Here is a link to a video of the Roundtable discussion from This Week.
My question is specifically for the Krugman followers or Keynesians in general. You believe the stimulus wasn’t large enough and you are able to do a second stimulus plan. How big would it be? How much debt would be acceptable to take on during this recovery? We have $14.5 trillion in debt now. Krugman says the stimulus wasn’t large enough. I understand the rationale of not cutting government spending during a recession. How much more debt can we take on to attempt recovery ($2 trillion more, $5, $10)?
I’m not looking for retrospective thinking or causes of the downturn or anything like that. I understand that as a Keynesian you believe we should have paid down the debt when the economy was good (end of Clinton, beginning of Bush), shouldn’t have started wars, shouldn’t have done tax cuts, shouldn’t have done Medicare Part D, whatever. Starting from right now, with the exact circumstances that we currently have, how much additional debt would you be willing to take on with a new stimulus plan? Any point when you would abandon it if it isn’t reducing unemployment?
The idea is to increase employment by ratcheting up demand. The working people would pay taxes and replenish our treasury.
That would also require taxing the wealthy and closing loopholes.
If you are cutting back in a time of financial distress, there is no mechanism in place to recover. Less jobs, result in less taxes. Cutting back slashes treasury income. It is a whirlpool sucking us down.
The aim is not to increase debt, but to retire debt.
I agree. Higher deficits or more spending is a false dichotomy. We should raise taxes and increase spending. Wealthy people have a lower marginal propensity to spend, so tax cuts for them is not useful. We have a demand problem, not a shortage of capital.
We had a higher debt/gdp ratio during WWII, without collapsing. The UK (IIRC) has had a debt/gdp ratio in excess of 200% at some points in history, without collapsing.
To answer the OP, you keep doing stimulus until unemployment drops to around 5%. Once it does that, you slowly start cutting back.
EDIT: I’ll also add, that depending on which model you want to use, it is actually cheaper to borrow now then to tax and spend. And we have a ton of infrastructure stuff that has to be done anyway, so now is a good time to do it. I wouldn’t recommend stimulus spending for pie-in-the-sky stuff, but if it’s stuff you’re eventually going to spend money on anyway, why not do it now?
EDIT2: I wouldn’t abandon it until the cost of borrowing began to rise significantly (like past Reagan-era levels).
The OP is thinking about it wrongly. First of all, let’s talk about the cost of borrowing, which is really the limiting factor. Right now, the interest on the national debt as a fraction of GDP is about as low as it’s been in the past third of a century. So the debt we have is really quite affordable.
Second, let’s think about spending we’re going to have to do at some point anyway - repairing our crumbling infrastructure, and extending and improving it in places where it makes obvious sense to do so. When’s the cheapest time to do so? When both capital and labor are sitting idle in great quantities, and when interest rates are low.
There’s going to be no better time than now to do that spending. We will hopefully never again have so much capital and labor idled, and we won’t have interest rates this low forever. So let’s repair our crumbling bridges and highways, and our crumbling water and sewer systems. Let’s figure out where the gaps are in our freight rail system, and lay track there. (A freight rail line would get all those trucks off of I-81, for instance.) Let’s create a better electricity grid. Etcetera.
And what will happen if we do all this, which would be in our best interest to do now anyway? We’d put people back to work. They’d pay taxes, so the spending would be somewhat ameliorated by tax revenue. But they’d also buy stuff, which would increase demand, which would put people back to work in other industries, who would also buy stuff and pay taxes, and so forth.
You’d want to ease off on this as the resulting recovery became self-sustaining. You’d want to start cutting back on these projects when unemployment hit 6%, and continue only the most essential projects when it hit 5%. Interest rates would have started rising by then, of course, but GDP would have done the same.
And well before unemployment hit 6%, you’d have wanted to increase taxation on the well-off - and I’d include people like me in the $100-250K bracket as well as the >250K folks: we aren’t as rich, but we’re not hurting, and there are more of us. Then we’d have a good revenue stream in a healthy economy, plus we’d be in a much better position with respect to infrastructure. Win-win-win!
