In Praise of Deficits ?

ts-krugman-190.jpg

In today’s New York Times, Paul Krugman (in Economics 101 style) explains why deficit spending in the short term is actually good for the economy and that the only arguments against it are purely for political gain. Perhaps his cheap shot at the Conservatives at the end of the piece, though I may agree with it, is counterproductive.

August 28, 2009
Till Debt Does Its Part
By PAUL KRUGMAN

So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?

Let’s start with the effects of this year’s deficit.

There are two main reasons for the surge in red ink. First, the recession has led both to a sharp drop in tax receipts and to increased spending on unemployment insurance and other safety-net programs. Second, there have been large outlays on financial rescues. These are counted as part of the deficit, although the government is acquiring assets in the process and will eventually get at least part of its money back.

What this tells us is that right now it’s good to run a deficit. Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.

Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.

Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.

The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P. That’s not good, but it’s within a range that has historically proved manageable for advanced countries, even those with relatively weak governments. In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis.

So is there anything to worry about? Yes, but the dangers are political, not economic.

As I’ve said, those 10-year projections aren’t as bad as you may have heard. Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.

That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.

But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to “pull the plug on grandma.”

So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.

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12 Comments

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12 responses to “In Praise of Deficits ?

  1. He doesn’t know shit, like every so-called “economist” …

    Economy, because it is comprised only of theoretical models of subjective perception is a null set game; i.e. there’s nothing to do, all that can be done is to watch.

    It’s exactly the same as those who tout themselves all knowing of the Stock Market; purest perception and guessing.

    Debt is debt; deficit is deficit ~ unbacked loans from the Chinese are the path of certain failure, Maobama is a moron, lead around from his short hairs by felons, because he is the most … oh screw it ~~ jellyfish.

  2. eric

    As I have continuously said, Obama is just the continuation of a long line of U.S. policy. No Change.

    Mr. Bush was the debtor king. The tax cuts cost a few trillion, paid for by the Chinese as did the wars. American refuse to pay more taxes but love to get stuff, especially military revenge.

    Of course, economics is not a hard science and I am not agreeing with Krugman per se. I am just duplicating his argument.

    The question is, if you discount deficit spending, then how does a country jump start its economy?

  3. Stop socialised programs, stop having the f*n government give handouts to indigents, illegals and foreigners …

    Stop allowing lobbyists, activists and special interest groups to determine legislation …

    Treat the actions of prosticians as they should be treated; treason.

    Treason against the country, treason against the citizenry … and hang them from the neck until dead, in full public view.

    Then put the lawyers in front of a wall with blindfolds on and cigarettes dangling … and give me an M249 with a couple of hundred thousand rounds … I’ll take care of this issue, personally.

    Credit cannot extend beyond 8-12%, (including interest) of an individual’s income.

    In the sixties, the standard margin of profit was set at a normative 1.8 to 2.4%; remember “mediated avarice”. 20 – 50% profit margin is unethical and voids the Social Contract; make it punitive for companies who gouge, deceive, misrepresent, or if they engage in financial services as a company ~ make the penalties far more severe.

    Upon this a question arises: whether it is better to be loved than feared or feared than loved? It may be answered that one should wish to be both, but, because it is difficult to unite them in one person, it is much safer to be feared than loved, when, of the two, either must be dispensed with. Because this is to be asserted in general of men, that they are ungrateful, fickle, false, cowardly, covetous, and as long as you successed they are yours entirely; they will offer you their blood, property, life, and children, as is said above, when the need is far distant; but when it approaches they turn against you.

    The words of the Father of Pragmatics, Niccolo Machiavelli

    Then realise, out of the rigors of intellectual exercise, that humans are morons, and their perceptions of “economy” run in cycles of +/- 7 years, so it’s all BS anyways.

  4. ReWrite

    Take a deep breath… count to ten. And before you go postal I would look into who is really collecting handouts. I think you have been listening to too much fascist radio or corporate controlled TV or print news. It is amazing the amount of disinformation that comes from the media these days.

