Paul Krugman Still Believes That “the debt” Can Be a Problem for the U.S.

The deficit is now down to under 3% of GDP, and in contemplating that fact, Paul Krugman asks why the deficit hawks aren’t celebrating the precipitous fall from nearly 10% of GDP a few years ago. He then explains that:

Far from celebrating the deficit’s decline, the usual suspects — fiscal-scold think tanks, inside-the-Beltway pundits — seem annoyed by the news. It’s a “false victory,” they declare. “Trillion dollar deficits are coming back,” they warn. And they’re furious with President Obama for saying that it’s time to get past “mindless austerity” and “manufactured crises.” He’s declaring mission accomplished, they say, when he should be making another push for entitlement reform.

All of which demonstrates a truth that has been apparent for a while, if you have been paying close attention: Deficit scolds actually love big budget deficits, and hate it when those deficits get smaller. Why? Because fears of a fiscal crisis — fears that they feed assiduously — are their best hope of getting what they really want: big cuts in social programs.

So, he unmasks them and then goes on to say:

But isn’t the falling deficit just a short-term blip, with the long-run outlook as dire as ever? Actually, no. Falling deficits right now have a lot to do with a strengthening economy plus some of that “mindless austerity” the president condemned. But there has also been a dramatic slowdown in the growth of health spending — and if that continues, the long-run fiscal outlook is much better than anyone thought possible not long ago. Yes, current projections still show a rising ratio of debt to G.D.P. starting some years from now, and uncomfortable levels of debt a generation from now. But given all the clear and present dangers we face, it’s hard to see why dealing with that distant and uncertain prospect should be any kind of policy priority.

That is, Paul Krugman is saying that

— he doesn’t think it’s necessary to deal with a possible long-term rising debt-to-GDP ratio now, because of the many other problems we still have to face; but he’s also implying that if the projection of such a rise holds later, then we will have to deal with it at that time;

— the lowered deficit now is due to both a strengthening economy and some austerity measures, thereby excluding the possibility that it is due to the recovering economy alone, in spite of the fiscal drag from reduced Government spending at the Federal level pulling in the opposite direction; and

— “. . . uncomfortable levels of debt a generation from now” are a possibility, implying that high levels of debt, and debt-to-GDP ratios mean something to the fiscal sustainability of Government spending in the United States.

Also, what he is not saying is that the deficit is far too low for a full employment US economy that can drive up wages and drive down inequality, courtesy of both major parties and the Administration, who made deficit reduction a priority since the stimulus bill passed in 2009. So what does this tell us about the thinking of the “progressive” economist with the greatest name recognition among the public and the Democratic Party faithful?

Simply this:

— Krugman evidently still is communicating to progressives and Democrats that levels of debt and the debt-to-GDP ratio matter for a nation like the United States with a non-convertible fiat currency, floating exchange rates and no debts in a foreign currency.

— He ‘s still implying that it was good to cut the deficit using some austerity, even though we still have 25 million Americans wanting full-time jobs who can’t find them.

— He’s still saying that higher debt levels can be a problem for future generations.

And by not saying that the deficit is too low for the economic context of the US in 2014 – 2015, he is also telling us that he still doesn’t understand the significance of the Sectoral Financial Balances (SFB) Model, and in particular that if the deficit has been driven down to under 3% of GDP by the politicians, that implies that the sum of private sector savings and current account balance cannot exceed 3%, and further that if the current account balance is approaching 3% as I believe it is, then that must mean that aggregate savings for the private sector was close to 0% in 2014.

A bad year for the private sector by any standard, and the lowest aggregate savings figure for the private sector since the first quarter of 2008. That is not a good sign for the continued recovery of the economy, and judging from his column quoted earlier, Krugman doesn’t appear to have a clue about the sheer fiscal irresponsibility of driving the government deficit down to a low enough level that there is no surplus available for the private sector to save. Now that’s austerity. But Krugman’s claiming that austerity is over.

In addition, the fact that his continued belief that the level of debt subject to the limit and the debt-to-GDP ratios can be a problem for our economy, means that if we listen to his advice we will one day have problems with our economy. This is true because sooner or later he is bound to conclude that the existing level of debt, or the debt-to-GDP ratio, is too high to allow the US to deficit spend very much to get to full employment, or create an economy that is fully recovered from a depression or serious recession.

