For Krugman followers: How much debt would be acceptable?

Great Debates
81

From David H. Hackworth, certainly not a liberal or leftist of any stripe.

In his book Hazardous Duty, page 326…

It’s possible the Center for Defense Information is wrong, but this puts some perspective on why Keynesians would prefer stimulus in other forms besides military spending. Even should those jobs in health care not be as well-paying as some in military production, employment for more people allows for a larger increase in aggregate demand for needed goods over luxuries.

I haven’t read the Center for Defense Information’s work, but it may be interesting and relevant to the way this thread has progressed if anyone wants to check it out.

82

He can certainly claim to be more right than someone who claims that there will be a dry, overcast day without rain. And as a matter of logic even if X, Y and Z are co-related predicting all three correctly does count as getting three predictions right. So long as you don’t have perfect co-relation, getting just one right is not the same as getting all of them right. And in this case the co-relation is probably not that high. There are plenty of examples of countries with low growth and high interest rates. Or countries with high growth and low inflation. The co-relation is just not that strong that we can confidently predict one variable based on another. It all depends on the overall situation of the economy.

It’s not a matter of not liking inflation. Krugman too doesn’t like persistent high inflation. It’s a matter of continuously arguing over the last few years that inflation is a serious threat and right round the corner which displays a serious lack of understanding about how inflation arises in a modern economy.

83

Paul is actually right there has been no new net fiscal stimulus
because even when the stimulus was announced state and local
governments pulled back there spending., so the government only filled
the whole a bit for 09-2010, in fact if states had the same number of employees
as they did last year unemployment would be a 1% lower.

GDP=GDP (Y) is a sum of Consumption ©, Investment (I), Government Spending (G) and Net Exports (X - M)

Consumption,Investment have all declined since 2009

and only Government spending has remained some what stable, but its
not big enough to fill the gap left from lack of consumption and investment.
Exports have increased as a result of a cheap dollar,but cant pull the entire load
because of bad trade deals with china.

You have an economy operating about 2.7 trillion under capacity and you only fill the whole
by 800 billion,thus you have unemployment at 9%, and under reagan the unemploymemnt got to about 10.9 percent even though this recession is twenty times worse under obama unemployment topped out at 10.1. Comparing gdp contraction to unemployment technically
unemployment should have been 11.8-12%, but Obamas policy kept it at about 10%.

84

Well, my original question was directed towards DtC, who thought that Bush’s wars instigated the crash. I have offline friends with similar views, so I was curious about the argument.

Saying that other stimulus areas might be a better bet is all fair enough, but that’s not the line of argument I was curious about. Saying it caused a crash implies to me that the speaker thinks the spending had zero or negative Keynesian effect–clearly untrue.

It’s not my intuition, it’s Krugman’s. But I’ll allow that reasonable people can differ on points like this.

As tim-n-va says, there is value in sustained stimulus. And a war certainly counts as that–a factory owner is more likely to invest more capital and hire/train more workers if she is confident that the investment will amortize itself over a decade or more.

85

That’s all reasonable, but I’ll point out that it refers specifically to procurement, and seemingly ignores direct military employment, which is probably more efficient and thus would nudge the numbers higher.

Further, one has to consider hysteresis effects. If A and B are equally efficient in providing jobs, it’s a bad idea to cut from A to give to B, since the negative effects from the cut happen immediately while the positive effects from the stimulus lag. Clearly, there is some cutoff where B has to be not simply better than A but enough better that it pays for the transition costs. If the question is about cutting military spending (not the case for the wars, but comes up in other contexts), one has to consider any extra negatives that come from that.

In any case, my original question was again not why some Keynesians prefer other types of spending to military spending, but rather why a small number seem to view it as an outright negative.