WWII is not a useful comparison; everyone understood that as soon as the war ended, government spending would be slashed and the deficit eliminated; and by 1950, the budget was indeed cut in half and the deficit gone (Despite fears that doing so would bring back the depression). Nobody is suggesting similar cuts anytime in the forseeable future.
The UK’s story is similar: their debt spiked during wars vs. Napoleon and Hitler, and they ran surpluses during peacetime to pay it back.
Those were temporary deficits to cover crises. Our current deficit is structural: even assuming no new wars, bailouts, etc., and even if growth is solid and healthy, there are still deficits projected out as far as the eye can see.
Aren’t you now ignroing the wars that are ending and isn’t a huge chunk of our problem the lack of revenue? Run the government like Greece and you get Greece.
To answer the OP’s question: I don’t know. I do know that in my lifetime I have seen massive debt run up to defeat the USSR (maybe), to defeat Al Qaeda and its imaginary allies (Iraq), to make sure life’s fair to the super-wealthy, and to satiate old people. So military, rich people, and old people. All these people are not me. I am willing to run up as much debt until it is my fucking turn as a middle aging poorly employed Gen Xer with weak prospects atm. Whatever it takes so that I don’t have to borrow more money, while being taxed greater than rich people, in order to get myself back into productive employment.
Krugman is simply wrong. He lives in a world where stimulus spending can be applied instantly, efficiently, and where there are no negative effects from running up more debt.
In the real world, this government had a hell of a time spending the amount of money it did get for a stimulus - some of it still isn’t spent.
In addition, Krugman repeatedly refuses to accept the political reality that a stimulus much bigger than the one that passed was simply impossible to get through Congress. The guy lives in an ivory tower and issues edicts that the rest of the world can’t possibly live up to.
If the stimulus just needed to be bigger, then if it should have been twice as big we should have seen half the effect from this one. But in fact, this 810 billion dollar stimulus simply vanished into the economy. Studies of its effect have found that it did very little good at all. States that received stimulus money did not see their average purchasing go up at all compared to states that received less. A lot of the money was used to raise salaries for government workers who are already making as much as two or three times the median wage. Obama himself has joked that ‘shovel ready’ jobs were illusory.
Papers analyzing the more specific stimulus programs that were based on the same Keynesian logic, but for which accurate information is available, have failed to find multipliers or any positive effect. ‘Cash For Clunkers’ was an utter bust that simply pulled car sales from the period before and after the program into the program period, with very few extra car sales actually occurring (the government could have created more car sales with the same money by simply buying cars and dropping them in the ocean). In the meantime, the program demanded the destruction of hundreds of thousands of cars which represent actual wealth - the result was that the price of used cars has gone up because the used pool was depleted. This hurts poor people who can’t afford to buy new ones. $10 billion dollars down the train, plus the lost value of all those used cars.
The mortgage finance subsidy was expected to stimulate the purchase of new homes and help revive the construction industry. In fact, home sales increased during the program period, but after it was over home sales declined to a point lower than what they were before the program started, erasing all gains. $22 billion dollars down the drain.
Given the inefficient delivery of this stimulus, how do you expect the government to have fared attempting to deliver one that was two, three, ten times as large? It’s a joke.
And Krugman has never said how big the stimulus should have been. That way, no matter what stimulus was passed, if it failed Krugman could always fall back on the argument that it should have been bigger.
In the meantime, Krugman utterly refuses to acknowledge the recent academic literature showing that deficits are more destructive to an economy than previously thought. He has also ignored papers showing that countries with floating exchange rates and open economies tend to gain no output from fiscal stimulus. He has also ignored peer-reviewed analysis of previous stimulus programs that have found them to be ineffectual and have ‘multipliers’ below 1.
