Paul K’s Strange Logic

By Joe Firestone

In an October 12th Post entitled “Foreigners and the Burden of Debt,” Paul Krugman made the following comment.

”. . . we’d all agree that deficits make us poorer if they crowd out investment spending — which they would if the economy were near full employment, but won’t if we’re deeply depressed. All we have to do is realize that net foreign investment — purchases minus sales of assets from and to foreigners — is also a form of investment. Or to put it a bit more simply, sure, budget deficits can make us poorer as a nation if they lead to bigger trade deficits.”

I have to say I have a bit of a problem understanding this one. Let’s assume we’re in a depressed state as we are now and the Government decides to run an additional $1 Trillion deficit, without, for simplicity, any corresponding debt issuance. Then, assuming that the private sector saves at the rate of 6% of GDP and the trade deficit is 4%, and, neglecting any fiscal multiplier, the additional Government deficit adds $900 Billion in aggregate demand to the US economy, $60 Billion immediately to savings, and $40 Billion to the foreign sector. So, the Government deficit spending has certainly made both the domestic non-Government sector, and the foreign sector richer in USD nominal wealth, though the domestic government sector has been made 24 times more wealthy than the foreign sector.

Of course, if we take into account the fiscal multiplier on the $900 B deficit, and we assume that the Fed will add to the money supply as necessary during the ensuing economic expansion, then that 900B deficit might end up adding as  much as $2.7 Trillion in GDP to the economy if it’s spent in the right way. So how has this made us poorer?

Maybe Paul K has real wealth in mind in the quote and not nominal wealth. So, would the $40 Billion in increased trade deficit decrease out real wealth? I don’t see how, since in a trade deficit we send USD to the foreign sellers in return for real wealth, thus increasing the real wealth held by Americans. But maybe I’m missing something about the logic of the IS-LM model?

So, how, again, can budget deficits that increase trade deficits make us poorer?


62 responses to “Paul K’s Strange Logic

  1. “we’d all agree that deficits make us poorer if they crowd out investment spending”

    I don’t agree at all. More money in the hands of consumers will motivate companies to invest more so they can extract it from us. Unless they are holding loads of inventory. How could too much spending potential crowd out investment?

    Potential spending = savings. Investment = savings. If savings goes up investment goes up. What am I missing?

    Krugman is so far out of paradigm he’s become an embarassment to the profession (although less so than some others).

    • If aggregate demand from deficit spending exhausts capacity to produce in real time, then demand pull inflation ensues reducing the buying power of financial investment capital. That’s the sense in which excessive deficit spending can “crowd out” investments. Of course, Krugman may have meant the classical notion of “crowding out” holding that government spending drives up interest rates and crowds out investment by making loanable funds too expensive. But, I’m giving him the benefit of the doubt, figuring that he knows that the CB controls interest rates.

      • Joe, I agree with both you and Ron T below, you are correct. I was referring to the normal use of the phrase “crowding out”, so my comment was a little off point.

        But if we parse Krugman’s statement further based on his meaning, it reveals that he thinks we “choose” deficits, rather than the fact that they are ex-post accounting views of previous economic performance. Deficits are “slack” given to an economy when it needs it to run, like a fish on the line.

        He further assumes that anyone in a position to make such policy choices would increase spending under those conditions. For what purpose? That would obviously cause inflation. It would be applying a fix to a non-existent problem.

        Krugman must think we are idiots. He’s describing a scenario that is so unlikely it makes little sense to bring it up. He isn’t promoting a serious discussion.

        Or maybe he understands he must speak in “code” so he doesn’t jeopardize his position among the pay-to-players and I’m misinterpreting his intent.

        • I agree Paul. I understand the main concern here is that since there’s no guarantee that our NIIP will ever become less negative or turn positive again, eventually accumulation of USD in foreign owned accounts will result in excessive purchases of US real assets by foreigners. I don’t think this fear can be well-supported by any rigorous evidence-based model, and also that on its face, the idea that deficits make us poorer is just another attempt to save the policy concerns of neo-liberalism from extinction.

          I wish these guys (Krugman, Delong, Rowe, etc.) would get off that crap and just advocate using the fiat money system to employ people to solve real national problems instead of always looking under the bed to create imaginary ones out of thin air.