    If you are worried about handouts you should be more concerned about the banks, the private defense industry, the US Auto industry and if you want go after the small guys look to corporations such as Boeing. What you refer to as indigents, illegals and foreigners (not exactly sure who you are xenophobically referring to here) combined are a drop in the bucket compared to the Corporate Socialism (which I refer to as fascism) that exists in the US and to a lesser extent in Europe. Who is getting subsidized, actually who is getting rich off of taxpayer dollars? Certainly not the ‘indigent, illegals or foreigners.’

    Regardless of Machiavelli or xenophobic, isolationist, hate logic, if you simply follow the money you will see exactly where the handouts/subsidies/taxpayer dollars went and where they are continuing to go.

    http://www.warresisters.org/pages/piechart.htm

  5. I think you have been listening to too much fascist radio or corporate controlled TV or print news.

    First off Rewrite, logic can’t be “hate”, because it is based on the actual ~ just stick with “reality”, you don’t get it.

    Secondly, the only T.V. I watch is football; American or European, that’s it/all. Radio, I only listen to sparsely, right on about twenty minutes a day … mindless ad hom? Strawman?

    Facts:
    http://www.state.gov/documents/organization/80701.pdf

    http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

    http://en.wikipedia.org/wiki/United_States_Foreign_Military_Financing

    I have to admit an error; I previously stated that we funded 43 foreign countries, I was dead wrong, it’s 72

    There goes your links supposed Defense budget guesstimations.

    The %GDP of national defense spending by the U.S. of A.: 5% <

    Guess who’s higher? The M.E., (+/-10%). Looking at the geographic expanse of nations, we’re at the same rate as China, and not a second world nation. I’m not defending no bid contracts, nor the prostiticians and their design on using the Defense Budget to try to hide their insidious misappropriations of tax monies. (“I wants mah Gulfstream 550 private jet!!! Can Iz gits some twenny foes on dat?”)

    Can haz fakts? I think not. Awwww, you didn’t win, but thanks for playing, as a nice parting gift, we have the cognitive enhancer, Provigil. Enjoy better lucidity through chemistry!!!

    Speaking of “misinformation” … do you ever read anything that has a fact in it, or just the slanted material that suits your victimhood mentality?

    Xenophobia? **laff** I don’t “hate” foreigners; I despise the fact they think they can come here, supplant our culture, our history, our traditions with their own; all the while raping our system with special entitlement treatments, with the free nod from the corrupted prosticians … and then let’s not forget the ethnocentric hubris that they love to share … “melting pot”, **laff**, my ass.

    You’ve never read Machiavelli, or else your commentary would be quite different. Come back when you find a fact, or at least learn what “pragmatics” means. (You might want to get in a bit of learning on the philosophical positions of “reductionist” and “mechanist”, as well.)

  6. eric

    I think you just made Krugman’s point.

  7. ReWrite

    Even looking at the chart you attached Defense spending is 21% of the budget (which is over $600 billion); as we know the gov’t spent much more than that on the bailout of the financial institutions (which was both illegal under domestic and international law). And going back to my original point, the taxpayers (nor are the illegals) are not the ones receiving handouts or being subsidized.

    As I was trying to say earlier the gov’t gives subsidies to corporations such as Boeing for ‘civil development’ projects… this money either directly or indirectly trickles down/over to Boeing’s non-defense projects. Either way the gov’t is clearly spending much more subsidizing Corporations and War than it is taxpayers.

    I agree that spending taxpayer money on foreign militaries is wrong, an inappropriate use of taxpayer money and against the propaganda that the govt’ spits on a daily basis. It shouldn’t be shocking to the US that Israel and the Palestinians are fighting so much and so violently when Israel and Egypt are the number 1 and 2 receipts of US military financing.

    The health care system in the US is broken. The Universal Health care would actually cost taxpayers less money. The privatized system has jacked prices up and is not a model that promotes prevention at any level. In fact, the current US system is the most expensive in the World (per person).
    http://www.nationmaster.com/graph/hea_spe_per_per-health-spending-per-person

    Lastly, I still do not understand your xenophobic account of US history. Other than the Native Americans and African Americans, everyone in the US is either an immigrant or a descendant of one. Italian Americans had much worse reputations than Latinos or any other immigrant group that came to the US. The Mafia was no joke. Italian Americans are part of the US history, whether good or bad I don’t know or care, but they certainly are part of its history, just as any other group is. America is different than most countries as it is a country made up of immigrants. And just because the gov’t has somewhat recently decided not give out citizenship (for economic reasons, but sold to the American as xenophobic/protectionism).

