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Paul Krugman losing his mind..."Deficits Matter Again"

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  • Strongly Liberal Democrat
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    Krugman has sealed his fate here as a partisan-hack of the sort we deride on the right. Below I've sort of laid out my critique sentence by sentence of his "Deficits Matter Again" blog post at the NYT January 9th. I have tried to explain operations as simply as I can. What you should recognize is that Paul Krugman has completely flip-flopped on deficits because Trump is President-Elect. Deficits are never a principle problem, but they always matter. The American public has a lot to learn about how government deficits matter. Government deficit=non-government surplus.

    ....."America, which borrows in its own currency and therefore can’t run out of cash, isn’t at all like Greece."

    This is absolutely correct. Krugman was late to the party of the lonely few progressives who were saying that from the very beginning. This completely correct statement is followed by dark omens of things to come.

    "But running big deficits is no longer harmless, let alone desirable.".......

    First of all, the quantity size of the deficit tells us nothing without further context. Meanwhile, if we 'borrow our own currency,' then there are no real financial solvency constraints, and the 'limits' are on the real side of the economy. So what follows makes no sense if Krugman thinks that unlike Greece, the United States government is a sovereign currency issuer. Federal government 'borrowing' operations are nothing more than a matter of Treasury offering special insured savings accounts at the Fed that earn interest.

    "In the depressed economy that prevailed for years after the financial crisis, government borrowing didn’t drive up interest rates,"

    He's talking about the federal government here and federal government 'borrowing' NEVER drives up or down interest rates; because the 'borrowing' always supports or is accommodated by Fed policy so as not to disrupt the interest rates fixed and targeted by the Fed. If government borrowing, which is uneven and happening daily, was disruptive to financial markets by competing with the funds available to the entire market and thereby raising/lowering interest rates based on the levels of government borrowing, there would be massive financial chaos day to day, and you would read about it in the newspapers. The federal government can always deficit spend without the threat of additional extortion from bond vigilantes with the given institutional settings of the Fed and the Treasury. Now by law, which has been and can be changed or suspended, the Treasury cannot overdraft on its account at the Fed or 'borrow' directly from the Fed. However, in the event that the market is short deposits to buy new issues of government securities, the Fed would adjust the composition of dollars in the banking system from older securities to deposits, or it could simply offer to repurchase those new securities from bond dealers once they have purchased them from the Treasury. All the prohibition on Treasury overdrafts at the Fed does is force interest payments to rich people on account of the normal business of government. Even if the government is running a surplus, some 'borrowing' is going to happen because of 'timing' issues. Treasury cannot do its job without paying some ransom at the Fed's interest rate targets, but its not subject to bond vigilante attack. Operations and financial markets would be much more efficient if Treasury simply ran continuous overdrafts at the Fed and the FDIC offered unlimited deposit insurance.

    "money creation by the Fed didn’t cause inflation"

    QE was a tax in the first place, not money creation. When the Fed purchases government securities and Treasury backed agency debt, it adds dollars to the economy, and removes government securities and interest incomes.

    QE removed interest income from the economy and added it to the Fed's balance sheet allowing the Fed to report record profits to the U.S. Treasury. The economy has less dollars as result. More of the remaining dollars exist as deposits, added by the Fed, and less exist as interest bearing bonds, securities, and Tsy backed mortgage agency debt, removed by the Fed. This is all simple financial accounting. So of course the Fed didn't cause any inflation. It took dollars out of the economy and its profits contributed to Treasury revenue that reduced government deficits.

    "and nations that tried to slash budget deficits experienced severe recessions."

    Yes, trying to reduce deficits in the face of recession is bad news bears.

    "But these predictions were always conditional, applying only to an economy far from full employment.".....

    Krugman is using an unrepentant ISLM macroeconomic approach still taught to most university undergrad macro students even though it was repudiated by its founder John Hicks. While it's a great class room exercise, it does not conform to the monetary system that we have and later in life Hicks recognized that.

    "What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment."

    This is the most damning paragraph. Nothing changes at full employment as far as the dollar supply is concerned. Unlimited funds are always available per demand for savings and investment at interest rates fixed and targeted by the Fed. The Fed might raise interest rates as a consequence of inflation, but the dollar supply is always unlimited at the Fed's policy rates. When government deficit spends, funds are added to the economy in the form of government securities and the interest income they earn. I repeat. When government deficit spends, dollars are added to the economy in the form of government securities that earn interest. Again, basic accounting here. Noncontroversial. Not in dispute. So where is the limited amount of dollars that government and those seeking investors are competing for? How is increasing the dollar supply shrinking it?