Each time he was presented with those papers, he’d hand wave them away, stating that they have ‘obvious’ problems that he’d love to outline in detail if only he had the time. Apparently, he’s an oracle that can spot glaring problems that all the peer reviews completely missed.
The fact is, the U.S. is already only 3 months away from a possible debt downgrade. The economy is probably in a double-dip recession. The additional near-trillion dollars from the stimulus is now a perpetual drag on the economy, with the money having been spent but the $30-$50 billion dollar per year interest payment for it here in perpetuity. If the U.S. has its credit downgraded, that could add another $150 billion dollars or more to the deficit.
The stimulus failed. A larger stimulus would have failed more spectacularly.
No. For one, even if you erase the Iraq, Afghanistan and Lybia deployments and move tax rates (all of them, even the ones Obama wants to keep down) back to where they were under Clinton, we are still running a large and growing deficit.
For two, I take it as a given at this point that over any significant period of time there will be more “unexpected crises.” Iraq is ending, but in 2017 it’ll be Iran, or Egypt in 2019, or Congo 2021, or some other place where we decide they need Marines. Or just as we “had to” bail out a series of mortgage, financial and automotive companies, in 2015 we’ll find out that that it’s vital we bail out IBM or Disney. Or California and Illinois. The point is, once you set the precedent that every problem can and will be fixed courtesy of the US taxpayer, those problems keep appearing. And of course a recession every 10 years or so is pretty much a given, and thus ought to be incorporated into our planning … but never is.
For three, saying “our problem is the lack of revenue” seems to assume that somehow we can/should just keep raising taxes until we get enough to pay for all the stuff we want to spend on. Since the last time we were balanced (2000), our revenue has gone up ~20% … but our spending has doubled.
So, yeah, I guess you can say the problem is revenue, if you’re of the opinion that the federal government under Clinton was just way too small.
I believe you’ve misunderstood Krugman here. He’s saying the opposite of what you seem to have assumed. Amanpour’s question was what do you see happening after these spending cuts go through. Krugman’s response was that it would be similar to the Japanese, who adopted similar policies.
IOW, he meant “role model” in that the same scenario would likely play out, not that he was advocating following them.
I’d take on a couple of trillion dollars worth of debt quite easily. At current real rates we could borrow two trillion for ten years for a total cost of six billion dollars a year in interest. Financed over seven or less years we’d actually pay a negative level of interest, we’d make money on the deal.
Interest rates would increase as we come out of recession but when we have to roll over the debt in ten years the economy would have grown so that the extra debt and interest payments would be easily affordable. Actual serious stimulus injections carried out elsewhere in the world worked gangbusters :
Unlike in the west, there is little debate in Asia about how well the stimulus worked. It has been spectacular. Asian output is well above pre-crisis levels. HSBC is predicting growth for Asia ex-Japan of 8.6 per cent this year. Rather than contemplating more stimulus, authorities are trying to cool things down. Banks have been raising interest rates for months. China and others have introduced measures to take the heat out of the housing market. Fears about unemployment have given way to concerns about labour shortages and spiralling wage demands. Thus the question in most of Asia is not whether to remove stimulus, but how fast. Asia is in orthodox territory, balancing well-trodden trade-offs between growth and inflation.
What you’ve really got to do is balance the extra deficit and debt you’d create by spending a trillion or three rebuilding America’s infrastructure (which needs the investment), all spending which boosts future economic growth, and the extra deficits and debt caused by the economy bouncing along with rubbish growth/dipping into recession/high unemployment/high government safety net spending etc. etc. if we dont.
However we’d also need to see the income distribution in the economy altered if the stimulus is going to work. 90% of the benefit of what little recovery we’ve had since the 2008 meltdown has gone to corporations. The bottom 99% of the country are going to have to see a bigger share of national income so that they can actually spend it and it pinballs around the economy, creating jobs for their fellow 99%ers. If income keeps accruing to the top 1% and corporations then America is fucked no matter what economic policies you try.
