Krugman column

david52 Zone 6March 1, 2013

We’re just a few weeks away from a milestone I suspect most of Washington would like to forget: the start of the Iraq war. What I remember from that time is the utter impenetrability of the elite prowar consensus. If you tried to point out that the Bush administration was obviously cooking up a bogus case for war, one that didn’t bear even casual scrutiny; if you pointed out that the risks and likely costs of war were huge; well, you were dismissed as ignorant and irresponsible.

It didn’t seem to matter what evidence critics of the rush to war presented: Anyone who opposed the war was, by definition, a foolish hippie. Remarkably, that judgment didn’t change even after everything the war’s critics predicted came true. Those who cheered on this disastrous venture continued to be regarded as “credible” on national security (why is John McCain still a fixture of the Sunday talk shows?), while those who opposed it remained suspect.

And, even more remarkably, a very similar story has played out over the past three years, this time about economic policy. Back then, all the important people decided that an unrelated war was an appropriate response to a terrorist attack; three years ago, they all decided that fiscal austerity was the appropriate response to an economic crisis caused by runaway bankers, with the supposedly imminent danger from budget deficits playing the role once played by Saddam’s alleged weapons of mass destruction.

Now, as then, this consensus has seemed impenetrable to counterarguments, no matter how well grounded in evidence. And now, as then, leaders of the consensus continue to be regarded as credible even though they’ve been wrong about everything (why do people keep treating Alan Simpson as a wise man?), while critics of the consensus are regarded as foolish hippies even though all their predictions - about interest rates, about inflation, about the dire effects of austerity - have come true.

So here’s my question: Will it make any difference that Ben Bernanke has now joined the ranks of the hippies?

Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice. True, it wasn’t really a break with what he has said in the past or, for that matter, with what other Federal Reserve officials have been saying, but the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before - and what he said, translated from Fedspeak into plain English, was that >b>the Beltway obsession with deficits is a terrible mistake.

First of all, he pointed out that the budget picture just isn’t very scary, even over the medium run: “The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of G.D.P. through much of the current decade.”

He then argued that given the state of the economy, we’re currently spending too little, not too much: “A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.”

Finally, he suggested that austerity in a depressed economy may well be self-defeating even in purely fiscal terms: “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

So the deficit is not a clear and present danger, spending cuts in a depressed economy are a terrible idea and premature austerity doesn’t make sense even in budgetary terms. Regular readers may find these propositions familiar, since they’re pretty much what I and other progressive economists have been saying all along. But we’re irresponsible hippies. Is Ben Bernanke? (Well, he has a beard.)

The point is not that Mr. Bernanke is an unimpeachable source of wisdom; one hopes that the collapse of Alan Greenspan’s reputation has put an end to the practice of deifying Fed chairmen. Mr. Bernanke is a fine economist, but no more so than, say, Columbia’s Joseph Stiglitz, a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored. No, the point is that Mr. Bernanke’s apostasy may help undermine the argument from authority - nobody who matters disagrees! - that has made the elite obsession with deficits so hard to dislodge.

And an end to deficit obsession can’t come a moment too soon. Right now Washington is focused on the idiocy of the sequester, but this is only the latest episode in an unprecedented run of declines in public employment and government purchases that have crippled our economy’s recovery. A misguided elite consensus has led us into an economic quagmire, and it’s time for us to get out."

So to reiterate the point, Washington is deliberately harming the economy in the name of reducing deficits, and the actual cuts in spending make the deficit worse - see Europe.

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...well, you were dismissed as ignorant and irresponsible unpatriotic.

Hogwash. Krugman and Bernanke and Stiglitz make too much sense. We want Friedman!


    Bookmark   March 1, 2013 at 2:15PM
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nancy_in_venice_ca Sunset 24 z10

We’re just a few weeks away from a milestone I suspect most of Washington would like to forget: the start of the Iraq war. What I remember from that time is the utter impenetrability of the elite prowar consensus. If you tried to point out that the Bush administration was obviously cooking up a bogus case for war, one that didn’t bear even casual scrutiny; if you pointed out that the risks and likely costs of war were huge; well, you were dismissed as ignorant and irresponsible.

