in others' mouths, I try to rephrase what they advocate, either directly or by implication, in plain language. For example, Krugman's reference to WWII being the greatest public works program (or something to that effect) does carry implications."

Yes, but you're putting forth the least charitable interpretation of his words. As Lafayette has already succinctly pointed out, Krugman was not arguing for starting WWIII as a public works project. He was simply stating that massive government spending on public projects does have a very positive effect upon an economy experiencing a depression and massive deflation, and WWII is an example of that. He leaves it as an example of common sense that war spending is not desirable, for many reasons that go way beyond economics.

[2]

"...if fully enlightened
will always find the best move
is to continue the dance..."

Yes, but consider what has been happening. Central banks around the world are frantically removing non treasury US debt from their books. They are even removing Fannie and Freddie debt. The US Fed is being forced to put all of this debt on its books to keep mortgage and other loans flowing. It has been a mad dash for the exits for all non US treasury debt, despite this meaning that the rest of the debt is devalued.

Enlightened actions by foreign entities will result in what is best for them, not what is best for us. At some point, foreign entities will calculate the risk of keeping the current dance going as higher than being first to get out. If the time comes for removing treasuries from foreign books, it will be a mad rush for the exits. All foreign entities will shun treasuries at the same time, and no more loans of stuff will happen.

[paine]

ndk

your limits are imposed by institutional facts
not potential reality
buiter is a boob

and keynes was an establishment reformer not a radical

i suggest only whaqt's possible
not whether it would be too radical
for serious present system stakeholders

[ndk]

your limits are imposed by institutional facts
not potential reality
buiter is a boob

When you resort to decrying facts and call a widely respected economist from the NBER and CEPR a boob, there's really nothing left to discuss. I'm sorry.

[paine]

"At some point, foreign entities will calculate the risk of keeping the current dance going as higher than being first to get out"
if you are talking about US IOUs
they can't escape em collectively
only circulate em
like the boob card in what ever
PC nominalization of cards make up the game
that has sublated pre late 60's..." old maid "

what do you fear ???

track it down to real changes
in real stuff going to particular real folks
not the circular paper tail chase
partial models can induce
or
the what's really happening and why
so easily obscured
by the filthy veil of forex

as bruce wilder suggest there will be sacrifices
here at home
and not even in the best of all regime changes
will these sacrifies by slung on the backs
of the moneybags

regular folks will take a cuffing from
the relative rise of import prices
as one big example

but there is a route to a higher plain
where productivity measured
by real value of hourly ouput
(properly pigou-ed)
grows fastest
wages and participation is highest
and
most sustainable
a great green clean production machine
can be built right here in america

[paine]

ndk
lets not get into who has authority they can mobilize

face it
for example
the money market fund as a way to make our payments
is hardly crucial to long term prosperity

in fact i think we should have
a depository and payment system
that is backed by an uncle sam payment guarantee

if i decry anything
i " decry "
the confusion of existing
but easily change-able institutional arrangements such "conditions "
should never go around masquarading
as necessities of social reality

------
nothing you or your authority figures
have suggest
changes what is possible

show me where among
the vistas of social "facts"
impossibility lies
and i'll defer to authority
like uncle marty's NBER

the collapse of todays money puddlings
might create such an opportunity

[don]

Paine -
What do you think of the credit default rates on U.S. Treasuries, and Japan's recent rquest for the U.S. to issue Treasuries denominated in yen?
I share Arthur James' concerns. All would be fine if it were only money we owed ourselves. But that is certainly not the case and I am very surprised to see Krugman say that it is. I wish he would answer Arthur's questions.
I think the CA deficit is not given and that it will respond importantly, and perversely, to any stimulus. I would not be surprised to see $500 billion of Chinese currency purchases in 2009, with the amount of lending ending up in the U.S. directly proportional to the size of the U.S. fiscal stimulus. And to the extent the CA responds (i.e., to the extent foreign lenders fund the stimulus) it will increase U.S. debt and dissipate the stimulus. So, when you say you would put the CA problem last (if I understand you correctly), you apparently agree with Krugman. Since I have little hope he will respond, I wonder if you could expand on why, exactly, you think the CA leakage is of such little import?

