Paul Krugman - The Third Depression

[explanade]

Yet if they don't try to prop up demand, what is the alternative? We saw car sales go off the cliff, , almost 50% IIRC. As other industries see similar declines in the space of a few months, what's the response, just shrug it off?

On the deficit, I heard a claim that just letting the Bush tax cuts expire will close 1/2 the gap. Don't know if it's true but I recall seeing studies showing how much of the deficit that Bush ran up was attributable to the tax cuts. The supposed increased tax revenues from higher growth because of those tax cuts never happened.

 

[dex]

The supposed increased tax revenues from higher growth because of those tax cuts never happened.

How much growth was created or saved because of them and how much worse would have the problem been without them? If you accept that there were jobs created or saved from the 'stimulus' money then the concept is the same for the tax cuts. The concept 'cuts' both ways.

 

[Bikerdude]

How much growth was created or saved because of them and how much worse would have the problem been without them? If you accept that there were jobs created or saved from the 'stimulus' money then the concept is the same for the tax cuts. The concept 'cuts' both ways.

Hey, don't confuse people with logic.

 

[IndependentlyPoor]

Dudes, you are so negative. As Martha said, it is depressing.

From a true Keynesian point of view, this only works if you are willing to fire them once the private sector is hiring again.

True

You know that won't happen.

It is true that bureaucracies become entrenched, but anyone who has worked for a NASA or a defense contractor knows that those jobs only exist until the end of the contract. The federal government is quite capable of shedding jobs just as ruthlessly as the private sector. The obvious counter example to the quoted statement is the alphabet-soup set of work programs created during the New Deal. They served their purpose and went away.

It's another example of "one-way Keynesian" thinking where we crank up public spending in rotten times but can't cut back in the good times.

Our country does have a problem with "one-way Keynesian" thinking, but that is not Krugman's fault. I suspect that he understands both sides of the Keynesian argument very well. Nor is this "one-way" affliction limited to liberal economists and politicians; it was Greenspan who advocated adjustable rate mortgages in 2004. Whoopee, laissez les bon temps rouler.
It isn't even true that we cannot cut back during the good times. For example, Clinton (with the support of Greenspan) reformed welfare and (with a tax increase) balanced the budget.

That said, I don't know if Krugman is right or not. It might well be that a WWII amount of spending would be required to get the economy rolling again, and that also might well bankrupt us.

 

[samclem]

For example, Clinton (with the support of Greenspan) reformed welfare and (with a tax increase) balanced the budget.

The budget was never balanced during President Clinton's term. I'm surprised folks are still saying this. The national debt went up every year.

What was done (no fault of President Clinton) was that the SS surplus was counted as income. As we were discussing in another thread, all this did was build up debt that had to be paid off by later taxpayers.

Details:

. . .
Verifying this is as simple as accessing the U.S. Treasury (see note about this link below) website where the national debt is updated daily and a history of the debt since January 1993 can be obtained. Considering the government's fiscal year ends on the last day of September each year, and considering Clinton's budget proposal in 1993 took effect in October 1993 and concluded September 1994 (FY1994), here's the national debt at the end of each year of Clinton Budgets:

[See link for chart--I won't try to re-build it here]

As can clearly be seen, in no year did the national debt go down, nor did Clinton leave President Bush with a surplus that Bush subsequently turned into a deficit.
. . . .
So why do they say he had a surplus?

As is usually the case in claims such as this, it has to do with Washington doublespeak and political smoke and mirrors.

Understanding what happened requires understanding two concepts of what makes up the national debt. The national debt is made up of public debt and intragovernmental holdings. The public debt is debt held by the public, normally including things such as treasury bills, savings bonds, and other instruments the public can purchase from the government. Intragovernmental holdings, on the other hand, is when the government borrows money from itself--mostly borrowing money from social security.