          • Actually I’ve asked this question on MMT sites several times. If the Chinese (to use them as an example) finally used their dollars to purchase goods/services in America could that cause inflation? I actually doubt it, it would probably just cause a lot of welcome employment. However, I’ve also wondered about the effect of Chinese purchase of assets and whether that has any potential negative effects for the US (maybe the 1%?). It tends to be blocked politically in any case, but an opinion?

            • SteveK9,

              Seems to me if the Chinese started buying stuff at a reasonable pace with their USD balances unemployment would drop, tax revenues would rise and deficits would recede. If they tried to spend $1.2 Trillion in one year, I suspect that would cause inflation.

              • Depends on what they spent the money on. If they just bought assets and supplied money to rich people there’s probably be big demand leakage. If they also invested a lot more financial capital in businesses they bought, then that might help employment if they made investments in people. I doubt even such massive spending would be inflationary, however, since it wouldn’t be deficit spending, and income coming from its spending would raise tax revenues due to the automatic stabilizers

  2. Waiting for the answer, waiting, waiting….

  3. Paul, PK meant that at full employment of resources, if the govt spends more, it does not crowd out nominal spending (I think he used to believe so, so this is progress! He will never admit where he learnt this though) but it will crowd out real resources, labor. More highways then means fewer houses. At full employment this is true.

    • Right, Ron. But it still doesn’t follow that deficit spending makes us poorer. It depends on how resources are used in that competitive situation and the impact of that resource use in actually producing increased real wealth.

  4. My personal opinion: Spend less and owe less. If the ultimate end is to reduce deficits and debts then we have to produce more and save something for further investment. If the budgets cannot be made to enter into the surplus territory at least they should in balance on both sides without less and less of involving leverage at least of foreign debt.

    • Javed, the Government isn’t like your household or mine. If it spends more and owes more that doesn’t affect its continued capacity to spend or to owe. So, from the government’s point of view, it ought always to be an issue of the impact of government fiscal policy on a broad range of indicators measuring public purpose. If, on balance, a particular program contributes to public purpose, then we ought to implement that program. Full employment and inflation are two indicators among many we ought to consider in making public spending decisions. But one thing we do know is that the expectation of deficits or surpluses resulting from policies should not be considerations, since Government fiat funds are not subject to solvency considerations. That is, the Government is not, and under current law, cannot, run out of money.

      • Joe Firestone: I agree with you that sovereigns do not got bankrupt (short of fiat money). I have in fact restricted myself to the balance sheet figures (governments and households) whenever expenditures exceed income the gap is filled by debt and there is deficit. Social spendings need to be controlled and if not, then these two Ds (debt and deficit) will have to be tolerated. Thank you for your comment.

        Kind regards

        • Social spendings need to be controlled and if not, then these two Ds (debt and deficit) will have to be tolerated.

          The money you have in your pocket is a result of – IS – somebody else’s debt & deficit. Of course “social spendings” should be controlled – but the problem is that everywhere they are too low. Higher social spending —> stronger economy. The point is that taxation simply is NOT income to a government. It is just taking, cancelling money that the public has. The government doesn’t, can’t get any money from it.

          If the ultimate end is to reduce deficits and debts This is an absurd, destructive goal for a state to have.

          then we have to produce more and save something for further investment. This is simply not possible for a nation to do, if saving is meant in terms of its own currency. It is like thinking writing checks to yourself & “saving” them is saving in any meaningful sense. The only meaningful sense of saving for a nation as a whole is investment, including public investment, building infrastructure etc. Spending less & owing less means less production, less investment, less saving.

        • Sorry, Javed. I don’t know what you mean! Try distinguishing between private and public debt and deficits.

  5. Joe – – –

    Good discussion.

    Crowding out is a joke. The logic is based on deficit spending causing people and businesses to spend less in anticipation of future taxes when the debt and interest on the debt has to be paid.

    It is just as logical if people anticipate higher taxes in the future that they would try to make more now when taxes are lower, which would produce just the opposite effect to crowding out.

    But neither are likely to be real macro effects. The entire premise of reaction is based on an attempt to extend micro theory through “rational agents” to macroeconomic models. This is a bad practice exercised by a majority of economists.