    Krugman is offering himself up for strong rebuke from across the spectrum.

    Democrats should deny that government deficits are ever a principal problem. Inflation is not about government deficits, but about total spending in the economy and total output. Government deficits are a residual reflecting non-government savings attempts with the given institutional structure and economic conditions. The government budget balance is always a meaningful piece of information when understood with the right context. Deficits always matter, but not the way broadcasted by media and politicians would have you think. Democrats should worry about full employment and price stability, and keeping the government limited to public purpose.

  • Independent
    Ft.myers, FL
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    Carlitos, nice story. My idea is that if you as government spent your money on stupid things of which the "people" have zero benefit, then I call that pure waste. Having huge "debts" with for instance with China because of an trade balance difference, could have huge political impact. Thus what I think which ever way you look at all of these things they have an effect on the society. Sorry we are not the only nation on this globe; thus if you don't account for that, then lots of trouble can start with or without deficits. Thus dependence of money does not mean that much for humanity. As an example Hitler built an huge army without money. After the war we had boxes full of Deutsch Marks as play money; totally worthless. If Trump pushes the "button" then all worldly money is worthless; also the billionaires are then broke; there will be "nothing" to buy, except radioactive rubble.
  • Liberal Democrat
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    Carlitos -- I read your post and also Krugman's article. I thought about a response but of course I'm not qualified to get into the nitty gritty of fiscal and monetary policies and the effects on the economy. I do read Paul Krugman's column's in the New York Times on a regular basis and agree with much of what he says. He has been an influential voice for liberals on a whole host of issues. And he has the credentials to back up his statements. Here's his brief bio from Wikipedia:

    Paul Robin Krugman born February 28, 1953) is an American economist, Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for The New York Times. In 2008, Krugman was awarded the Nobel Memorial Prize in Economic Sciences,for his contributions to New Trade Theory and New Economic Geography. The Prize Committee cited Krugman's work explaining the patterns of international trade and the geographic distribution of economic activity, by examining the effects of economies of scale and of consumer preferences for diverse goods and services.

    Krugman was a professor of economics at MIT and later at Princeton University. He retired from Princeton in June 2015 and holds the title of professor emeritus there. He is also Centenary Professor at the London School of Economics and was President of the Eastern Economic Association in 2010. As of 2016, Research Papers in Economics ranked him as the world's 24th most influential economist based on citations of his work. Krugman is known in academia for his work on international economics (including trade theory, economic geography, and international finance), liquidity traps, and currency crisis.

    Krugman has written over 20 books, including scholarly works, textbooks, and books for a more general audience and has published over 200 scholarly articles in professional journals and edited volumes. He has also written several hundred columns on economic and political issues for The New York Times, Fortune and Slate. A 2011 survey of economics professors named him their favorite living economist under the age of 60, followed by Greg Mankiw and Daron Acemoglu.

    As a commentator, Krugman has written on a wide range of economic issues including income distribution, taxation, macroeconomics, and international economics. Krugman considers himself a modern liberal, referring to his books and blog New York Times The Conscience of a Liberal. His popular commentary has attracted comments, both positive and negative.

    Okay, you would agree that is a pretty impressive résumé. I also know from reading various articles by favorite Modern Monetary Theorists including yourself that Paul Krugman is a favorite person to scorn. It's like you are applying a purity test to him much the same as Bernie Sanders and Jill Stein applied to Hillary Clinton. Those purity tests evolved into outright hate for Hillary amongst their supporters, and I sense the same kind of hatred is now being applied by the MMTers against Krugman. I looked up Greg Mankiw and Daron Acemoglu and found that they are also MIT economists. Maybe this is MIT Krugman economists versus University of Missouri Randall Wray economists...a tribal allegiance of sorts for each university.

    Getting back to Krugman's article, I didn't read into it what you did. It looked to me like the bigger point that Krugman was making is that for Republicans while they are in office and control, deficits do not matter, but when Democrats are in power, deficits are the worst things in the world. We both know that is true and that Republicans control the messaging on that point..."tax and spend liberals" versus the "household Republicans" who carefully manage their household budgets. It's a narrative that the Republicans have won, and I just see Krugman pointing out the hypocrisy of the Republicans in that regard. Krugman is not our enemy. Do not make him an enemy by applying MMT purity tests.