But again, what Krugman fails to acknowledge is the limitation of politics. He believes in a world where bright social engineers such as himself can twist and pull the knobs and levers of the economy and make it do his bidding. He’s like an engineer who designs vehicles while believing there truly is a massless, frictionless bearing.
In the real world, stimulus spending winds up in the hands of the politically powerful rather than invested in idle resources. In the real world, by the time you get approval for all your grand infrastructure projects, the recession is over or if it’s not, the fiscal crisis is so severe due to lost revenue and increased expenses that the public, the credit ratings agencies, and debt buyers lose the stomach for a huge fiscal gamble.
So even assuming Krugman’s core assumptions about what works are correct, you’re still left with an entirely predictable outcome of a poorly-administered stimulus followed by blowback and the imposition of austerity measures that undo anything the stimulus was supposed to do.
Not only was it a predictable failure of politics and government, but it was also a failure of Krugman’s core belief, because even in areas where it WAS done ‘correctly’, there’s no evidence for the kind of multipliers Keynes predicted.
The experience of the stimulus and the debt problem HAS strengthened the validity of another economic principle: Milton Friedman’s permanent income hypothesis. The permanent income hypothesis says that people spend based not on their immediate income, but on their perception of what their lifetime income will be. If you think you’ll be filthy rich 20 years from now, your propensity to spend now will go up. On the other hand, if you think you’ll lose your job in a year or you have home equity wiped out that changes your perception of your retirement income, you will spend less.
So when stimulus money gets handed out, people understand it’s temporary, and they don’t spend it. States that receive the money use it to offset their own spending rather than engage in new spending. In the meantime, the stimulus causes the debt to increase, and people are increasingly seeing the debt as a form of implied future taxation - either their retirement funds will be cut, or they will see higher taxes to pay down the deficit and ultimately to pay off the debt. This causes everyone to cut back on spending.
So what a stimulus winds up doing is putting money in the pockets of people who don’t spend it, while everyone else actually cuts back on spending to pay for it. Long gone are the days when the government could borrow ‘free’ money.
A paper that came out last year found that when deficits get to around 90% of GDP, they start to assert a drag on the economy equal to equivalent tax hikes. So if you borrow a trillion dollars, the economy behaves as if you had raised taxes by a trillion dollars then doled the money back out again. You get no net increase in spending - you just pull money from one part of the economy and dump it on another.
Another paper by Christina and Paul Romer from last year found the same thing in reverse - tax increases cause a drag on the economy, but if the taxes are used to reduce the deficit, the drag vanishes. This implies that the economy ‘sees’ a deficit as if it was additional taxation. That negates the entire strategy of Keynesianism, which presupposes that borrowing money and spending it will act as a net injection of spending. But if people cut back their spending by an identical amount, no net increase happens. You just distort the economy and drive up government debt.
This particular recession was also the worst possible kind to attempt to fix with Keynesianisn, because it’s not a normal business cycle recession where demand is down temporarily due to excess inventories and low labor productivity driving layoffs. This recession was a ‘balance sheet’ recession driven by the bursting of an asset bubble and the loss of real wealth which caused people to adjust their expectations of future income and rationally cut back on spending and increase savings. So having the government borrow money on their behalf was simply offsetting the rational changes the economy is trying to make, delaying a recovery.
Getting back to the original question of how much stimulus would have been required to ‘correct’ the economy: The amount of equity lost in the real-estate bubble bust was over 10 trillion dollars - and it’s still declining. The resulting contraction cost trillions more in lost equity in the markets and the wider economy. So even if Krugman was right, the amount you’d need to seriously right the ship would probably be on that order.
But then you run into a few little problems - such as the inability of the world to lend America that much money, or the fact that such a level of borrowing would never have been tolerated without seriously driving up interest rates, crushing any recovery that might have happened, or that the economy could never have absorbed that much stimulus spending in any reasonable timeframe without serious crowding out, or that government would have been hopelessly unable to administer a stimulus of that size.