  6. “Paul, PK meant that at full employment of resources, if the govt spends more, it does not crowd out nominal spending”

    Why do these people obsess about the condition at full employment so much? That is boom time and in boom time you can get away with pretty much anything – including putting taxes up.

    Counter-cyclical fiscal policy via strong automatic stabilisers will *automatically* back off the deficit as the economy tightens. You can then fine tune the budgets and taxation as required.

    This is another of those situations where Paul really should use a balance sheet and a bunch of accounting transactions so that we know what the hell he is on about.

    • Thanks Neil. It is one of those times. PK does seem to get lost in his IS-LM models very frequently and to elevate those over the priority of fixing real problems, such as the number of annual US fatalities due to lack of health insurance coverage in the United States.

  7. If a deficit is funded by foreigners, that makes the deficit country BETTER OFF INITIALLY. I.e. if a country can get REAL goods and services from another country in exchange for bits of paper called “Treasuries” or “dollar bills”, then the deficit country is initially better off. But it is “worse off” in the sense that it’s in debt.

    If the deficit country can debase the value of those bits of paper via inflation, then the deficit country has won hands down.

    But if and when the creditor country demands real goods and services from the debtor country in exchange for the bits of paper, then it’s payback time.

    • I agree, Ralph, but I think there’s a problem in thinking about real wealth as static in character. $1 Trillion in deficits can result in a huge accumulation of new real wealth, which dwarfs in magnitude the $40 Billion in assets foreign exporters can buy in real assets. So, it seems to me that in any faintly normal scenarios not involving hyperinflation, that $1 Trillion in deficit spending can only make the non-Government sector richer, not poorer. PK is focusing on only one aspect of the impact of deficit spending and is neglecting the whole picture.

    • Payback time also means people are employed time (the Americans producing the goods and services).

      Why do the surplus countries do what they do? The main benefit goes beyond keeping people employed (they could do that without a trade surplus), it is a way to develop the workforce, and the mechanisms of production in a very competitive environment.

    • “But if and when the creditor country demands real goods and services from the debtor country in exchange for the bits of paper, then it’s payback time.”

      If and when the Methane Clathrates in the Pacific Ocean and under the northern Tundra melt it is ‘payback time’.

      Do you spend your days restricting what you do today in ‘fear’ of that happening? Because it is just fear. The probabilities are low.

      The MMT approach is to say that the best way to make sure there is enough real stuff for foreigners to buy in the future is to make sure that you are running at maximum capacity today – eliminating the hysteresis effect in the real circuit.

      And ZIRP makes sure that they have to store their savings in the private sector and get any return from the private sector – which may go bust and destroy those savings. No other guarantee of a return, no guarantee they will be able to get real stuff when they want in the future and no guarantee of the safety of their savings.

      After all if there is a problem in the future you have the tools to deal with it – you can tax foreign spending, you can restrict bank withdrawals and you can put in place capital controls. But the chances are that you won’t need that.

      It is much better to offset the drain in domestic circulation from foreign central bank activity today and make sure that real output is at maximum *today* than it is to fret about extreme possible futures that are unlikely to happen and which you have to tools to offset anyway.

      The destruction of domestic production and skills and the loss of billions of man days of output a year is happening *today*. To sanction that because of an unwarranted fear of the future is economic madness.

  8. So, how, again, can budget deficits that increase trade deficits make us poorer?

    What matters is always, always, always not how much you spend, but what you spend it on.
    Spending on bads is … bad! Spending on goods is …. good!

    Ordinarily, the budget deficit would promote investment, consumption and employment, and the trade deficit would shrink the multiplier, but increase the amount of spending we could do before we would get inflation. The bigger deficit should increase employment more than importing decreased it, or even if not, we could still spend to full employment, so no problem there. The increased demand from us would stimulate foreign economies and increase their demands for export from us – free trade can be good – and this can go on for a loooong time, benefitting everyone. So you have to be a bit crazy to make something bad out of it.

    The first way I can see any sense to the idea that a budget deficit that increased a trade deficit could make us poorer is if the government decides to import bads. If Uncle Sam instituted a national imported cocaine & heroin addiction promotion program paid with federal dollars. We would have a nice party for a while, but we’d be left with the foreign dollar-denominated debt, which us honest druggies would not inflate away. Perish the thought!