  • Independent
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    Deficits matter to the f.i.r.e. sector as ability to service debt is a driver in the move to consolidation state.
  • Strongly Liberal Democrat
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    Schmidt, if Krugman wants to point out that Republicans are dishonest hypocrites, he would find no quarrel with me. But he goes beyond that in a complete flip-flop from what he was writing a month before the election. Meanwhile, he is conceding scientific principle with his allusions to bond vigilante attacks. There is no Democratic future in adopting Republican propaganda points. Krugman could easily just say Republicans were lying about deficits in the Obama years and their long record of flip flopping when in power is the evidence. Instead, with liberals like Krugman talking about "crowding out," it makes it all the more easier for Republicans to return to deficit hysteria when Democrats return to power. Worse, by spreading this nonsense from his highly visible perch at the NYT our people believe it, and the progressive policies that would help us win elections are closed off.
  • Strongly Liberal Democrat
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    In short, Krugman is on Krugman's side, not ours.
  • Strongly Liberal Democrat
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    Krugman like any high level career bureaucrat is simply aligning himself with the lying on the wall. A resume from a person who maintains employment by being flexible and agreeable is not much. Krugman loses civility in bragging about his knowledge, foresight and preductions. So why after 8 years of hope and change has the income gap and wealth possession been narrowly concentrated at the top incomes. Credentialing solves nothing. Trusting them is false hope.
  • Liberal Democrat
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    Carlitos – Let’s get on the same page. You have convinced me long time ago that federal government deficit spending is necessary in times of high unemployment (i.e. recessions). Where the private sector has failed, the government needs to spend money to help stimulate the economy and create jobs. The deficit spending can result from tax cuts which encourages private sector spending, or direct spending on social programs or infrastructure projects. In 2009 Paul Krugman was a strong advocate for deficit spending to help extract ourselves from the Great Recession. In fact, he argued that the stimulus needed to be much greater…more than twice as much. Many economists were forecasting gloom and doom.

    Now after 75 straight months of private sector job growth we are largely past that point. The overall unemployment rate of 4.7 percent is approaching what in nominal terms might be called “full employment” in the sense that wages are rising and there are skill shortages. The unemployment rate is 2.5 percent for college graduates: 3.8 percent for some college or associate degree. This demographic is where the skill shortages are and where wages are rising.

    On the other hand, for those with less than a high school education the unemployment rate is 7.9 percent. The African American community has a 7.8 percent unemployment rate. White’s as a race have a 4.5 percent unemployment rate, but of course many unskilled whites in that demographic make up a significant part of the unemployed.

    Many of these unemployed folks are victims of automation and changing markets; they are usually the first to lose in this economic environment because they fall into the “unskilled “category. If you are a skilled worker, the future looks bright; if you are unskilled, not so much so. We have discussed Job Guarantees, training programs, apprenticeships, and subsidized (or free) higher education in other forum posts so I won’t go there now except to say that’s where we need to be spending money big time…but that’s not on the agenda in the next Trump administration. Just more trickle down.

    Higher government deficit spending as the outcome of proposed by Trump and Republicans spending plans will not do much for those who are on the bottom of the economic ladder. I haven’t seen anything in the Republican plans or Trump’s ideas of plans that will specifically help those at the bottom. Just the opposite.

    Furthermore, deficit spending by itself is not the panacea for economic growth. It really depends on how the tax cuts and spending is distributed. That and the whole enchilada of such confusing things as proposed border adjustment taxes (illegal under WTO), tax holidays for corporations repatriating earnings (didn’t work last time), and massive infrastructure spending. The trouble with a massive infrastructure program is that to implement it will require a massive job training program first. The reason the 2009 stimulus was a bit slow to get off the ground was that we had so few “shovel ready” projects in the works, even though we had laid off skilled workers.

    Now we have neither…no shovel ready projects and few skilled workers (engineers, craftsmen, etc.) that are unemployed and ready to on these projects now. Those projects would just be taking people from other employment. Yes, some of the unskilled could be trained but that takes time and money. As such, Krugman has proposed “modest fiscal stimulus”.

