Krugman - Debt Reduction = Increased Spending

[ASH]

Re: Krugman - Debt Reduction = Increased Spending

I don't want to speak for Krugman, but my understanding of his views is that a depressed economy has "magneto troubles," as Keynes once put it. That is, it is stuck in an energy well and cannot muster the escape energy on its own. If the government can "jump start" the economy via stimulus, it will run again on its own if it gains enough momentum.

So, I think the idea is to give the economy enough of a jolt through stimulus that it will start growing on its own, and at the point the budget can be examined and trimmed and the debt can be paid off in due course. Krugman claims that debt as a percentage of GDP was much higher in the aftermath of WWII, among other times, and that we had no trouble paying it off because the economy was running full steam from the massive jobs program that the war provided. Krugman does not think the ease with which the debts were paid off had anything to do with Europe being blown apart, as he says that if you believe in free trade, having trade partners able to produce goods makes both parties better off.

Krugman also advocates debt forgiveness and/or a period of moderately high inflation to work the debt overhang off.

Thanks -- that comports pretty much with my understanding of the plan. Yet I think that has been the general plan for many decades, and the debt hasn't come down. (Even in the Clinton years which were deemed "surplus" by cash flow accounting, the debt increased because of the entitlement trust funds.) Also, the incremental GDP growth per dollar increase in debt has been dropping steadily. That's where the disconnect occurs for me -- it seems like "we'll grow our way out of debt if we get economic expansion going with fiscal stimulus" is the liberal twin of the conservative argument "we'll grow our way out of debt if we get economic expansion going by cutting tax rates". Both arguments are valid under certain circumstances, but neither is valid in all circumstances, and neither seems to apply to the actual state of our current economy. A further reason for my skepticism is that even before the recession, the GAO was saying that the projected fiscal gap was too wide to close through plausible rates of economic growth. If it wasn't possible before adding a few trillion to the tab, then it seems less possible afterwards. Do you personally find the argument that we can grow our way out of the debt incurred by deficit spending to be plausible? (You've mostly been presenting Krugman's commentary, so I was wondering where you personally stood on the issue... if you've got a strong opinion.)

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

Too bad my grandfather, who lived in the bad old days of a private "for profit" health care system, and was able to have a surgery and stay in the hospital for 12 days in 1944 at a total cost of $84.75, couldn't live to see the day when we were on the cusp of having "free" health care brought to us socialist-style courtesy of those who don't seem to have learned anything from the socialist economies in the former U.S.S.R., Cuba, or pre-"socialism with Chinese characteristics" China. We in America have been missing out on how great they had it!

No you're missing out on how great every other industrialised country has it: France, Germany, Canada etc, etc.... This constant arguing from a false choice is laughable. The cold war ended decades ago. Makes me wonder if it wasn't more ideologically useful to US domestic politics than to any international reality it might have reflected since only Americans still think like this. It's ludicrous.

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

The private sector does what it knows is profitable, and meeting peoples' needs is generally always profitable.

Meeting people's needs is not profitable and will only become less profitable if income distribution has become so extreme that there is a failure of effective demand. Without a robust middle class you cannot have the kind of vigorous economy that you are assuming is possible. The cruel nature of the current situation is that the decay in earning power has been masked by credit growth that created, perversely, a sense of ruddy good health. The result is not just a cyclical return to a more moderate growth tend but a kind of Buster Keaton moment where the Potemkin village facades of Starbucks and Home Sense Stores collapse all around our hapless middle class, the business class makes off with the tax receipts, and the political class presents the bill for the whole charade to poor old Buster.

There's really no money to be had in selling services to this loser.

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

Chomsky needs to ask any immigrant from the old USSR about their opinion of the old Soviet system.

No, you need to ask a Canadian, French or German manufacturing business how socialised medicine helps them compete against American manufacturers.