Looking at the makeup of the national debt and the claimed surpluses for the last 4 Clinton fiscal years, we have the following table:

[See link for table--I won't try to re-build it here]

Notice that while the public debt went down in each of those four years, the intragovernmental holdings went up each year by a far greater amount--and, in turn, the total national debt (which is public debt + intragovernmental holdings) went up. Therein lies the discrepancy.

When it is claimed that Clinton paid down the national debt, that is patently false--as can be seen, the national debt went up every single year. What Clinton did do was pay down the public debt--notice that the claimed surplus is relatively close to the decrease in the public debt for those years. But he paid down the public debt by borrowing far more money in the form of intragovernmental holdings (mostly Social Security).

 

[IndependentlyPoor]

The budget was never balanced during President Clinton's term. I'm surprised folks are still saying this. The national debt went up every year.

What was done (no fault of President Clinton) was that the SS surplus was counted as income. As we were discussing in another thread, all this did was build up debt that had to be paid off by later taxpayers.

Details:

I imagine this is correct. I was sloppy in my post. Didn't need to and shouldn't have included the balanced budget bit.
Welfare did get reformed however. Unless I am mistaken on that also, some budget cutting was done.

 

[ziggy29]

Unless I am mistaken on that also, some budget cutting was done.

Defense was cut. Remember the "peace dividend"? I remember the waves of layoffs working in aerospace in the early Clinton years.

Most other cuts weren't real cuts but merely the Washington-speak version of "cuts": a smaller than originally planned increase in spending.

 

[snodog]

Factcheck seems to think Clinton balanced the budget. Don't know if they are correct in this instance but I do trust them.

FactCheck.org: During the Clinton administration was the federal budget balanced? Was the federal deficit erased?

 

[IndependentlyPoor]

Man you guys are a tough crowd.

Defense was cut. Remember the "peace dividend"? I remember the waves of layoffs working in aerospace in the early Clinton years.

Cutting the defense budget is not necessarily an unpatriotic or bad thing. Lots of defense spending takes place beyond the wishes of the military, purely to direct government funds to lawmaker's districts.
And despite it all the economy took off, so as painful as those layoffs were to workers, the overall effect on the debt to GDP was positive.

Most other cuts weren't real cuts but merely the Washington-speak version of "cuts": a smaller than originally planned increase in spending.

Washington speak or not, slowing (almost stopping) the growth of the debt sounds good to me!

From Wikipedia

Is it possible to describe (almost) halting the growth of the national debt in a more negative way than the following?

As we were discussing in another thread, all this did was build up debt that had to be paid off by later taxpayers.

 

[ziggy29]

Cutting the defense budget is not necessarily an unpatriotic or bad thing. Lots of defense spending takes place beyond the wishes of the military, purely to direct government funds to lawmaker's districts.?

Where did I say it's a bad thing? Why did you make that assumption?

 

[IndependentlyPoor]

Where did I say it's a bad thing? Why did you make that assumption?

You didn't say it was a bad thing, but I thought your juxtaposition of real cuts in defense spending with unreal cuts elsewhere (yes, I am paraphrasing here) implied it. At the very least, I believe that many would read it that way. Such criticism of "liberal" (for lack of a better word) budget policy is pretty common. Was I supposed to let it slide with no comment?

 

[ziggy29]

Was I supposed to let it slide with no comment?

Not necessarily, but you could have sought clarification before assuming it was some sort of slam.

 

[ERD50]

And despite it all the economy took off, so as painful as those layoffs were to workers, the overall effect on the debt to GDP was positive.

I don't think you can link the two so closely. Logically, we could say that yes, we had cuts, and yes, the GDP rose... but that does not mean that one affected the other. There [-]may have been[/-] [-]were[/-] , always are other things pushing/pulling the economy.

If we turn it around.... [NOTE: said for effect only - don't quote me!>>>] Several steps have been taken recently to reduce unemployment. But the unemployment rate has risen. So the overall effect of those programs was negative.[<<<NOTE: said for effect only - don't quote me!]

I'm guessing that doesn't sound so good to you, but it is the same logic.