    Finally, as we have discussed before, the reality on fiscal monetary policies is that over 99 percent of Americans and members of Congress think of government budgets as being not unlike household or state budgets. The concept of fiat currency is not a part of their mindsets. Hence, as always, Republicans will demand that their tax cuts for the rich and corporations will require an offset elsewhere -- social programs for the poor and middle class will again be under attack (squeezed). Governor Brownback of Kansas has even urged Trump to look at Kansas as a model of how to “balance the budget”. We know what that entails.

    I don’t feel that singling out Paul Krugman as some kind of villain because he doesn’t pass an MMT purity test adds any value to the discussion. He has been a champion for the middle class and poor for a long time and why I will continue to read his columns.

  • Strongly Liberal Democrat
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    "He has been a champion for the middle class and poor for a long time and why I will continue to read his columns."

    It's a tale of two countries. I don't understand how a guy gets elected president running a campaign promising jobs while 8 years of incumbency is saying how great it is. Crime and violence is increasing and the restaurant industry is in a recession. The food service problem is dire warning of problems. If movies start to tighten and I think they will the problem will be disastrous.

    Movie attendance is declining. Big big trouble ahead.

  • Liberal Democrat
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    Washington Post, January 2016: Venezuela is on the brink of a complete economic collapse

    "The country is basically bankrupt. That's not an easy thing to do when you have the largest oil reserves in the world, but Venezuela has managed it. How? Well, a combination of bad luck and worse policies. The first step was when Hugo Chávez's socialist government started spending more money on the poor, with everything from two-cent gasoline to free housing.

    "Even triple-digit oil prices weren't enough to keep Venezuela out of the red when it was spending more on its people but producing less crude. So it did what all poorly run states do when the money runs out: It printed some more. And by "some," I mean a lot, a lot more. That, in turn, became more "a lots" than you can count once oil started collapsing in mid-2014. The result of all this money-printing, as you can see below, is that Venezuela's currency has, by black market rates, lost 93 percent of its value in the past two years.

    "It turns out Lenin was wrong. Debauching the currency is actually the best way to destroy the socialist, not the capitalist, system."

    Source: dolartoday.com

    Source: dolartoday.com

    ----------------------------------------------------------------------------------------------------------------

    I just thought I would share this. Venezuela also has a "fiat currency"; they control their own currency.

  • Independent
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    don't forget Schmidt, that currencies can be attacked. soros attacked the pound iirc. the danger regarding money is that it is not simply a neutral store of value, it is a social construct and as such is subject to social and political impact. the best way to destroy ANY political system is to allow the financial sector to control the currency through central banks that are unaccountable. capital will ALWAYS wield authority over central banks.
  • Independent
    Ft.myers, FL
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    The path of the US may follow this example. Republicans or Communists have a lot in common , except money moves in the opposite direction; it only feeds the rich. The picture of the "slope" could apply to us if Trump follows the "spending" pattern he wants, like building "walls" and boosting the military; starting wars all over as well tinkering with "healthcare" etc.
  • Liberal Democrat
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    My point in bringing up the Venezuela example was not to suggest that we should have any fear of hyper inflation happening in the USA, but rather to argue the point that rampant spending without a responsible fiscal policy on revenue generation does have it's limits. Venezuela's currency decline is not a result of an attack by an outside group of speculators like Soros, but rather an incompetent understanding of monetary theory and fiscal spending by Socialist president Nicolás Maduro. It started with Hugo Chavez and his Bolivarian Revolution, but Maduro is digging that hole even faster and deeper. We can expect a complete collapse of the Venezuelan economy soon.
  • Independent
    Ft.myers, FL
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    Schmidt Wrote: My point in bringing up the Venezuela example was not to suggest that we should have any fear of hyper inflation happening in the USA, but rather to argue the point that rampant spending without a responsible fiscal policy on revenue generation does have it's limits. Venezuela's currency decline is not a result of an attack by an outside group of speculators like Soros, but rather an incompetent understanding of monetary theory and fiscal spending by Socialist president Nicolás Maduro. It started with Hugo Chavez and his Bolivarian Revolution, but Maduro is digging that hole even faster and deeper. We can expect a complete collapse of the Venezuelan economy soon.
    Yes Schmidt you are right. however the US may end up differently on the "down slope" for different reasons as you said. It is not only the "money" but as well "political" issues which may make America's role in the world less, which can indeed affect the economy. Like I said in the past "empires come and go" that happens to be lessons from history.
  • Strongly Liberal Democrat
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    Schmidt Wrote:

    Carlitos – Let’s get on the same page. You have convinced me long time ago that federal government deficit spending is necessary in times of high unemployment (i.e. recessions). Where the private sector has failed, the government needs to spend money to help stimulate the economy and create jobs. The deficit spending can result from tax cuts which encourages private sector spending, or direct spending on social programs or infrastructure projects. In 2009 Paul Krugman was a strong advocate for deficit spending to help extract ourselves from the Great Recession. In fact, he argued that the stimulus needed to be much greater…more than twice as much. Many economists were forecasting gloom and doom.