    The current xenophobia isn’t that new or different. As I told to my older relatives or even my father he will tell you that people used to tell him that he could never be a doctor b/c he was Italian American. We have relatives on both sides of the family that came to this country and passed away never learning English. We have relatives on both sides of the family that lost jobs, struggled financially and got support from the government. My paternal-grandmother told me that she didn’t have health insurance when she was a teenage girl working at a dress factory, nor did her mother or father. I am sure that our Maternal great-grandparents have similar stories.

    Either way, I am tired of the gov’t saying that they can’t spend taxpayers money on taxpayers, but they continue to spend it on big corporations, war and special interests.

    If the US wants to reduce the money spent on welfare, then spend money on job/employment creation. Giving money to banks and to war does not provide jobs. And the current health care system is too expensive, inefficient, focused on making corporations risk, not on prevention, research or health care. (Private) Nursing Homes, Adult Homes and hospitals can be scary places were residents get minimal care and the corporations get maximal profits.

    Resource allocation in the US makes no sense. Why incarcerate millions of nonviolent offenders for over $40,000 per year… why not bring industry, jobs or employment back to these communities? It is not sustainable.

    Why subsidize US farmers to the point that their products are cheaper on foreign markets than foreign goods, thus putting local foreign farmers out of business… the result of which is that they abandon their farmers and come to the US to work on the same farms that put them out of business. This is not free trade or free market. Nor is it sustainable.

    If the xenophobes and fascists really want to stop immigration they need to stop domestic and foreign policies which allow such (non-free trade) policies to exist. Ironically, most of the of the support for such legislation and policies comes for taxpayer and elected who justified the legislation using xenophobic rhetoric. Meanwhile these farmers would never hire a citizen to work on their farmers b/c they would have to pay them a living wage and couldn’t work them like animals. Again, none of this is sustainable. There will be a tipping point.

  8. eric

    Kitapisz,

    You do realize that your laundry list of changes all require government intervention in one form or the other, and in most instances necessitate government interference and control of the free market, for example of labor and services? A rose by any other name would still be rose . . . aka, what you dreadfully label as socialism is exactly the same thing that you are calling for to replace it with.

  9. Eric,

    You do realise that is a Straw Man, because nowhere did I allude to, or otherwise represent, in any manner, anything that shows I would call for the intervention or interference of government.

    It shows that you don’t understand, or willfully choose to ignore, what I post.

    Educated citizens, with a bent for the revolutionary, can effect greater change than any gubament ever could. I never expect anything of the gubament, except epic failure and unending corruption/deception. Expectation, (form of belief), mother of all failure.

    “OH NOES, cugino!!! What is that all over your best good shirt??!!”

    “Mia culpa, must have spewed some belief earlier, and it got all over me.”

    Rewrite,

    The “budget” is virtually meaningless, especially as compared to %GDP. You’re buying into smoke and mirrors, nuff said.

    Secondly, induction/assumption/agenda? Can haz? I r vyctImh0odz? i R eatEd oll maH reasoninz? can HaZ medya owtamaton wit mah cheezeberGer?

    Oooooh, watch your step, I just tripped on your Straw Man fallacy!! You should really get rid of that.

    I never said anything about “stopping immigration” or “US immigration history” … nice try on the avoid/deflect/misdirect sequence, but alas, no avail.

    Enjoy the slavery of bad brain mappings and consequent cognitive dissociation from actuality.

    ::blue pill::

    ::Kool Aid::

    “It’s all just a conspiracy Timmy, back in your tube now, and dream your favored reality again. The Oracle is waiting for you, and she’s got cybercookies!!!”

    Pragmatist, skeptic, kitapsiz. Then, like the feathered trail of a light wind, barely perceptible … it was gone.

    **poof** (and the penguin left too)

  10. P.S.

    Hey cugino and Rewrite, here’s a book for you to read, that will show you just how far off the mark you both are about Reagan …

    I know you won’t read it, but I’ll make you aware of it anyways.