-ERD50

 

[IndependentlyPoor]

Not necessarily, but you could have sought clarification before assuming it was some sort of slam.

If you did not intend that juxtaposition to have any negative implication, then I apologize.

 

[IndependentlyPoor]

I don't think you can link the two so closely. Logically, we could say that yes, we had cuts, and yes, the GDP rose... but that does not mean that one affected the other. There [-]may have been[/-] [-]were[/-] , always are other things pushing/pulling the economy.

If we turn it around.... [NOTE: said for effect only - don't quote me!>>>] Several steps have been taken recently to reduce unemployment. But the unemployment rate has risen. So the overall effect of those programs was negative.[<<<NOTE: said for effect only - don't quote me!]

I'm guessing that doesn't sound so good to you, but it is the same logic.

-ERD50

Your argument proves too much.
Yes, there are always confounding effects. Are you saying that the economy and change in national debt cannot be related to fiscal/economic policy? If so, why are we talking about policy at all?

 

[Texas Proud]

You didn't say it was a bad thing, but I thought your juxtaposition of real cuts in defense spending with unreal cuts elsewhere (yes, I am paraphrasing here) implied it. At the very least, I believe that many would read it that way. Such criticism of "liberal" (for lack of a better word) budget policy is pretty common. Was I supposed to let it slide with no comment?

I didn't... I read that he was defining what was really cut and what was not... even when others said it was cut...

It is only gvmt that can increase spending from one year to the next and call it a cut...

 

[IndependentlyPoor]

It is only gvmt that can increase spending from one year to the next and call it a cut...

Yes, that is a poor and disingenuous argument to make. I wish they would stop making it.

 

[ERD50]

Are you saying that the economy and change in national debt cannot be related to fiscal/economic policy? If so, why are we talking about policy at all?

No, I am saying you can't assume cause/effect, and I am saying it is difficult to parse out an action/policy from all the other noise.

I've said before, I think it helps to look at what we know to be true, and apply that as best we can. These other 'observations' cause us to act in ways that may be counter-productive.

A physical example:

A) I *know* that putting a 1000W heater in a room with no other HVAC system will add to the heat in the room.

B) I may not know everything about the thermal mass of the room, and the insulation and leakage values. I may not know the outside temperature, and I sure can't predict it with super-accuracy. I don't know if people will be coming and going from the room, or how many occupants there are at any one time.

C) But I can say with certainty that the heater will not cause the room to be cooler than if it were not running, and that it will add heat to the room. Even if I can't predict the actual temperatures.

Yet, someone might observe that I turned on the heater, and the temperature of the room went down. Maybe this is because a bunch of people just left, the sun went down and a cool breeze came by with a big drop in outside temperature.

That person could come to the conclusion that heaters cool rooms.

Or maybe there was something even more indirect - maybe some one placed flowers in the room, and removed them later. We could plot room temperature versus the number of flowers in the room and possibly see good correlation. Time to buy more (or outlaw!) flowers!

So my point is, we really need to do the best we can to understand cause/effect, and apply 'solutions' (policy) reasonably. If we do that, we should be reasonably assured that we had a good chance of improving the situation, even if it continued to trend poorly (it's reasonable to assume it would have been worse w/o our reasonable action). It takes a little faith in your knowledge/understanding, but what doesn't?

-ERD50

 

[Rustic23]

I think I put cause/effect predictions of national/macro economics right up there with predicting the weather, and I am beginning to think there is more consensus in the weather forecast! It is like two people with wind up clocks arguing about what time it is. Both know, and both are wrong!

 

[IndependentlyPoor]

Let's wind this back just a little.
We were talking about Keynesian economics and Ziggy allowed that here in the U.S. we tend to be all for the stimulus part but not so enthusiastic about counter-cyclic policy during the boom times. I mostly agree. I worry about that. Especially now, since I believe that we are going into this in a poorer position.

Perhaps I shouldn't have, but I pointed out that we did engage in a little counter-cyclic policy during the Clinton years. Greenspan is often given credit for pushing Clinton in that direction.