86

Well, I can only speak for myself, not for whoever set off the “outright negative,” but a couple reasons not to use the military as a jobs program beyond the economic efficiency of it:

  1. Veterans deserve special treatment. They literally lay their lives on the line for their country, and so benefits in terms of health and retirement should be disproportionately high for veterans, such as the pension after 20 years of service. This justifiably makes military personnel more expensive than their civilian counterparts in peacetime and more so in wartime.

  2. The number of soldiers, sailors, airmen, and marines should be driven by military necessity, not by unemployment figures.
    2a. Even though the military shrunk during the shift from a draft military to the volunteer force in the '70s, it’s effectiveness and efficiency (military efficiency, not economic efficiency) increased. We don’t want to reverse that trend.
    2b. The military has a rough enough job ensuring the preparedness, training, and high quality of the personnel they have now. Adding more people to that job the military doesn’t want places a burden unrelated to their current mission, and we want the military to be good at being responsible for military action, not to dilute their responsibility with trying to manage part of the economy’s unemployment problem.

  3. Perhaps most obviously, every additional soldier, sailor, airman, and marine adds to the military procurement needed to keep them supplied and housed; everything from uniforms to entrenching tools to trucks and barracks. Increasing personnel necessarily increases procurement expense.
    If you want a jobs program, have a jobs program, don’t saddle the military with responsibility for the civilian economy.

87

You’re right - my bad for reading the wrong column. Furthermore, a core number of 1.5% is actually a pretty good number - high enough that it diminishes the risk of deflation.

But the fact is that growth is next to zero right now, which would explain the lack of inflation even if the ‘Libertarian’ argument is correct.

As to why Libertarians are inflation hawks, I’m pretty sure it’s because of their distaste for the Fed as a central controller of the money supply and fiat money in general. They see the Fed as being an organization poorly equipped to actually understand the nuances of the economy, and which attempts to thwart market forces through monetary policy.

And they have a point. There’s plenty of evidence that Alan Greenspan held interest rates too low in the 2000’s, which helped trigger the real-estate bubble. Loose monetary policy contributed to the inflation of the 1970’s, and excessively tight monetary policy may have made the depression of the 1930’s worse.

But in the modern era, the errors of the fed have been a tendency to loose monetary policy in an attempt to keep the economy growing, which is why there is a fear of inflation among people who are opponents of that kind of activist central planning.

88

Short answer: Milton is simply wrong. Australia had the best designed stimulus in the world, which included $900 cash payments in lieu of tax cuts favoured by the Opposition. The Opposition argued these payment would not be spent because of exactly this argument. As it turns out, they were simply wrong. The payment were spent, buoying consumer confidence and increasing retail sector activity - keeping the nation out of recession.

The reason for this is obvious if you’re interested in actual human behaviour and not just a mathematically elegant utility function. The reason one-off payments are spent is because they’re perceived as a psychological windfall rather than an adjustment to ordinary income (PAYE or PAYB). This makes perfect sense because we already know people are irrational about small numbers, and so small tax cuts simply have no potential to act as a circuit-breaker to saving behaviour and so cannot be stimulatory. Long run expectation do matter, but much less than a cheque here and now with multiple zeros on it.

89

Sam Stone,
There is a powerful casethat NGDP targetting is a superior and more “neutral” policy framework than inflation targetting and that would imply much more aggressive monetary policy today as Scott Sumner, who is a libertarian, has been arguing for so long.

And the preferred libertarian solutions like the international gold standard and 100% reserve banking are much more draconian systems of control over the economy than anything we have today.

90

I actually agree with you. I was explaining the general libertarian distaste for central banking and fiat money - I didn’t say I agree with them on that issue.

91

As previous, I’m not an economist, but in the US, these things are widely assumed to be highly correlated, from what I read and hear of mainstream economists cited in the media.

OK, what does that change in the context of our discussion?

92

We weren’t hearing about government borrowing driving up interest rates, crowding out etc. from roughly around the time Obama got elected? You don’t have one or two posts back around then mentioning interest rates and inflation rising, crowding out etc?