[Munger]

Re: Krugman - Debt Reduction = Increased Spending

Thanks -- that comports pretty much with my understanding of the plan. Yet I think that has been the general plan for many decades, and the debt hasn't come down. (Even in the Clinton years which were deemed "surplus" by cash flow accounting, the debt increased because of the entitlement trust funds.) Also, the incremental GDP growth per dollar increase in debt has been dropping steadily. That's where the disconnect occurs for me -- it seems like "we'll grow our way out of debt if we get economic expansion going with fiscal stimulus" is the liberal twin of the conservative argument "we'll grow our way out of debt if we get economic expansion going by cutting tax rates". Both arguments are valid under certain circumstances, but neither is valid in all circumstances, and neither seems to apply to the actual state of our current economy. A further reason for my skepticism is that even before the recession, the GAO was saying that the projected fiscal gap was too wide to close through plausible rates of economic growth. If it wasn't possible before adding a few trillion to the tab, then it seems less possible afterwards. Do you personally find the argument that we can grow our way out of the debt incurred by deficit spending to be plausible? (You've mostly been presenting Krugman's commentary, so I was wondering where you personally stood on the issue... if you've got a strong opinion.)

I think we are pretty much on the same page. I don't see the debt being paid down any time soon regardless of what happens. Certainly a balancing of the trade deficit would help. A serious gasoline tax would be prudent. Neither of these things (or many others) are likely to happen soon.

But, I do feel that we would be in a much better position in many regards -- employment, GDP, debt -- if we did not make cutting the deficit our main priority right now now now now, as the republicans are advocating.

In fact, that would likely make the debt problems worse. Mainly because tax revenues tank when the economy tanks, and a lower GDP is hardly good for the deficit. The government is currently the only thing keeping the economy sputtering along, and cutting unemployment, teachers, firemen, etc etc would only increase the economic troubles.

Further, it's not like Obama has really increased spending anyway. In fact, the whole of increased government spending over the last few years is caused by increased unemployment, social security, and other welfare claims that spike when the economy tanks. If the economy gets worse, and we don't want people starving in the streets, those expenditures will likely stay the same or increase.

That being said, I would gladly trade most of our quixotic military spending for temporary productive domestic endeavors. Oddly enough, such an idea never seems to be on the table.

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

LMAO. How about if we have a substantive argument?

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

It IS necessary that debtors have income, and that their debts don't rise faster than income growth.

Absolutely. From this comes the two scourges of the present situation: 1) The housing bubble ensured that debts would outstrip income by a long shot. 2) It also ironically provided a way to paper over the fact that income has actually been declining through the miracle of refis and home equity withdrawals. (Those helpful bankers and their politician friends.)

The problem with Krugman - besides that he is a hypocritical idiot - is that his 'theories' do not in any way account for growth.

It is not necessary that savers must sacrifice their savings in order for debtors to pay their debts.

I'm not sure I follow this. If you're saying that investments that create productive assets do not require a sacrifice on anyone's part because productivity gains grow the pie so to speak and so allow the vig to be paid off safely without resorting to a ponzi-like system of ever-increasing, progressively more unsustainable debt then I get it. In such a situation the rentier is really an investor and the whole thing works. Is this what you mean?

That's obviously the best model and if your criticism of Krugman is that he's trying to solve a structural problem with Keynsian counter-cyclical policy then I'd kind of agree.

That said, I think part of the problem is one of expectations. I never thought the point of the stimulus in the US or anywhere was to suddenly return the patient to some kind of robust health but to not allow the patient to die from shock due to its fall off of a great debt-levered pyramid. The best prognosis I ever had is that he would limp away from the hospital a mere shadow of his former debt-addled self and with a nasty hospital bill to pay on top of it all, but alive.

It's a structural problem. It can't be solved by monetary policy but monetary policy was part of the triage I suspect.

[tsetsefly]

Re: Krugman - Debt Reduction = Increased Spending

No you're missing out on how great every other industrialised country has it: France, Germany, Canada etc, etc.... This constant arguing from a false choice is laughable. The cold war ended decades ago. Makes me wonder if it wasn't more ideologically useful to US domestic politics than to any international reality it might have reflected since only Americans still think like this. It's ludicrous.

