It’s truly amazing that Washington debate is dominated by fear of the bond market. And it’s also truly amazing that nobody is suggesting that a government able to borrow long term at a real interest rate of 0.7 percent really should be taking advantage of those rates to finance some much-needed infrastructure investment. (my emphasis)On the other hand, it's also quite sad. I'm convinced that one day, say, thirty or forty years from now, economists will look back at today's policymakers and be astonished by the lack of action on their part. Talk about a missed opportunity.
That being said, if you agree with Prof. Krugman but believe that, unfortunately, the US government is already overburdened with debt and therefore should refrain from spending any further, I suggest you read this recent brief by economist James Galbraith on the myth of the unsustainability of US government debt. The brief does an excellent job at exposing the flawed assumptions used in the economic forecasts of doomsayers such as the US Congressional Budget Office who claim that US federal government expenditures are on a "reckless" and unstainable path. According to Galbraith,
[t]he CBO’s assumption, which is that the United States must offer a real interest rate on the public debt higher than the real growth rate, by itself creates an unsustainability that is not otherwise there. It also goes against economic logic and is belied by history. Changing that one assumption completely alters the long-term dynamic of the public debt. By the terms of the CBO’s own model, a low interest rate erases the notion that the US debt-to-GDP ratio is on an “unsustainable path.” (my emphasis)I also leave you with this excerpt from economist Abba Lerner's classic piece, "Functional finance and the federal debt". In my opinion, it offers one of the most powerful explanation for why, barring the improbable event of a complete breakdown of the economy due to hyperinflation or other catastrophic occurence, it is very unlikely that US government debt will grow infinitely if focus is placed on promoting full employment and growth:
"...as the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income. As current saving is thus discouraged by the great accumulation of past savings, spending out of current income increases (since spending is the only alternative to saving income). This increase in private spending makes it less necessary for the government to undertake deficit financing to keep total spending at the level which provides full employment. When the government debt has become so great that private spending is enough to provide the total spending needed for full employment, there is no need for any deficit financing by the government, the budget is balanced and the national debt automatically stops growing." (my emphasis)Lerner, A.P. (1943), ‘Functional finance and the federal debt’, Social Research, 10: 38–57.
I don't know if you have an opinion on this but I would be curious to know why do you think we are not seeing more fiscal stimuli. a)Obama is ill-advised b)Obama is wrongfully distracted by other items on his agenda (2012 election, middle-east, etc) c) Obama doesn’t have the cojones to propose a package and defend it in congress d)not Obama/other
ReplyDelete2plates, that's a good question. The last choice can't be it. Whether Democrats like it or not, the president is always responsible: the "buck stops with him". He chooses the team, he sets the goals, etc...
ReplyDeleteThe other three are all possibilities, though I'd put my money on the first choice. With Jack Lew heading the Office of Management and Budget, I'd say the possibility of additional stimulus are slim to none. Lew was the guy in charge of budget back in the final Clinton years when the US had budget surpluses. Obama brought these guys in with the goal of repeating the Clinton surpluses. With unemployment this high and households paying down debt rather than spending on houses and cars, there's no way surpluses are in Obama's horizon. Also, let's not forget that Obama has lost some good advisors (eg. Romer, Volcker) in the last year.
Finally, don't forget that Obama's plan was for "swift action" on the stimulus front. Those words words are found in all official statements. Additional stimulus might give the appearance of setback or failure.
Bottom line: it's a pretty sad state of affairs when policymakers refuse to listen to two big names like Stiglitz and Krugman.
Hi circuit. One of your Anonymous buddies referred me to your work. As 2plates says...you got cojones!!! but 90% of the central bankers think you fellas are UNREALISTIC.
ReplyDeleteI know that they created this mess. But they still think it.
Keep them rollin'
Very well done! I appreciate your reference to Abba Lerner. It is time that good thinkers get proper recognition. Moreso, I appreciate the fact that you easily cite merit...nowadays, the blogworld is permeated by plagiarists. Keep up the excellent work.