I brought it up because I thought that Ziggy's statements

but I've never seen a government willing to cut deeply in *good* economic times. That's what real Keynesianism would have us doing.

and

You know that won't happen. It's another example of "one-way Keynesian" thinking where we crank up public spending in rotten times but can't cut back in the good times.

were just a bit too negative. We have a recent example of a moderate policy (I don't recall it being draconian) getting it almost right. The debt almost stopped growing and the debt/GDP declined. Anything wrong with that?

I acknowledge confounding factors, but do not accept the idea that the dramatic change in the debt curve cannot be related to policy decisions. It could have been different. Clinton could have gone on a giant spending spree. (If you want to say "like Obama" here, I won't complain.)

It turned out that raising taxes and cutting spending (or if you prefer, reducing planned increases) did not prevent the economy from growing nicely. Seems to me that actually goes against Keynes' theory, and it confuses things. However I would be in favor of risking a mild recession during boom times if it were required to reduce the debt down to comfortable levels. Mainly I take this as an indication that getting our fiscal house in order does not necessarily require drastic action.

And I repeat. I am not comfortable with Krugman's blithe attitude toward the debt.

It may be that there is no good solution.

 

[explanade]

How much growth was created or saved because of them and how much worse would have the problem been without them? If you accept that there were jobs created or saved from the 'stimulus' money then the concept is the same for the tax cuts. The concept 'cuts' both ways.

We'll never know.

The context in which these actions were taken are entirely different.

The stimulus was necessary according to many.

Bush first presented the tax cuts as giving money back to the people because there were projected surpluses. All the talk about letting people keep more of their money.

That wasn't the first time that tax cuts were talked up as being good for the budget. It started with Reagan and we know the fiscal results under Reagan, Bush Sr. and W.

Curiously, Clinton raised some taxes and the budget, whether it actually balanced or not, was in a lot better condition when he gave up the reins.


Now, it's much easier to count up the budget than to determine the effects of job creation measures in the economy. The first is simple arithmetic while the second one is probably some multivariate calculus.

 

[ERD50]

It turned out that raising taxes and cutting spending (or if you prefer, reducing planned increases) did not prevent the economy from growing nicely. Seems to me that actually goes against Keynes' theory, ...

No. As in my previous example/analogy - there may be external forces that outweigh what you are looking at.

It may or may not be the case in your example, but it doesn't prove/disprove anything, unless we can fully quantify the external effects - and we probably can't.

-ERD50

 

[Texas Proud]

No, I am saying you can't assume cause/effect, and I am saying it is difficult to parse out an action/policy from all the other noise.

I've said before, I think it helps to look at what we know to be true, and apply that as best we can. These other 'observations' cause us to act in ways that may be counter-productive.

A physical example:

A) I *know* that putting a 1000W heater in a room with no other HVAC system will add to the heat in the room.

B) I may not know everything about the thermal mass of the room, and the insulation and leakage values. I may not know the outside temperature, and I sure can't predict it with super-accuracy. I don't know if people will be coming and going from the room, or how many occupants there are at any one time.

C) But I can say with certainty that the heater will not cause the room to be cooler than if it were not running, and that it will add heat to the room. Even if I can't predict the actual temperatures.

Yet, someone might observe that I turned on the heater, and the temperature of the room went down. Maybe this is because a bunch of people just left, the sun went down and a cool breeze came by with a big drop in outside temperature.

That person could come to the conclusion that heaters cool rooms.

Or maybe there was something even more indirect - maybe some one placed flowers in the room, and removed them later. We could plot room temperature versus the number of flowers in the room and possibly see good correlation. Time to buy more (or outlaw!) flowers!

So my point is, we really need to do the best we can to understand cause/effect, and apply 'solutions' (policy) reasonably. If we do that, we should be reasonably assured that we had a good chance of improving the situation, even if it continued to trend poorly (it's reasonable to assume it would have been worse w/o our reasonable action). It takes a little faith in your knowledge/understanding, but what doesn't?

