It’s Not the Deficit, Stupid

From “That Terrible Trillion,” Paul Krugman, NYT:

“The first thing we need to ask is what a sustainable budget would look like. The answer is that in a growing economy, budgets don’t have to be balanced to be sustainable. Federal debt was higher at the end of the Clinton years than at the beginning – that is, the deficits of the Clinton administration’s early years outweighed the surpluses at the end. Yet because gross domestic product (GDP) rose over those eight years, the best measure of our debt position, the ratio of debt to GDP, fell dramatically, from 49% to 33%.

“Right now, given reasonable estimates of likely future growth and inflation, we would have a stable or declining ratio of debt to GDP even if we had a $400 billion deficit. You can argue that we should do better; but if the question is whether current deficits are sustainable, you should take $400 billion off the table right away.

“That still leaves $600 billion or so. What’s that about? It’s the depressed economy – full stop.

“First of all, the weakness of the economy has led directly to lower revenues; when GDP falls, the federal tax take falls too, and in fact always falls substantially more in percentage terms. On top of that, revenue is temporarily depressed by tax breaks, notably the payroll tax cut, that have been put in place to support the economy but will be withdrawn as soon as the economy is stronger (or, unfortunately, even before then). If you do the math, it seems likely that full economic recovery would raise revenue by at least $450 billion.

“Meanwhile, the depressed economy has also temporarily raised spending, because more people qualify for unemployment insurance and means-tested programs like food stamps and Medicaid. A reasonable estimate is that economic recovery would reduce federal spending on such programs by at least $150 billion.

“Putting all this together, it turns out that the trillion-dollar deficit isn’t a sign of unsustainable finances at all. Some of the deficit is in fact sustainable; just about all of the rest would go away if we had an economic recovery.”  Emphasis added.

November 6 — Slow Job or Snow Job?

From “Pointing Toward Prosperity?,” Paul Krugman, NYT:

“The point is that America is still suffering from an overall lack of demand, the result of the severe debt and financial crisis that broke out before Mr. Obama took office.  In a better world, the president would be proposing bold short-term moves to move us rapidly back to full employment.  But he isn’t.

“O.K., we all understand why.  Voters have been told over and over again that the 2009 stimulus didn’t work (actually it did, but it wasn’t big enough), and a few days before a national election is no time to try to change that big a false belief.  So all that the administration feels able to offer are measures that would, one hopes, modestly accelerate the recovery already under way.

“It’s disappointing, to be sure.  But a slow job is better than a snow job.  Mr. Obama may not be as bold as we’d like, but he isn’t actively misleading voters the way Mr. Romney is.  Furthermore, if we ask what Mr. Romney would probably do in practice, including sharp cuts in programs that aid the less well-off and the imposition of hard-money orthodoxy on the Federal Reserve, it looks like a program that might well derail the recovery and send us back  into recession.

“Mr. Obama may not have an exciting plan, but if he is re-elected, he will get to implement a health reform that is the biggest improvement in America’s safety net since Medicare.  Mr. Romney doesn’t have an economic plan at all, but he is determined not just to repeal Obamacare but to impose savage cuts in Medicaid.  … Think instead about the 45 million Americans who either will or won’t receive essential health care, depending on who wins on Nov. 6.”  Emphasis added.

And think about who will or won’t be appointed to the Supreme Court depending on who wins.



The Danger and Damage of Extreme Income Inequality

From “Plutocracy, Paralysis, Perplexity,” Paul Krugman, NYT:

“If something like the financial crisis of 2008 had occurred in, say, 1971 — the year Richard Nixon declared that ‘I am now a Keynsian in economic policy’ — Washington would probably have responded fairly effectively.  There would have been a broad bipartisan consensus in favor of strong action, and there would also have been wide agreement about what kind of action was needed.

“But that was then.  Today, Washington is marked by a combination of bitter partisanship and intellectual confusion — and both are, I would argue, largely the result of extreme income equality.

“For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal.  Specifically, money buys power, and the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.

“Disputes in economics used to be bounded by a shared understanding of the evidence, creating a broad range of agreement about economic policy. … Now, however, the Republican Party is dominated by doctrines formerly on the political fringe.

“And why is the GOP so devoted to these doctrines regardless of facts and evidence?  It surely has a lot to do with the fact that billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests. … And now the same people effectively own a whole political party.

“Many pundits assert that the U. S. economy has big structural problems that will prevent any quick recovery.  All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.

“No, the real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority.  And the key to economic recovery lies in finding a way to get past that minority’s malign influence.”  Emphasis added.

I think it’s obvious that if Mitt wins, this problem won’t get better.



A Self-Sustaining Recovery

Editorial in The Economist, “Can it be…the recovery?”

“For the year as a whole America’s economy will probably grow around its trend rate of around 2.5%.  That’s a lot lower than might be expected after a normal recession; but after financial crises, when consumers are weighed down by debt, recoveries tend to be anaemic.  That level of growth…could be the first step towards a self-sustaining recovery, thanks to the virtuous circle of stronger job growth leading to higher consumer spending, which in turn should generate more jobs.

“America’s priority should be to craft a medium-term plan which puts the budget deficit on a downward path without snuffing out the recovery.  There is, unfortunately, not a chance that it will do that before November’s presidential election.

“The reasons for optimism are real.  But if policymakers get it wrong again, the recovery could yet turn to dust.”  Emphasis added.

That phrase “self-sustaining recovery” captures my problem with both parties.  For me, the Democrats don’t know when to stop the government spending, while the Republicans don’t know when it’s necessary.  I believe in stimulus to get a recovery going, when consumer spending isn’t there, but when that recovery become “self-sustaining,” I want less government.  I believe that “expansionary austerity” isn’t just an oxymoron, it’s a dangerous and delusional myth.