[paine]

don

"All would be fine if it were only money we owed ourselves. But that is certainly not the case"

if i follow you...

you are concerned about the relative
size of our external sovereign debt
to what???
our gdp ???

u note the crucial difference between
issued in sovereign currency

or foreign currency

but suggesting uncle issue yen based obligations

why ???

to get a lower rate ???
"..to the extent foreign lenders fund the stimulus...
it will increase U.S. debt and dissipate the stimulus. "

but what the wealth effect ???

i know you are on to something important here

i just want to understand it first
--for once--
before i blast off responding to it

btw
i agree with krugs priority list
but think his amonut of fiscal thrust is way too low
i suspect he knows that
and will feed us the higher numbers as they become necessary

[anon]

OhNoNotAgain - Keynes said quite explicitly that massive government spending can restore a prosperity lost to the bursting of a bubble independent of what that spending was for. Of course, he was not stupid. He didn't claim that making war, building pyramids or digging ditches were *preferable*, but that they would do in a pinch (I'm obviously paraphrasing.) Krugman and knzn echoed that.

First, I think that's flat out wrong. Wasting resources, practically by definition, does not bring about prosperity. Maybe that's why they use technical terms to advance their position. Beyond that, following such advice is downright dangerous, yet there are vested interests close to power who are more than happy to profit from reckless spending, yes, including wars. Such unscrupulous people will use whatever "ammunition" they can get.

Keynes also wrote that productive capacity that existed just prior to the bursting of the bubble is in a sense still there, just inaccessible without the policies he was advocating. If that productive capacity is for useless things that were produced only because of easy money from the banking system, then I think it should remain inaccessible.

Instead, we should direct our resources - both public and private - towards things that are useful even without easy money. These are too many to enumerate here, yet that can't happen as long as the ever expanding bailout continues. Krugman in principle supported said bailout, with ever present references to Keynes, though he has quibbled with some details. He also seems to reflexively support the current Fed chairman, his former department chair. I think criticism of those positions is warranted, prize or no prize, Keynes idolatry or not.

[Gegner]

'a' gets it right in one again! Throwing money at a broken economy will do nothing to 'stimulate' that economy.

The crux of the problem rests in the fact that there is no new labor intensive 'project' that will create a new market niche, thereby spurring 'cash flow'.

And our idiotic, predatory, economic system lives or dies by cash flow.

If we are to save civilization, this is the nut that needs to be cracked.

Since there is 'nothing new under the sun' (for the foreseeable future anyway, we have a couple of technical problems to overcome before the next 'great project' is feasible.) We would be best served to rearrange how cash flows in our economy.

[mmckinl]

Without a major economic restructuring of the economy all that fiscal stimulus will eventually be for naught.

Our economic model has been borrow to spend rather than borrow to invest to the point that now 70% of our economy is consumption. More spending on a broken model will only lead to more waste, debt and rapid economic decline.

[don]

The credit default on U.S. Treasuries is over 1/2%
Japan has called for yen-denominated U.S. debt issues.
The CA will respond to the stimulus - China will probably buy $500 billion in foreign reserves next year, eviscerating foreign stimulus packages.
I want answers to Arthur James' questions. How can someone of PK's ilk say its only 'money we owe ourselves'?

[2]

"...they can't escape em collectively
only circulate em..."

It means no more loans of goods/services to the US for a long time. If the country gets into trouble, there will be no significant overseas borrowing to help us through it. It also means that the transition to restoration of the circular flow will be sudden and traumatic.

Better to just adopt fiscal sense now, while the transition can be made in an orderly fashion.

[roger]

Well, the troubles in the U.S. began when private investment crowded out public investment, thus causing the massively perverse allocation of capital to the financial sector, and away from all other sectors (who have historically been more productive but less profitable in the short term), getting us to where we are now. Hmm, I wonder why nobody worries about that? Oh, I forgot, magically, what the government does - from building the Hoover Dam to educating every generation of Americans - is crap, whereas look at the wonders of private investment - security vehicles as far as the eye can see!

If the State keeps investing in the deadend financial sector, this will, of course, all end in tears. The state is uniquely unqualified to intervene there except on the institutional scale. That is, it can simply make the peer to peer system illegal, can set up institutions which would make the shadow financial system come in from the cold, and it can, for the nonce, capitalize a state bank to more effectively allocate credit where it is needed at this moment. Banks hording cash are banks that should be put out of their misery - they have lost any purpose.