    The second way is the same – if we spent our budget deficit to hook everyone on domestically manufactured booze, PCP & LSD & the money we had left over were used by us druggies to get non-drug necessities from China through Wal-Mart. Same thing, when the party is over, we’re left with a hangover, an addiction & a foreign debt. But because of the multiplier, we could party longer and harder!

    So Hey, but let’s party, Man!
    Just as long as we don’t convert our dollar debt to foreign-denominated debt for a temporary discount on either drugs or appliances (the first hit is free, kid!)
    Keep away, that’s a bad trip, that stuff’ll kill you!

  9. The Dork of Cork

    A trade deficit is a free lunch.

    It can make you poorer in the long run as the deficit country runs out of skills to provide real goods while the exporting country reduces rational fixed capital investment so as to sustain its trade surplus.

    The strange UK / Germany dynamic is the most extreme & classic example of this.

    After the big bang Germany gave up any pretence of core investment in energy (Nuclear) as it was too capital intensive.

    Why do this when you can get a income from UK credit note production ?
    Surely with a income you can pay for any imports such as oil & Gas.
    Until its gone that is.
    The North Sea is mostly gone…..the capital base is gone.
    And what have they to show for it ?
    A land full of BMWs and not a single PWR in Germany post 1990 and just one in the UK.
    A disaster zone.

    • I agree that it can be a problem, Dork. But that’s a secondary effect, contingent on not spending the b budget deficit in the right way. As long as the budget deficit is spent on employing people to produce real wealth including capability to produce more real wealth in the future, then the size of the trade deficit leak from the budget deficit is small enough that it represents no problem. Our issue here is that when we run deficits, they’re mostly an inadvertent result of economic downturns and aren’t allocated toward employing people. We need that MMT Job Guarantee very badly.

      • The Dork of Cork

        Sure in theory.
        But the UK has no incentive to invest in internal productive capacity as it feels it can always extract the real resourses of its neighbours.

        From the UKs ORR
        “Government subsidy towards the railway industry in 2011-12 was £3,901 million (£3.9 billion), this is £59 million lower than the previous year.

        2). Government support reached its peak in 2006-07 with £6,308 million; government support has declined every year since.”

        The lines to the south are now reaching capacity limits because of a lack of fiscal money as passenger numbers keep increasing.

        Therefore the UK is more “efficient” in the use of capital stock but this surplus from capital rundown is expressed by more bank credit production for cars and stuff which further burns the remaining resourse base.
        Pointless in the long run , as I said recently they are merely the last europeans holding credit notes which is why their car purchases is the only positive figure this year of the large European countries.

        private investment in rail capital during Y2011 /12 was £503 million of which £369 million was rolling stock…pathetic
        This contrasts with the scale of French rail rail investment much of which is off the fiscal books.

        But in fairness to the Brits they are still in trade surplus with Ireland (oil & Gas I imagine)……I guess they are still earning a income off us………..they know were are really really really stupid so we will pay the debt even if it kills us.
        But paying the debt or not paying the debt will kill us anyway so why not ?

        • “But the UK has no incentive to invest in internal productive capacity as it feels it can always extract the real resourses of its neighbours.”

          Different problem. MMT tells you that the money isn’t the constraint and the deficit isn’t the constraint.

          The constraint is real.

          • The Dork of Cork

            I am rereading “The first world war vol 1” by Hew Strachan – the “financing the war section” – a must read.

            The Germans & French held much of the above ground gold ( not unlike China & Japan $ treasuary holdings today ?)
            The UK could “print” more Gold as the Empire had control over most of the below ground stuff in Canada & South Africa.
            While India gave it a favourable balance of trade ( I think Europe of today functions as the modern India)

            OK there was a run on the BoE………in my opinion because the US became both China & Saudi Arabia in one monster package.
            The Bank act was suspended and the clearing banks expected the Gold standard to finish as the BoE would need to issue more notes , but HMT issued the notes (legal tender in Scotland & Ireland)

            Keynes hammered home 2 points – the first was the difference between the internal demand for gold and the external.
            1. The first was the internal vs external demand for Gold – the 10shilling notes (paying 5% interest) were for the former.
            By easing the domestic calls for Gold the Bank had more gold available for exchange purposes.