93

Here’s what I get from Krugman, the chipmunk from Mensa. I offer this in part as a public service to other mathtards.

First: for better or worse, we have a consumer economy. If our people don’t buy the stuff we make, we got no economy.

Numero two-o, if the people don’t have any money, they cannot buy the loud, shiny crap.

Therefore, it is necessary for any recovery that the people have money. Pretty simple so far.

Here’s where it gets a bit tricky: if we borrow money to put into the hands of the undeserving, then we owe a bunch more money, which is hard to pay off when our economy bites the bag.

BUT (I love big buts, and I can’t deny it…), if borrowing the money kicks up demand, and the people start buying shit again, the economy recovers and it gets a lot easier to pay off the debt.

So, a medium sized debt is harder to pay for with a suck-ass economy than a big debt with a healthy economy. Plus, as a minor bonus, our people can buy stuff. Our people love to buy stuff. We’re Americans, its what we do.

Which leads us straight into the wilds of speculative math. Which leads us even quicker into political bias. Rightish leaning, debt is so very, very terrible, any boost in demand will be smothered by the crushing burden of debt, everything falls apart and we are trading beads and sex for food. Leftish leaning, the economy booms, we pay off what we owe and still have happy, healthy people frolicking in the daffodils with the axolotls. Which would be a good thing, healthy, happy people.

Seems to me, any way we cut it, we are in the realm of speculative math, colored by political bias. Being on the conservative wing of the extreme left, I have no such bias, and Krugman is right and Sam is, as usual, wrong.

But if it comes down to a gamble, I would much prefer to gamble on our people.

By the way, are there any economists of any repute who have no political views, whatsoever? We could trust them, I suppose, in that if they are wrong, at least they are wrong in a non-partisan, unbiased way. Which would be a great comfort.

94

Holy smokes! I think this is an example of integrity, from a conservative!!!

Here’s David Frum acknowledging that Paul Krugman has been correct and that conservative economic predictions have been wrong!

95

Incidentally those revised figures not only reveal how utterly terrible the economy was in 2008, they also highlight that the recovery in 2009 and 2010 was in fact one of the most dramatic in US history. The problem was that it petered out, not coincidentally, at the same time as the stimulus.

Take a look at the [[id]=GDPC1&s[1][transformation]=pc1"]graph](Federal Reserve Economic Data | FRED | St. Louis Fed[1)of recessions since the world war. The 2009 recovery was in fact a dramatic V-shaped recovery, much more so than the previous two recessions. And keep in mind this is based on the old data. The recovery would look even more dramatic with the new data which shows a 8.9% decline in Q4 2008 which is truly Great Depression territory.

There should have been a much bigger stimulus but what stimulus there was along with quantitative easing did produce an extraordinary recovery in 09/10. The problem was neither policy was large enough or sustained enough to finish the job .

96

The crowding out argument is very different. That’s an issue with the implementation of fiscal stimulus. We’re talking about inflation from monetary policy. The other argument is that if inflating the aggregate money supply coincides with the kind of growth the Obama administration was predicting (over 5% per year GDP growth), then you WOULD get inflation. On the other hand, if you are inflating the aggregate supply as velocity falls, the money supply may remain unchanged or even shrink, and you won’t see inflation. In fact, that was the argument for QE1 and QE2 - falling velocity of money needed to be compensated for by an injection of money to keep the overall money supply from shrinking and the country falling into deflation.

I supported QE1 for exactly that reason. In my opinion, a valid activity of the Fed is to stabilize the money supply and prevent it from expanding or contracting too much. My argument with the Fed is that it often strays from that simple goal and tries to use monetary tools to maximize growth, which is what Greenspan was attempting to do. He misread the nature of the growth, and helped cause an asset bubble.

97

Its a trap!