-ERD50

My first thought to "A" was.... not if you do not turn it on... then later you say that you did... so... no fun here


sure, you can spend the money for the heater... but if the room is the size of a football stadium... and the heater cost $1 million dollars... then maybe it is not the right thing to buy.... that is another argument on this stimulus spending... that they are not spending it on things that actually can 'warm' the place up...

 

[Texas Proud]

Let's wind this back just a little.
We were talking about Keynesian economics and Ziggy allowed that here in the U.S. we tend to be all for the stimulus part but not so enthusiastic about counter-cyclic policy during the boom times. I mostly agree. I worry about that. Especially now, since I believe that we are going into this in a poorer position.

Perhaps I shouldn't have, but I pointed out that we did engage in a little counter-cyclic policy during the Clinton years. Greenspan is often given credit for pushing Clinton in that direction.

I brought it up because I thought that Ziggy's statements

and


were just a bit too negative. We have a recent example of a moderate policy (I don't recall it being draconian) getting it almost right. The debt almost stopped growing and the debt/GDP declined. Anything wrong with that?

I acknowledge confounding factors, but do not accept the idea that the dramatic change in the debt curve cannot be related to policy decisions. It could have been different. Clinton could have gone on a giant spending spree. (If you want to say "like Obama" here, I won't complain.)

It turned out that raising taxes and cutting spending (or if you prefer, reducing planned increases) did not prevent the economy from growing nicely. Seems to me that actually goes against Keynes' theory, and it confuses things. However I would be in favor of risking a mild recession during boom times if it were required to reduce the debt down to comfortable levels. Mainly I take this as an indication that getting our fiscal house in order does not necessarily require drastic action.

And I repeat. I am not comfortable with Krugman's blithe attitude toward the debt.

It may be that there is no good solution.

IMO, it was not for lack of trying that Clinton did not spend money... he had a Republican congresss that did not want to back his programs..

He did not cut the budget at all... even with cutting the defense budget... his budgets were averaging about a 3.5% increase year over year... but the receipts were close to an average of 9% per year increase...

SOOO, even then we did not cut like Keynesian says to do... it was the tax increases that did the trick...

http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf


BTW, according to someone in Wiki..... we can NOT grow our way out of the current problem...



Can the U.S. outgrow the problem?

GAO Comparative Increase in Spend vs. GDP.


Some politicians and economists have argued that the U.S. can "grow its way" out of these fiscal challenges. Their argument is that economic growth (driven by tax cuts, productivity improvements, and borrowing) will generate sufficient tax revenue to offset growing entitlement spending.[87] However, the GAO has estimated that double-digit GDP growth would be required for the next 75 years to do so; GDP growth averaged 3.2% during the 1990s. Because mandatory spending growth rates will far exceed any reasonable growth rate in GDP and the tax base, the GAO concluded that the U.S. cannot grow its way out of the problem.[88]
Fed Chair Ben Bernanke stated in April 2010: "Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies."[89]







http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf

 

[ERD50]

My first thought to "A" was.... not if you do not turn it on... then later you say that you did... so... no fun here

heh-heh-heh, and I tried to word that sooo carefully Let's see, if a 1000W heater is not plugged in, is it really a 1000W heater, or is it merely a device with 1000W of heat capability?

sure, you can spend the money for the heater... but if the room is the size of a football stadium... and the heater cost $1 million dollars... then maybe it is not the right thing to buy.... that is another argument on this stimulus spending... that they are not spending it on things that actually can 'warm' the place up...

And this is where it comes down to having some (even if it is imperfect) knowledge of the cause/effects. Even with a very, very wide range of assumptions, one could calculate that producing 1000W of heat in a stadium size room will at most only have a very local affect.

I suppose similar rough estimates could be made regarding stimulus money. But I don't see much interest in it, politicians want to be able to claim they did this or that, and they apparently have a big enough audience for it to keep getting elected.

-ERD50