            2. He reiterated throughout the war that it was useless to accumulate gold reserves in times of peace unless it was intended to utilise them in time of danger.
            This is the MMT full employment meme in its ancient form.

            But if HMT just issued raw notes into the economic medium – what would have happened ?
            Would we have had the War to end all wars ?

            One of the problems I have with yee Anglos is that yee think something will turn up in the physical world that will both sustain full employment in the UK & US and also sustain your external purchasing power.

            The Larry Summers of the world was not screaming that we need a French scale nuclear & Rail programme to reduce these trade imbalances but just give us some time.
            He and others of his vast bulk just want to consume and not produce – facist corporate forces in Germany and China are happy with this very unsatisfactory arrangement.

  10. The Dork of Cork

    There is really not much remaining in Germany and Poland now.

    Even Poland of all places is going into coal deficit !!!!! Polish coal was forever was it not.

    IEAs “energy balances of the OECD nations Y2011

    Self suff. coal Poland
    Y2000 : 1.26
    Y2010e : 0.997

    Germany is further down this entropy road.
    Self suff. coal
    Y1990 : 0.9472
    Y2010e : 0.5874

    This is a 1984 like growth through depletion meme , indeed the UK went into current account deficit in 1980 blooody 4.
    After this the city merely ran surplus North sea oil & gas through the PIigs domestic energy systems so as to get a yield from their new grot production.
    The entire European core capital base decreased from that moment in time.

  11. The Dork of Cork

    Maybe Sterlings value is dependent on non sov euro states….if they become sov again and internalise domestic demand and rational investment what happens to Sterling ?
    Its a interesting dynamic is it not ?
    Nothing must happens in the UK yet London is a gigantic european consumer goods vaccum cleaner.

    DB Schenker Rail launches second weekly rail freight service between UK and Poland

    Tuesday 09 October 2012

    “DB Schenker Rail has strengthened trading links between the UK and Poland with the introduction of a second weekly rail freight service between the two countries

    Poland is now turning its coal into london consumer goods.

    Uk trade in Goods by area (Balance of payments, £ millions)
    Y2002 : +50
    Y2003 : – 84
    Y2004 : -412
    Y2005 : -664
    Y2006 : -879
    Y2007 : -1330
    Y2008 : – 1307
    Y2009 : -1870
    Y2010 : -2309
    Y2011 : -2768

    They make Fiat 500s in Poland by the way.

    From this angle its looks as if Europe is a colony of the UK
    The real goods trade deficit with Germany & China is masssive of course.
    In 2011 the UK imported £50,457m ( – 17,893 balance) from Germany
    & £ 31,501m (-22,203 balance) with China.

    During the finacial crisis of 2008 this US ,UK trade (unsustainable ?) began to break down – see above Poland data for example.
    So called sov currencies must be looked at withen the context and dynamics of non sov currencies or countries which decide to be non sov to accumalate paper credits rather then real goods and rational capital investment which sustains rational domestic demand.

  12. As long as foreign entities are willing to accept imaginary US pixel dollars for real objects, like barrels of oil or bottles of wine or boxes of bananas, there isn’t any problem, the pixelated currency will eventually return to the US to either purchase goods or buy US government securities. A trade deficit indicates that more of these dollars are being used to buy government securities rather than goods, since holders of dollars are unlikely to hide them in rice paddies. Presently the dollar occupies the place of the world’s reserve currency, oil consuming nations being able to use US dollars to purchase oil from yet other countries, there being no US involvement in the transaction. At some point, however, isn’t it likely that participants in international trade will decide that the continued enpixelation of US dollars to satisfy US domestic economic and political demands is having a negative effect on third party trade? And that moving to a different medium of exchange would be more beneficial? As is constantly reiterated on this site, sovereign countries can never write a bad check, but that doesn’t mean anyone must accept it. You’d have trouble buying a cup of coffee in Omaha with a handful of Philippine pesos.

    • This will happen. But it will happen gradually, and then we’ll just have to make more stuff ourselves again., and maybe we can once again have labor unions and a growing middle class.

    • It all depends on what the exporting country (like an oil country) wants to save in. Dollars or donuts. If it wants dollars, it will export to us, or export to a country that will pay it in dollars. What you call the “continued enpixelation of US dollars” has been going on since 1971, so what’s the problem? They’ve had 40 years to study the “negative effect on third party trade,” haven’t they, and yet they continue to want them.

