Dear Dr. Krugman: Please Let Me Explain

By Joe Firestone

Paul Krugman can’t explain why the deficit issue has suddenly dropped off the agenda. He says:

. . . quite suddenly the whole thing has dropped off the agenda.

You could say that this reflects the dwindling of the deficit — but that’s old news; anyone doing the math saw this coming quite a while ago. Or you could mention the failure of the often-predicted financial crisis to arrive — but after so many years of being wrong, why should a few months more have caused the deficit scolds to disappear in a puff of smoke?

Why indeed are they so quiet? Could it be because the deficit hawks have succeeded in getting the short-term result they want, which is a likely deficit too small to sustain the private savings and import desires of most Americans, and also because the political climate is such right now that they cannot make progress on their longer term entitlement-cutting program until after the coming elections have resolved the issue of whether there will be strong resistance to such a campaign if they renew it? Let’s look at the budget outlook first.

Here’s CBO projecting deficits of 3.0% of GDP this fiscal year, followed by 2.6%, 2.8%, and 2.9% for fiscals 2015, 2016, and 2017. Those deficits are mostly smaller than Warren Buffett’s and the Eurozone’s favorite deficit target of 3.0%. They are the same too small deficit targets that have prevented the Eurozone’s PIIGS from responding effectively to the crash of 2008, and the prolonged depression and astronomical unemployment rates which have engulfed them since. When one considers that CBO’s projections are usually too conservative when it comes to projected deficits, so that the reality of these is likely to be smaller, as it has been regularly, for the past few years, then it’s even more apparent that Peter G. Peterson and his other austerian friends have gotten where they want to go for the time being.

Nor are there any other major influences in Washington, DC advocating higher deficits. Even “progressive” groups and politicians always talk about “pay fors” and offer 10 year deficit reduction plans that envision deficits averaging far less than the 3% target.

So, the deficit hawks have already gotten to their short – term goal. Their long – term goal of hollowing out the social safety net has met with increasing resistance over the past four years. And the resistance is strong enough that the Democrats have no stomach for bipartisan compromises cutting Medicare or Social Security for the present.

The deficit/debt hawks now need a breather. They needed to go into wait-and-see mode to see what the elections of 2014 produce.

If they produce the right mix of tea partiers, and Republican and Democratic debt hawks. They may be able to produce a new “Grand Bargain” early in 2015 before 2016 election pressures become intense, and the influence of Hillary Clinton’s candidacy on Democrats in Congress becomes too great. I say this not because I think that Clinton will necessarily oppose any such bargain in the long term; but because such a bargain would be risky for her candidacy and the Democrats in the run-up to the elections of 2016.

So, from my viewpoint I don’t think the time is propitious for the deficit/debt hawk forces to keep pressuring for entitlement reforms and a long-term solution to their favorite, and non-existent, financial problem of excessive public debts in fiat sovereign nations like the United States. And I think they know that.

Instead, it is a good time for them to regroup and plan their next attack on entitlements. That will come under cover of the Republicans’ next debt ceiling attack, which is a good possibility for March of 2015.

So, I see the Peterson forces beginning to beat the drums again towards the end of the year and build up the intensity of their appeals from January to March. I don’t see a strong move to cut entitlement spending in the lame duck session, since there will be no debt ceiling cover then to generate leverage heavy enough to get Democrats to accept part of the blame for cutting entitlements.

15 Responses to Dear Dr. Krugman: Please Let Me Explain

  1. Pingback: Joe Firestone: Dear Dr. Krugman – Please Let Me Explain | naked capitalism

  2. Pingback: Dear Dr. Krugman: Please Let Me Explain | The M...

  3. The only protection we have from them is that if Obama is for it, they are against it. That has saved cuts in social security and medicare several times already.

    • I don’t agree, Bill. I think it was more important that the right wing didn’t want to take the blame for entitlement cuts. They wanted to make those cuts, sure. But they didn’t want to play the game of holding hands and jumping off the cliff. And increasingly, as time passes, the Democrats are becoming very clear that the part of the ciff they inhabit isn’t level with the part that the Rs inhabit. The Dems would have a much steeper drop, and think the last 3 years has brought that lesson home. Obama’s rapidly becoming a lame duck, so when he asks them to do something risky for his legacy, they are more inclined to politely tell him to shove it, reminding him that he doesn’t have to run again and they do.

  4. I have a third opinion. The 1% realize that the deficit is funding their excess savings during our period of a negative trade balance. A balance surplus could only come from their pocketbook. Entitlement spending trickles up. Austerity negatively impacts inequality.