    Now after 75 straight months of private sector job growth we are largely past that point. The overall unemployment rate of 4.7 percent is approaching what in nominal terms might be called “full employment” in the sense that wages are rising and there are skill shortages. The unemployment rate is 2.5 percent for college graduates: 3.8 percent for some college or associate degree. This demographic is where the skill shortages are and where wages are rising.

    On the other hand, for those with less than a high school education the unemployment rate is 7.9 percent. The African American community has a 7.8 percent unemployment rate. White’s as a race have a 4.5 percent unemployment rate, but of course many unskilled whites in that demographic make up a significant part of the unemployed.

    Many of these unemployed folks are victims of automation and changing markets; they are usually the first to lose in this economic environment because they fall into the “unskilled “category. If you are a skilled worker, the future looks bright; if you are unskilled, not so much so. We have discussed Job Guarantees, training programs, apprenticeships, and subsidized (or free) higher education in other forum posts so I won’t go there now except to say that’s where we need to be spending money big time…but that’s not on the agenda in the next Trump administration. Just more trickle down.

    Higher government deficit spending as the outcome of proposed by Trump and Republicans spending plans will not do much for those who are on the bottom of the economic ladder. I haven’t seen anything in the Republican plans or Trump’s ideas of plans that will specifically help those at the bottom. Just the opposite.

    Furthermore, deficit spending by itself is not the panacea for economic growth. It really depends on how the tax cuts and spending is distributed. That and the whole enchilada of such confusing things as proposed border adjustment taxes (illegal under WTO), tax holidays for corporations repatriating earnings (didn’t work last time), and massive infrastructure spending. The trouble with a massive infrastructure program is that to implement it will require a massive job training program first. The reason the 2009 stimulus was a bit slow to get off the ground was that we had so few “shovel ready” projects in the works, even though we had laid off skilled workers.

    Now we have neither…no shovel ready projects and few skilled workers (engineers, craftsmen, etc.) that are unemployed and ready to on these projects now. Those projects would just be taking people from other employment. Yes, some of the unskilled could be trained but that takes time and money. As such, Krugman has proposed “modest fiscal stimulus”.

    Finally, as we have discussed before, the reality on fiscal monetary policies is that over 99 percent of Americans and members of Congress think of government budgets as being not unlike household or state budgets. The concept of fiat currency is not a part of their mindsets. Hence, as always, Republicans will demand that their tax cuts for the rich and corporations will require an offset elsewhere -- social programs for the poor and middle class will again be under attack (squeezed). Governor Brownback of Kansas has even urged Trump to look at Kansas as a model of how to “balance the budget”. We know what that entails.

    I don’t feel that singling out Paul Krugman as some kind of villain because he doesn’t pass an MMT purity test adds any value to the discussion. He has been a champion for the middle class and poor for a long time and why I will continue to read his columns.

    Schmidt, thanks for the reply.

    Yes, Trump's trickle-down deficit spending won't do much of anything at all but fatten the wallet's of the rich. Deficit spending itself is not a panacea for full employment, especially when there is persistent long-lasting long-term unemployment. We have to directly target deficit spending with a Job Guarantee to deal with that.

    I don't like this MMT "purity test" stuff. I'm just talking about operations and observable phenomena, which contradicts what Krugman is saying. There are a ton of non-MMT people on Wall Street who agree with the view I've laid out. Krugman's wrong. He might be closer to being right than some; but he still gets a failing grade when it comes to National Income Accounting 101 and Money & Banking 101.

    I want to like Krugman, but he's very, very, very dismissive of MMT; even while he has taken direct quotes from Mosler and used them as his own with no credit given. Incidentally, both have homes on St. Croix and it would behoove the world to prompt Krugman to a sit down discussion with Uncle Warren to clear all of this up.