      • In 1971 crude oil was going for $11.85 a barrel in 2009 dollars, today, October 18, 2012, the London price for Brent crude is $112.42. You might say that this is due to increased demand or you could say that it’s a devaluation of the US dollar.

  13. I have long since ceased paying any attention whatsoever to that clown, Krugman, regardless of how, on occasion, he attempts to frame himself as a “liberal” (while ALWAYS coming down on the side of the central bankers and speculators), especially after the following:

    Krugman claimed there wasn’t a “housing bubble” when it was obvious to all;

    Krugman claimed there wasn’t speculation in the oil futures, when the incredible amount of futures speculation in oil/energy, refinery-involved chemicals (driving up the price of refining subsequently), and freight foward futures (driving up the price of transportation, supertanker rentals, etc.) was obvious to all; and,

    Krugman gave a talk before the EPI not too long ago, where he stated that household debt had been the problem or cause of the global meltdown, and the top banks were all in a “healthy condition.”

    The so-called Nobel Prize in Economics is such a complete farce; I like Stiglitz and appreciate his evolving over the years, but he’s still somewhat slow on the uptake, although he eventually does “get it.”

    • In thinking on Krugman’s remarks further (an activity I heartily argue against as a waste of time), given that Krugman seemingly coincidentally always appears to fall on the side of the speculators and central bankers, perhaps this is his way of directing peope towards the EB-5 program.

      This program has been, and can be, used to steer foreign investment in specifically plutocratic directions, such as the recent surge in foreign investment, from EB-5 card holders, in the education privatization movement (i.e., charter schools).

      Food for thought?

  14. I can hardly P.K. got a Nobel prize after reading Firestone quote. Regardless of whether the economy is at full employment or not, public deficits are government indebtedness. The burden of debt will eventually fall on citizens. In fact, even if the public deficit were financied byforeign borrowing (a case in which some Neoclassicals argue Ricardian equivalence does not hold), such debt abroad must eventually be repaid. Finally, P.K. statement is tantamount to staying that the depressed, highly indebted nations in Europe shall not be concerned about the need for fiscal consolidation.

  15. “public deficits are government indebtedness”

    Not in the United States, Canada, Australia, Japan or the UK. In these cases the burden of public “debt” can never fall on citizens. Private debt is another matter altogether.

    In the Eurozone, what they call public debt is more akin to private debt. Although that can be fixed easily from a mechanical or technical perspective, it appears to be nearly impossible from a political perspective.

  16. “How can budget deficits that increase trade deficits make us poorer?”

    I’m a little shaky at Econ so this is just what I surmise:

    Krugman asserts that at full employment, a budget deficit causes a crowding out of investment spending because money that would be invested in capital formation is instead tied up in government bonds (i.e. not headed to capital formation). A trade deficit is simply another form of investment (Net Foreign Investment = Purchases from foreigners [imports] – Sales of assets to foreigners [exports]), which decreases investment in capital formation domestically.

    He goes on further to state that if budget deficits were to increase current account deficits it would make the nation poorer because money which could have been used in domestic capital formation instead went overseas. However, Krugman illustrates that this is not occurring, since a large increase in deficit spending in 2008-9 had no negative effect on the trade deficit.

    In summary, I believe he’s saying that increased deficit spending right now makes sense since our economy is depressed (and is supported by the example you’ve given above). At full employment however, it could have a negative impact (just like if deficit spending increased trade deficits, it would have a negative impact on the country’s wealth).

  17. In these cases the burden of public “debt” can never fall on citizens. That’s not correct. Public deficits are [increases in] government indebtedness, as Abraham Vela says. Of course he’s wrong with the Eurozone comparison. There’s been a big blogospheric debate Krugman, Baker, Delong, Rowe etc on debt burdens recently. Of course Lerner & others understood it all long ago & anticipated & answered the 70s nitwits who fooled Rowe. The point is that unless you really work hard at it, like in my example above (Thanks for the kind words , Joe!) the burden will fall on the shoulders of a stronger nation, so not be much of a genuine burden. Increased spending during a depression could cause a bit more inflation trouble in the future, necessitating higher & possibly “bad” taxes; but again, rational public policy should distribute this small burden well.