    Small excerpt:
    Reagan came to realize how much work he had left undone and began promoting an Economic Bill of Rights, a package of constitutional reforms that included a federal spending limit and a requirement for a two-thirds majority in Congress for tax hikes. It was too little too late. Such initiatives were doomed to be ignored by Reagan’s successor, George H.W. Bush.

    http://online.wsj.com/article/SB10001424052970204731804574387441733212788.html

    Hate for you to have to admit complete error with regards to the greatest/last President of America.

    It never ceases to amaze me just how much disinformation people spew, with out even the hint of a factual base.

  11. ReWrite

    So what Reagan wanted to acheive as President (but didn’t) makes him great, but what he did do we should ignore? That is lojical.

    He was great: he cut taxes for the rich (from 70-28%) and for corporations (the lowest levels since just before the Great Depression), he started semi-hidden wars in almost every central american country, he increased defense spending by 35%, he killed American labor, he supported the Apartheid South African government, the national debt went from $500 billion to $3 trillion, and the US started borrowing heavily from abroad, the US went from being the World’s largest creditor to the largest debtor; the wonderful ‘War on Drugs,’ the prison industrial complex (and private prisons)… and on and on.

  12. lollercopters!!! LMMFAOROTFL …

    Go ahead Rerewrite, throw up some more fringe links, so I can disassemble them one by one.

    Iz phun, canz du et!!!

    You are so far off the mark, the argument point is dead.

    “He” didn’t shave the taxes, he had CONGRESS sign off on it all; you’re doing drugs … again. (Moreover, according to the United States Constitution, the United States Congress is responsible for government spending and thus, regardless of Presidential advocacy, bears constitutional responsibility for such things as spending and tax policy that have enormous effects upon the economy.) Retardation; it isn’t just a way of life, it’s a crime.

    “He” didn’t “start semi-hidden wars in almost every Central American country” … there were Ops support and military engineers working WITH so called rebel groups that were tired of their people being raped, sodomised, tortured, murdered, and imprisoned by despots, funded by druglords. (Iz called ‘speelings nd capItalizashuns’, trei sumz?)

    Mia culpa, I forgot, you only allow for those things if done by socio-fascists. I erred, what was I thinking.

    Unions killed American labor; period.

    As far as supporting Apartheid, I can’t even find a single credible source; not ONE.

    The national debt didn’t go anywhere near 3 trn; 909 billion … until Clinton sold us out to the Chinese, when it jumped to 3.2 trn in his first term, and then 5.6 trn by the end of his second term.

    Can haz faktz?

    War on Drugs … agreeable, it was a stupid domestic perception program; on par with the stupidity of the War on Poverty.

    The prison complex, as you term it, is the fault of ninnies with your mindset, in gubament. It becomes real simple, if you have a pragmatic mind; allow me to edify you, with a proper understanding:

    1. Criminal; one who has violated the sanctity of the social contract and is therefore stripped of citizen’s rights and privileges.

    2. If a criminal is found guilty, convicted by a jury of his/her peers, there should be no such punishment as “life sentence”. If they can no longer be a part of society in a functional sense, execution is the only avenue. Add in the “3 Strikes” rule” and BOOYAAAAAH … crime goes WAY down.

    3. A criminal is no longer deserving of rights, therefore, punitive consequences should not include appeals, education, healthcare, recreation equipment/time of any kind. They should be made to suffer; at the minimum, continuous hard labor from sunrise to sunset, in the pursuit of making the prison a self-sustaining, self-maintaining institution. If they refuse, automatic execution.

    4. All executions should be public, and done by hanging. (It IS a deterrent to crime when handled publicly.)

    Fools who actually “believe” that criminals are entitled to “rights” after conviction, especially with the advent and insurmountable supremacy of genetic identification, obviously can’t read above a third grade level and have never heard of “Social Contract Theory” … that which is the fundament of all Constitutional Law and Authority.

    Feel free to take responsibility for your ilk who are responsible for that particular brand of unmitigated idiocy ~ also the ones solely responsible for hiding those costs from the taxpayers.

    **laff**

    By gubament statistics, even for non-violent offenders, recidivism is 66%; until you get to pedophiles and rapists, where it approaches 90%.

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