I dont think France could really be used of an example of having it great... As for Canada, aside from their welfare state they have a pretty free economy and in a lesser extent Germany (their health care systems btw, have their own set of problems)
But the US health care is far from a "free-market"and it also is no coincidence that the greater government in health care the more expensive it has become.
Also, the US system with all its faults still allows for innovation that is unseen throughout the world. It's no wonder its leader in treatment quality for many serious illness and that Thousands if not millions flock to the US for treatment of all sorts of medical procedures if they can afford it.
There's other choices besides what type of welfare health care system that the US can look at.

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

France's health care system is reviewed regularly as being close to the top of the heap. Ditto Germany's. The ideal combination of low cost per-capita and high results. It is possible to achieve great publicly funded health care. The lack of curiosity about these successes is highly suspect IMHO.

Regarding balooning costs, it is a problem everywhere in the west and is a consequence of demographics; the fact that, with technological advances, comes a never-ending stream of more expensive therapies; and the fact that healthcare - like education - is labour-intensive (inflation in all the things we need; deflation in all the things we want - that's our motto.)

Granted, the leading edge likely belongs to the US, but its the trailing edge that disturbs me most: rising child mortality rates, people being ruined by health care costs... etc. I found this a very affecting interview with a former health insurance executive:

http://www.pbs.org/moyers/journal/07102009/watch2.html

BILL MOYERS: But during this 15 years you were [at Cigna] did you go to them and say, "You know, I think we're on the wrong side. I think we're fighting the wrong people here."

WENDELL POTTER: You know, I didn't, because for most of the time I was there, I felt that what we were doing was the right thing. And that I was playing on a team that was honorable. I just didn't really get it all that much until toward the end of my tenure at Cigna.

BILL MOYERS: What did you see?

WENDELL POTTER: Well, I was beginning to question what I was doing as the industry shifted from selling primarily managed care plans, to what they refer to as consumer-driven plans. And they're really plans that have very high deductibles, meaning that they're shifting a lot of the cost off health care from employers and insurers, insurance companies, to individuals. And a lot of people can't even afford to make their co-payments when they go get care, as a result of this. But it really took a trip back home to Tennessee for me to see exactly what is happening to so many Americans. I--

BILL MOYERS: When was this?

WENDELL POTTER: This was in July of 2007.

BILL MOYERS: You were still working for Cigna?

WENDELL POTTER: I was. I went home, to visit relatives. And I picked up the local newspaper and I saw that a health care expedition was being held a few miles up the road, in Wise, Virginia. And I was intrigued.

BILL MOYERS: So you drove there?

WENDELL POTTER: I did. I borrowed my dad's car and drove up 50 miles up the road to Wise, Virginia. It was being held at a Wise County Fairground. I took my camera. I took some pictures. It was a very cloudy, misty day, it was raining that day, and I walked through the fairground gates. And I didn't know what to expect. I just assumed that it would be, you know, like a health-- booths set up and people just getting their blood pressure checked and things like that.

But what I saw were doctors who were set up to provide care in animal stalls. Or they'd erected tents, to care for people. I mean, there was no privacy. In some cases-- and I've got some pictures of people being treated on gurneys, on rain-soaked pavement.

And I saw people lined up, standing in line or sitting in these long, long lines, waiting to get care. People drove from South Carolina and Georgia and Kentucky, Tennessee-- all over the region, because they knew that this was being done. A lot of them heard about it from word of mouth.

There could have been people and probably were people that I had grown up with. They could have been people who grew up at the house down the road, in the house down the road from me. And that made it real to me.

BILL MOYERS: What did you think?

WENDELL POTTER: It was absolutely stunning. It was like being hit by lightning. It was almost-- what country am I in? I just it just didn't seem to be a possibility that I was in the United States. It was like a lightning bolt had hit me.