    If it goes out of your way to burden some classes of citizens (and not others), then of course the government can make them bear the burden. The simple way in the old days was to sell them (abroad) as slaves. If there is a natural or social or military catastrophe, the burden, of which the foreign component is the only real part to the nation as a whole, might unavoidably bear down on everyone; pretty much the only way a debt burden can unavoidably be felt universally.

  18. “Public deficits are [increases in] government indebtedness,”

    Please explain. Indebtedness to whom? To itself? What does government “indebtedness” (it creeps me out even using the term) in it’s own currency have to do with citizens, other than provideing them with the balances needed for commerce? The government chooses to issue bonds. The government can choose not to, and has. Either way the “burden” is on the Federal agency that has to enter the numbers into the computer, not the citizens.

    “If it goes out of your way to burden some classes of citizens (and not others), then of course the government can make them bear the burden.”

    First of all I didn’t say the GOVERNMENT couldn’t cause a burden. I said public debt can’t. Public “debt” is an inanimate object… it has no means to impact a burden on the citizens through the natural result of accruing interest out of thin air from an unlimited supply of numbers.

    Please explain how public debt is a burden on it’s citizens without assuming some action by the government. If your argument requires some action by the government, then the burden is caused by the government, not the existence of public debt.

  19. Joe,
    You’ve absolutely shredded PK here man… killed it! great job! rsp,

  20. Good piece Joe. Krugman kind of irritated me with this… “budget deficits can make us poorer as a nation if they lead to bigger trade deficits.”
    He’s missing the point that the government could (and, per the Full Employment Act, should) peg full employment as its target and let budget and/or trade deficits float as necessary to reach the target. Like Wynne Godley said:
    “If the private sector decides to save more, the government has no choice but to allow its budget deficit to rise unless it is prepared to sacrifice full employment; the same thing applies if uncorrected trends in foreign trade cause the balance of payments deficit to increase.”

    I still have it extremely odd that Donald Trump is the only political figure who’s made the point that the simplest way to cut the budget deficit is to first cut the trade deficit. On another note, I’m reading Bob Woodward’s book. Great read but I was shocked to discover that we’re governed by morons. OK, I knew that already (and you already did too). :o)

  21. The background to this is a wonky academic debate in the blogosphere about the meaning of the idea of a “debt burden” (if there is any – it’s a hopeless debate of people talking past each other). So this is not a discussion of current conditions or policy.

    He’s saying a few things from a purely academic point of view, and they are very simple points:

    a) IF the economy is at full employment, it is arguable that the movement of resources from the private sector to the public sector may cause real crowding out. I think this is uncontroversial. It has nothing to do with current economic conditions.

    b) Real crowding out MIGHT take the form of displacing private sector investment which MIGHT have been more productive. That’s always a debatable point, but it’s possible. Again, given full employment, that scenario MIGHT result in the economy being “poorer” when measured in terms of the stock of real investment.

    c) He then turns to the case where a government deficit MIGHT lead to a higher trade deficit. If you read closely, he doesn’t worry too much about this. But IF there is a higher trade deficit, he is simply pointing out that other things equal it results in higher net international claims on existing US assets – which is a reduction in domestically held wealth. As to what other things are involved in the process of linking the two deficits, if you read closely, he’s saying its silly to worry too much about this if the thing that causes a higher trade deficit is economic expansion associated with the higher budget deficit.

    In short, he’s really making an incredibly simply point that other things equal a trade deficit increases foreign claims on existing US assets – which is a reduction in domestic wealth when measured by claims on investment (it doesn’t consider the value of the imports that have been consumed – i.e. non-investment goods).

    Again, this has nothing to do with current economic conditions or current economic policy.

  22. John O'Connell

    “though the domestic government sector has been made 24 times more wealthy than the foreign sector.”

    Did you mean to say the domestic NON-government sector? I’m having a hard time with the meaning of the wealth of the domestic government sector. (As if there were a non-domestic government sector to consider.)

  23. Will Richardson

    Interesting run out of the social credit idea here;

    Anyone read any of James Robertson’s integration of eco-socio-political economics here;

    OK it’s a bit over-focused on the fractional reserve red herring but…