Where the state can do better is in bailing out manufacturing. In contrast to the shrinking of the financial sector, the car sector, globally, is expanding. American made cars, say Ford's diesel fueled cars in Europe, are doing well. In the American market, there is a massive stall out as the consumer, out of pocket at the moment, doesn't know which way to jump. The heavy, visible hand of the government, bailing out Detroit, can certainly solve that dilemma by simply forcing new models, new standards, new ideas upon the car companies. It can raise the tax slightly on imported cars. And it can make the new standards really high - making demands on really big increases in gas mileage over five years, for instance. Detroit will kick, not seeing that this is really in its interest - for only re-learning how to build a cutting edge car will it produce a product that gives the consumer a reason to buy it. And of course the big advantages here are environmental and geo-political. I very much doubt the U.S. will ever tax gasoline like they do in Europe, so the diminishment of the U.S. dependence on Middle Eastern primary product producers has to begin at the industry end.

If the U.S. is going to finally catch up on its public investment deficit, there are a lot of places to start, and it isn't just transportation or energy, but healtcare and education which should be the foci.

[don]

My second post was made, because I thought the first got lost. Sorry for the repetition, and for cluttering up the blog with this explanation.

[D. Malcolm Carson]

Krugman owes it to us to give us some sense of what the upper limit of how much we can spend might be. I totally agree that deficit spending iis warranted (particularly if it's spent wisely), but I've also heard people talking about the possibility that we will push our borrowing capacity/dollar value to the breaking point of collapse.

An economist like Krugman should be able to venture an opinion as to where that breaking point might be and how we can best avoid it while still spending what we need to to get out of this recession.

[don]

Paine -
Thanks. It's a question of relative magnitudes and I admit I don't have a solid grasp. But sooner or later the remaining imbalances must correct. Asset values, especially in the financial sector, have gone some way to needed corrections, but U.S. overall borrowing and artifically bloated (and lop-sided) world trade are still far from home.
Also, I strongly believe that keeping up earlier perceived wealth (asseet values) is beyond 'uncles' resources.

[david]

Lovely last post there, Paine. The forex fiddle has fallen to second tier, or did you have it there all along?

fully jobbed up through the green domestic sustainable production campaign, or otherwise jobbed?

I ask to learn, seems right to me.

says...

Myopia and drunkedness in the disco results in waking up next to a transvestite in the foreclosed flophouse.

Who will we be in bed with after the fiscal stimulus party?

The subprime lenders are reorganizing as FHA loan lenders. Banking regulation is still lax as ever. Globalization still equals job exportation wage stagnation. Business executives are still in charge, driving industry into the ground or abroad. The insurance companies will remain in charge of health care and health care costs. These people are not competent to run the nation, evidently.

Uncle Sam is a john paying exorbitant prices for non-fertile transvestite hookers that look good right now. Uncle Sam has been paying them for years, the exact same hookers. Myopically, we might get infrastructure inprovements and universal health care coverage. Unfortunately, long term, the infertile transvestites will not be generative, but generate only further decline.

We can Hope for Change. Hope. But we need competent people to implement the wonderful economic stimulus ideas. Who we have are the same people who got us here.

[Worker]

2 says...

Uncle can print paper, but can't make people want the colorful paper. At some point in the printing process, paper is no longer in demand as payment for overseas goods/services. Foreign goods/services producers are not like captive domestic producers. Foreign producers can simply pick up their marbles and leave at any time.

Quite true, but what's the alternative? The rest of the world is in the stimulus game. If everyone prints money and believes such stimulus to be a cure, then all money is equally worthless.

Seems, the US has to both print more money than the rest of the world is printing AND abrogate its reserve status by stupidly wasteful spending/ anti-social world policy actions such as protectionism. Stupid is judged by the eyes of the world, not by our politicians or US voters.

Please tell me how I'm wrong here. Just my view.

[paine]

"Without a major economic restructuring of the economy all that fiscal stimulus will eventually be for naught"

for the long haul post recovery
--amazing we're already past that discussion---
we better figure on fiscal deficits that parallel
the size of our nominal gdp growth
we prolly will need to recycle about
that much thru uncles check book

the return to balanced trade and the greening of domestic production
my boost spontaneously our infra structural
and industrial investment
and of course there's all the green machines and systems the households will need

think of these green cars and solar panels
as our new go to public expenditure target
hard ware and technology wise
the green industrial complex
plus the health-pharma complex
are the two bright side
replacement for death stars and storm troopers
of the modern corporate/state interface sysyem