[oddlots]

Re: Krugman - Debt Reduction = Increased Spending

The thing that I find eerily coherent about the whole Austerian movement is the fact that it maps so nicely onto Wall Street interests. What's left to pillage. We've run up American's biggest financial outlay - housing - and then, having created a massive bubble in that through the alchemy of securitisation, we brilliantly created a way to short it just in time to make sure we made money going and coming. Of course this still blew us up but, no fear: a) we always take the money upfront ("long term" is for suckers) and 2) we own the politicians so we take a quick pitstop to refuel at the public trough without even being lapped and now can go after the assets that are being coughed up at bargain rates by the municipal and state governments that we just bankrupted: anyone want to buy the Pennsylvania turnpike? The suckers have to get to work (snickers) somehow. It's a secure revenue stream. Lever that up and you are golden.

[tsetsefly]

Re: Krugman - Debt Reduction = Increased Spending

The thing that I find eerily coherent about the whole Austerian movement is the fact that it maps so nicely onto Wall Street interests. What's left to pillage. We've run up American's biggest financial outlay - housing - and then, having created a massive bubble in that through the alchemy of securitisation, we brilliantly created a way to short it just in time to make sure we made money going and coming. Of course this still blew us up but, no fear: a) we always take the money upfront ("long term" is for suckers) and 2) we own the politicians so we take a quick pitstop to refuel at the public trough without even being lapped and now can go after the assets that are being coughed up at bargain rates by the municipal and state governments that we just bankrupted: anyone want to buy the Pennsylvania turnpike? The suckers have to get to work (snickers) somehow. It's a secure revenue stream. Lever that up and you are golden.

I disagree. Especially when it was "austerians" that wanted no bailouts for the banks and would of not mind seeing them go under....

[thriftyandboringinohio]

Re: Krugman - Debt Reduction = Increased Spending

...Some companies cant react to the competition and go out of business how does this correlate with being up in the air about future policy?

By definition, one must be up in the air about future policy. I hasn't happened yet, it's in the future.

...I would say it's more than coincidence that once FDR's programs started coming off the books or where repealed by the supreme court things started to get better.

There is clear correlation between those events, but not clear causality. You could present the very same facts this way: Things started getting better after FDRs programs had been in place a while, then they started coming off the books or were repealed by the supreme court.

...The Obama administration is following similar steps that the japanese took, how has that gone for them?

It's gone badly. No argument there.

[WDCRob]

Re: Krugman - Debt Reduction = Increased Spending

The debtors and savors are the yen and yang: you cannot have one without the other. The pensioners' savings are the debtors' debts. The debtors cannot pay off their debts if the pensioners do not spend their savings. It is a mathematical impossibility.

Thus, the reasoning underlying the lowering of interest rates is to eliminate the interest income of the savers to encourage them to spend their savings, thus allowing the debtors to pay off their debts. The other way at it is inflation or debt jubilee.

Interesting... I actually thought the idea of ZIRP and QE I/II was to engineer inflation (and repair bank balance sheets until it comes about). As Finster points out "something is always going up" so there are always viable investment options. And it doesn't seem to me that you can force lenders to lend, borrowers to borrow or savers to spend in a time of so much uncertainty and fear in any event. As a saver I just look for a safer place to save (cf gold @ $1380+).

Am I the only one that literally can't imagine a debt jubilee in the U.S.?

[thriftyandboringinohio]

Re: Krugman - Debt Reduction = Increased Spending

Am I the only one that literally can't imagine a debt jubilee in the U.S.?

Strong inflation IS a debt jubilee of sorts, no?

[WDCRob]

Re: Krugman - Debt Reduction = Increased Spending

Strong inflation IS a debt jubilee of sorts, no?

Right - I get that and thought that was the entire purpose of the Fed's actions. I meant a real jubilee - where debts are explcitly wiped off the books in a single swoop and people recognize it's happening in real time.