98

Fron right around the time Obama got elected, the usual suspects – the wall Street Jounal editorial page, all the economists who’d just been proved spectacularly wrong by reality, right wing think tanks and so on – were warning about the effect of crowding out on interest rates due to government borrowing and inevitable inflation on the back of this. And so were you! So it’s incorrect for you to claim that “those people” were only warning about rising rates and inflation if and when the economy recovered. There’s a long documented record of them, and you, banging on and on about how government borrowing was going to crowd out private investment, cause interest rate rises etc.

Here is today’s yield cuve Sam :

Can you explain exactly the effect that the crowding out theory is having on current rates, or even rates over the past couple of years, or are you willing to admit that the people advocating this theory over the past couple of years were completely wrong?

99

The real rate of interest on the 30 year treasury is currently 1% and right now there’s currently vast amounts of money trying to buy long-dated treasuries. That means that America could borrow two trillion dollars over thirty years and pay a real amount of twenty billion dollars a year in interest, or roughly what we spend every couple of months in Iraq and Afghanistan. This would increase the national debt from around fourteen trillion to around sixteen trillion.

We could invest the money in our crumbling infrastructure. It’s currently estimated that it needs a one point six trillion investment to put it all back in good condition, and of course it’s the best investment we could make in our economic future. New highways, bridges, power grids, etc. etc. all create wealth, so the investment more than pays for itself in the long run :

*The Texas Transportation Institute estimates that traffic jams caused by insufficient infrastructure waste 4 billion hours of commuters’ time and nearly 3 billion gallons of gasoline a year.
*The Association of State Dam Safety Officials has found that the number of dams in the United States that could fail has grown 134% since 1999 to 3,346, and more than 1,300 of those are considered “high-hazard” - meaning that their collapse would threaten lives.
*More than a third of all dam failures or near failures since 1874 have happened in just the last decade.
*According to the U.S. Environmental Protection Agency, aging sewer systems spill an estimated 1.26 trillion gallons of untreated sewage every single year, resulting in an estimated 50.6 billion dollars in cleanup costs.
The following are some additional facts from the U.S. Chamber of Commerce…
*A decaying transportation system costs our economy more than $78 billion annually in lost time and fuel.
*The United States must invest $225 billion per year over the next 50 years to maintain and adequately enhance our surface transportation systems. Currently, we’re spending less than 40% of this amount.
*U.S. transit systems earned a D+ rating from the American Society of Civil Engineers. Transit funding is declining even as transit use increases faster than any other mode of transportation - up 21% between 1993 and 2002.
*Costs attributed to airline delays - due in large part to congestion and an antiquated air traffic control system - are expected to triple to $30 billion from 2000 to 2015.
*By 2020, every major U.S. container port is projected to be handling at least double the volume it was designed to handle.
*Throughout the United States, railroads are projected to need nearly $200 billion in investment over the next 20 years to accommodate freight increases.

and of course by upgrading everything now we’d save money out of national budgets over the next thirty years as we’d already have upgraded stuff.

Thirty years ago US GDP was three trillion dollars. Now it’s fourteen trillion. Thirty years from now, insh allah, it’ll be over sixty trillion. So our sixteen trillion debt goes from being about 115% of GDP to being about 25%. So really, what are we waiting for*? Bear in mind the cost of doing nothing so far and for the forseeable future is trillions of dollars of lost revenues, output, long term unemployment etc. etc.
*with the caveat I mentioned in my first post about there having to be some redistribution of wealth to make up for the massive redistribution upwards over the past thirty odd years.

100

We have stuff that needs fixing, and stuff that needs building. Which we will have to do, today or tomorrow. It won’t get any cheaper. The economy recovers (from my lips to the Ears). the material we need to buy will cost more.

So: do it. Borrow the money (which also won’t get any cheaper), buy the stuff, hire the people, and get to it. Baskets full of win. Oh, and it will help our people. Did I mention that? Pretty important.

Hope is not tangible, nor is it fungible. But its real, and it matters.