Would like to forget? Many are actively demonizing anyone who points out what Bush, Cheney, Rumsfeld & Co. did do the deficit. We're still not allowed to point out the actual cost of the Iraq war.

And besides the Iraq War is so last decade. The yapping lap dogs are squealing "Benghazi, Benghazi, Benghazi!" as if those who died in Iraq never existed, as if those trillions spent never left the U.S. Treasury, and as if no one in the Bush Administration lied to bring us that disaster.


    Bookmark   March 1, 2013 at 2:27PM
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Doesn't jib with the fadist called "financial conservatives" 2 words that should have a trade mark.

    Bookmark   March 1, 2013 at 3:24PM
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david52 Zone 6

"If there's one article of faith in Washington (and elsewhere), it's the idea that the United States might get into a debt crisis if it doesn't get its fiscal house in order.

This is not true.

The reason why it's not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars-something that the United States government can produce infinitely and at no cost.

That's the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That's the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That's the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called "the Widowmaker".

Well, what about Argentina? Argentina had to default on its debt because it had pegged its currency to the US dollar. It wasn't sovereign with regard to its currency since it had to maintain its currency's peg. It wasn't Argentina's debt that caused it to default, it was its currency peg.

What about Greece? Same thing. Greece hasn't used its own currency for ten years. Of course it's going bankrupt.


You don't have to take my word for it. How about Alan Greenspan? He said (PDF): "[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."

But waaaaaaait, you shout, what about inflation? If the government prints money like crazy, won't that create inflation?

Well, in theory, yes. But probably not. Why is that? Because the US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world's central banks, and so forth.

Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There's always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it's highly unlikely that this will change soon-being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that's extremely hard to break.)


In other words, while in theory printing tons of money could create inflation, in practice demand for the dollar is so high-and for structural reasons that have very little to do with how the US economy is doing at a particular point in time-that it's hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.

And even if it did-well, for all the bad memories we have about it, the Stagflation of the 1970s was many things, but it was not Greece. Life in the 1970s was still relatively okay, despite the stagflation. That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt that it caused moderate inflation, it still would not be a debt crisis of the kind that Greece and Spain are under right now. (Hyperinflation, meanwhile, is even less of a danger, since in recorded history it only happens in cases of not just reckless money printing, but also extremely serious exogenous shocks such as war, regime change, etc.)


A lot of people still think that the US is under some risk of one day becoming like Greece, and it's distorting our public debate.

It's especially distorting it on the Right, where hysteria about deficits, and debt, and becoming like Greece has reached a fever pitch. Paul Ryan, especially, has framed his entire message on entitlement-cutting on the flawed premise that the US needs to cut its entitlement or it will suffer a debt crisis. This message, in turn, has infected broad swathes of the conservative movement (including very smart people in it), a movement that I consider myself a member of and want to see in strong intellectual health. But very few liberals-certainly no Democratic elected officials that I'm aware of, certainly not the President and the Vice President-are disputing the premise that the US is in any danger of a debt crisis."

Here is a link that might be useful: Commie librul Forbes magazine

    Bookmark   March 1, 2013 at 6:29PM
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See a genuine response!

    Bookmark   March 1, 2013 at 8:31PM
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Millions of Iraqis and Kurds are mighty thankful that Krugman was so wrong. Saddam is gone and their lives are the better for it.
At least, better than living in Chicago. :)

    Bookmark   March 2, 2013 at 9:45PM
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marshallz10(z9-10 CA)

Horsepucketetic logic from the right. The USA spent trillions of dollars and tens of thousands of deaths and injuries of good Americans. Sure some of the Iraqis are happy. The ones in on the graft.

    Bookmark   March 2, 2013 at 11:05PM
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Millions of Iraqis have had their nation destroyed thousands murdered by the US.
Let me cure your headache by slamming your knee with a hammer!