ReplyDeleteIt's been a while Circuit. I see you've been very busy. I have to catch up on the late April entries. Some of your topics are very inviting. As far as your enthusiasm for Krugman, it is well-placed; however, he sometimes listens too often to himself, and forgets what he heard. Galbraith and Wynne Godley are more orthodox for your interests. But Krugman is a great economist and has great clout. I agree with Anon's comment on Abba Lerner: the Best of the Brightest. After Keynes and Kalecki, most undervalued economist in history. Dig up those 'classic pieces'
ReplyDelete2plates has a good point----no one seems to care---in the markets no one cares! Republicans are free-market driven and have little place for stimulus packages, they consider them inflation traps.
@1st Anon,
ReplyDeleteWelcome Anon. Thanks for checking out the site. I'll keep'em rolling as long as you guys are there to read this stuff.
You hit the nail right on the head when you say "that they created this mess". In fact, that's one of the reasons why I started this site. I wanted to show that it's simply not right to ask for austerity and government expenditure cuts when the impact of such cuts would most affect those folks that had nothing to do with creating the mess in the first place.
As for being unrealistic, I understand what you mean. In fact, I realize that I may be barking in the dark here. However, in reality, it's actually central bankers that are unrealistic and live in a different galaxy. Here's a short list of flawed concepts and policy recommendations that they (and officials at the Treasury) adhere to:
Budget surpluses: This is when government takes in more from the private sector than it needs to cover current expenditures. Read that sentence again slowly and think about it. In my opinion, it's completely ill-advised for a government to take money away from taxpayers and businesses if it's not going to be invested in public programs or infrastructure (especially during a downturn or a weak recovery, such as now). Sure, governments might use the funds to pay down the national debt, but on the other hand, if taxpayers were to keep the funds, it would allow them to either spend the funds themselves (and thus increase economic activity) or save it or pay down debt (which is always good, as it sets the stage for healthy future growth).
NAIRU: The idea that there is a rate of unemployment that is consistent with stable inflation. According to central bankers, artifically creating unemployment (by raising interest rates) puts a check on inflation. The concept should be completely abandoned. To give you an example, back in the late 90s, the US came pretty close to full employment...and inflation stayed within a very modest range.
Wealth effect: The idea that interest rate reductions boost up asset prices and give individuals and businesses an incentive to spend and invest. Honestly, other than helping to increase stock prices, I don't see any significant impact on the real economy. Economist Robert Shiller has demonstrated that the wealth effect is in reality pretty weak.
Quantitative easing: This was essentially an asset swap between the central banks and depository institutions and other banks. Basically, the Fed exchanges non-interest bearing assets for interest-bearing ones. QE was supposed to increase bank lending. However, since the Fed started this policy, loans have actually decreased! If anything, the most significant impact that QE has had is to increase speculative activity and ramp up the search for yields. Most studies suggest that QE's actual impact on the real economy has been fairly modest.
Crowding out: The idea that budget deficits reduce private sector investment. This is the most unrealistic belief out there. If we're to believe that government deficits crowd out private investment, then we might accept the argument that government surpluses "crowd in" private investment. In other words, that's like saying, tax increases resulting in a budget surplus would result in an increase in private sector investment. It just doesn't add up.
Anyway, I could go on, but you get the picture. In my view, these should be the priorities: full-employment, investing into productive and growth-inducing activities, ensuring the industrial/manufacturing base is thriving, etc.
As Krugman said, with interest rates this low, it's very disappointing that governments are taking up the challenge.
Let me know if want references regarding any argument made above. Thanks again for your valued comments.
@2nd Anon,
ReplyDeleteThanks very much. Glad you enjoy the Lerner quote. Also, I'll do my best to provide references to all arguments/facts made or presented on this site. Just let me know.
Welcome back Jorge. I know what you mean about PK. He's still pretty mainstream in terms of mindset (and approach to economics) but his focus is on the right place. Nice to know you like Kalecki, Lerner et al. You're in good company. As for your comment on the market, you and 2plates are probably right. However, I think there has been a small change toward a more sensible approach to government intervention in the last few years. Perhaps it hasn't hit the market yet (or maybe it never will) but I think the general population is slowly started to get it (notwithstanding the Tea Party, of course).
ReplyDeleteGood stuff. Looking ahead for more ideas
ReplyDeleteKrugman read and wrote that one correctly. So did you.
ReplyDeleteNice one. Change the names on the DO NOT ELECT board! Some of the House and some in the Senate. Include Perry in there; his luck will run out. Oh and send Paul Krugman a renewal form for Dr. Seuss. What is wrong with him
ReplyDelete