    • Well, you’re entitled to it, of course. But it flies in the face of history and also in the face of current facts when austerity across the world has exacerbated inequality.

  5. When will Democrats get it through their friggin’ stupid, thick heads that their only chance to get back into control is to generate a quantum increase in turnout — and that, as 2010 proved, the only way to do that is, first, do not piss off the Democratic base who are the people who knock on doors to get the vote out? The overwhelming majority of people want Social Security protected from any kind of cuts whatsoever, whether disguised (like chained-CPI was supposed to be) or straightforward and obvious. The Democratic base that does all the work in an election is squarely aligned with that popular will. In 2014, any Congressional candidate who does not use this issue to show he or she is capable of independence from a President of waning popularity, if for no other reason than to generate an enthusiastic group of campaign workers, is an idiot who doesn’t deserve to be elected — if the opponent were not a Republican, that is.

    • That’s right. But not just that. Surveys have shown for a long time that Americans overwhelming favor Medicare for All, and also favor a substantial rise in the minimum wage. I’ll bet that if polling were done on the idea of passing a Job Guarantee at a living wage and god fringe benefits for Americans to end unemployment, that a large majority of Americans would be for that too. They’d also be for getting those bonuses back from the banksters, and prosecuting and convicting the ones who caused the crash of 2008 through control frauds and other financial crimes.

  6. When will MMT advocates realize that the .1% has been using MMT to line their pockets for years. No? What do you call TARP, QE, and the continuing Great Treasury Raid (via the fed) begun by Bush & Paulson and continued by Obama. What? You think Rumsfeld just walked away from that steam room and forgot what Warren told him? Do you think 32 trillion hidden off-shore just happened by itself? C’mon, man!

    • I don’t know what you mean by this comment. MMT is a complex body that includes many different types of knowledge claims. Some are intended to be primarily descriptive. Whether the 0.1% are using these descriptive claims to help them decide on what policies they favor, I can’t say. Some of them may be. Most probably not so much. But apart from that, I don’t see any of the policies being recommended by MMT economists getting advocated by the 0.1%, except, perhaps Warren Mosler, himself. So, I think that the MMTers advocatng these policies certainly are not responsible for the views or actions of the 0.1%.

      • What I mean by the comment. . . is to argue that action speaks much more clearly than words and the actions of the ruling class over the past decade indicates an apparent understanding, and use, of those MMT principles that can be used selfishly by themselves for their own enrichment. Mosler is rich, but is a good guy and a populist without a party, well outside the ruling elite. Policies recommended by MMT economists, like JG, are designed to shrink the wealth equity gap. Why would the ruling class desire that? The .1% will ALWAYS oppose MMT and ALWAYS spread fear of fiat currency hyperinflation. But people who truly fear hyperinflation don’t finance two major wars, TARP, and continuing QE – all without any apparent concern for inflation. We are all watching the implementation of MMT by and for the ruling class and only the ruling class. Austerity for everyone else. But then, I may just be paranoid. Hope so.

        • You can’t use MMT without implementing MMT policies. Integral to the MMT is the idea of public purpose. The 0.1 aren’t MMTers even if they do understand that we have fiat money and are not really concerned about inflatio., and even if they realize that the Fed can issue unlimited money to benefit them when they need its help and even when they don’t.

  7. I’ll bet that if polling were done on the idea of passing a Job Guarantee at a living wage and good fringe benefits for Americans to end unemployment, that a large majority of Americans would be for that too.

    There’s the Yougov poll based on Jesse Myerson’s Rolling Stone proposals. The JG was the most popular proposal, supported by 53% of those who expressed an opinion. Looking at the full results, one sees support for a JG and a BIG (not clear if “big” or “small”) declining as income goes up.

    Decent for an idea which has zero media exposure and after decades of propaganda for the lunacy that allowing willing people to work could possibly “cost” something, rather than give everyone a free lunch.

  8. I’m with Beshiva. I think the .01% know that “money is no object” for a monetarily sovereign government and happily benefit from any policies that see Federal government expenditures show up in their accounts. They just don’t want ‘golden eggs’ from the Federal goose to end up in the rest of our ‘baskets’. Theirs is not a false consciousness, it’s a mendacious consciousness (to channel Georg Luka’cs).

    • As if MMT didn’t already have enough a challenge to educate the masses, now it has to deal will conspiracy theories on the inside! Picard facepalm moment indeed. Even if this notion that the elites knew about the implications of monetary operations described by MMT, the fact that more people become aware of it will only put pressure to ensure the knowledge is used to achieve public purpose. To be against MMT because “the rich know about and have abused it,” is a silly argument.