    Bookmark   March 2, 2013 at 11:19PM
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Saddam is gone and their lives are the better for it.

I DO like this new parody character!

    Bookmark   March 2, 2013 at 11:47PM
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nancy_in_venice_ca Sunset 24 z10

Millions of Iraqis and Kurds are mighty thankful that Krugman was so wrong

And they're wildly happy about the increase in birth defects and cancers due to the U.S. use of DU. Tens of thousands of Iraqi families have put their mourning behind them because everything turned out so nicely. (The hundreds of thousands still in exile in Jordan and Syria must not have received the memo re the wonderful conditions in Iraq.) And who can ever forget the thrill of a car bomb or suicide bomber in the local market place. Sunnis and Shia are getting along so well now too.

    Bookmark   March 3, 2013 at 12:27AM
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marshallz10(z9-10 CA)

smugness seems to be the default conservative attitude these days. Lightweight smugness, better expressed, I think.

    Bookmark   March 3, 2013 at 12:37AM
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Thank you Marshall, and Nancy and those pointing out again some difficult facts that wont go away just because some don't want to hear about it.

What excellent responses to an excellent thread and article snips David.

This thread will be interesting to follow.

    Bookmark   March 3, 2013 at 1:09AM
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What's up with all these sudden dble posts of mine?

Edited to remove another one.

This post was edited by mylab123 on Sun, Mar 3, 13 at 1:15

    Bookmark   March 3, 2013 at 1:11AM
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david52 Zone 6

There are a few basic facts.

1) We owe the money to ourselves. Two-thirds of the national debt is owed to the U.S. government, American investors and future retirees, through the Social Security Trust Fund and pension plans for civil service workers and military personnel. Another chunk owed to the Federal Reserve, who are driving down interest rates.
China holds less than 8 percent.

-so, its not as if the Social Security fund or the Federal Reserve are going to start breaking knee caps or suddenly start selling treasuries and drive up interest rates into the stratosphere.

2) we need to improve the infrastructure, replace bridges, roads, etc. We need to borrow money to do that. So we can do it now, when interest rates are at historic lows, or we can wait, and do it later when the prices are higher, interest rates are higher. - (this is where we see the thumb of 'disaster capitalism' on the scales - there is an element in this country who would like nothing more than to bankrupt the gvt, then dive in and buy assets like highways and bridges at pennies on the dollar, fix them up and charge tolls).

3) you put people back to work - just leaving alone the human costs of all those millions of unemployed, just focusing on the economics, the more money put into circulation the faster the economy recovers - which is obvious, but somehow, see the OP, it suddenly isn't.

4) of course we want to pay down the debt. But we do that when the economy is expanding, there is good employment: oh, lets say similar to the period at the end of the Clinton Admin and beginning of the Bush admin, when we were actually running a surplus on revenue and the annual budget. Thats the time to pay down the debt. Not start huge tax cuts pretending that "deficits don't matter".

5) what Obama is proposing in terms of infrastructure improvements has widespread support around the country. I would offer that its too modest, but even still, this has no chance of getting through the obstructionists.

    Bookmark   March 3, 2013 at 10:05AM
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Saw Krugman on Charlie Rose yesterday. Reminded me of what Robert Reich says-

"Today the Dow Jones Industrial Average rose above 14,270 " completely erasing its 54 percent loss between 2007 and 2009.

The stock market is basically back to where it was in 2000, while corporate earnings have doubled since then.

Yet the real median wage is now 8 percent below what it was in 2000, and unemployment remains sky-high.".....

The sequestration is likely to make all this worse, since it will slow the U.S. economy and keep unemployment higher than otherwise.......

The health of an economy is not measured by the profits of corporations headquartered within it or the value of its stock market. It depends, rather, on how many of people have jobs and whether those jobs pay decent wages."

Here is a link that might be useful: robert reich

    Bookmark   March 5, 2013 at 4:46PM
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