Government fiscal policy should be targeted on public purpose outcomes such as full employment, price stability, Medicare for All, a strong safety net, renewed infrastructure, re-invented energy foundations, etc while the deficit, the debt, the debt-to-GDP ratio, and the current account balance are allowed to adjust to spending, as they will (to float). That is Real Fiscal Responsibility in fiscal policy. And there is no room in the process of implementing it to target arbitrary values of debts and deficits; because they are not important in themselves for a nation like the United States with a sovereign fiat currency. More on the idea of Real Fiscal Responsibility and an effort to spread the idea is here. Please help us do that.

13 responses to “Paul Krugman Still Believes That “the debt” Can Be a Problem for the U.S.

  1. Pingback: Paul Krugman Still Believes That “The Debt” Can Be a Problem for the U.S. | naked capitalism

  2. “Also, what he is not saying is that the deficit is far too low for a full employment US economy that can drive up wages and drive down inequality…”

    You haven’t been paying attention.

    • Thanks. I admit I don’t pay attention to all of K’s posts. On the other hand, he doesn’t pay attention to mine. In this post, he didn’t say the deficit was too small,and some of his verbiage suggested that he was celebrating the low deficit rather than condemning it.

  3. E.g., “And as I said, given the needs of the economy, the deficit is currently too small.”

    • Again, thanks. Have yo ever noticed him saying what might not be too small a deficit given current conditions? That is, what might be a full employment deficit? If not why do you suppose he doesn’t say anything about that?

  4. once the trade deficit exceeds the budget deficit, then watch out below. We will see a recession, which I think will happen toward the end of 2015.

    • I think we may find that the trade deficit is slightly greater than the budget deficit now. However, that alone isn’t enough for a recession if the private sector blows a credit bubble.

  5. Joe … How do you see MMT’s response to the UK recovery (austerity worked?) and the Euro/France crisis (aside from letting the Euro implode) … for example, France’s govt share of GDP stands at 57% today… how can more fiscal deficit help them, in the context of being a currency user? Thanks

    • MMT has a number of different responses depending on the policies the troika will follow. My own preference is the abrogation of the Treaty by those nations currently being forced to practice austerity. The best thing for them, in my view, is to suspend their membership in it pending renegotiation of the Treaty to obligate the ECB to allow however much deficit spending is necessary by member states to create and maintain full employment. Failing that the member states should declare their suspended membership over and substitute full-blown withdrawal for that.

      Regarding your question about France, deficit spending by the Government if allowed would expand the private sector percent of GDP through the fiscal multiplier. The percent is so high now, because the French haven’t been able to do much deficit spending.

  6. Krugman, a summation of the left on Economics: Saner and better than the whack job “balanced budget/surplus at all time. Any gov deficit is evil” crowd, but still incorrect.

    I use left loosely, because I firmly believe the views espoused here and MMT/Post Keynes in general need not be left, but just reality! (And pitched in a way appealing to many)

    The real fiscal policy act…has a nice, good for media ring to it, this idea needs to be pitched to anyone who iwll listen!

  7. “Krugman evidently still is communicating to progressives and Democrats that levels of debt and the debt-to-GDP ratio matter for a nation like the United States with a non-convertible fiat currency”

    Joe, I love your stuff and find MMTers to be some of the most exciting economic commentators these days, but there is no denying that debt owed to foreigners (as is a considerable part of the US federal debt) allows foreigners to purchase and take ownership of US resources, including financial and real resources. In other words, while it’s true the burden the debt is not financial, there is a real resource burden associated with owing US fiat dollars to foreigners.

    • Joe Firestone

      Sorry, but I don’t see how foreigners owning debt instruments hurts Americans more than those same foreigners sending us material good that we wanted to buy form them. Can you explain that?

      Now they’re owning reserves is another matter, because they can buy our goods and services with them. But that’s only fair, since we bought theirs. So, I guess I don’t see the problem. Does it bother you that the Chinese just bought the Waldorf Astoria? If so, why?

  8. I don’t believe that it hurts Americans when foreigners own US debt instruments so there is no need to answer your first question.

    As for your second question, what matters is what the foreigners do with the interest paid out to them in dollars. They have three choices. They can buy American goods and services; they can invest in US dollar assets; or they can exchange dollars for assets in another currency (in which case the new owner of the dollars will have choices one or two). When foreigners choose option two, American lose control of domestic business. You may not have a problem with Chinese owning the Waldorf Astoria, but many Americans do. (So you know, I don’t worry about this too much myself but I understand why some people may do so.

    Anyway, Frank Newman’s book “Six Myths that hold back America” (which is endorsed by several MMT economists) recognizes this as a legitimate concern.