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Title: Paul Krugman is Dead Wrong: Debt Matters
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URL Source: http://www.marketoracle.co.uk/Article32528.html
Published: Jan 10, 2012
Author: Money_Morning
Post Date: 2012-01-10 13:25:04 by Capitalist Eric
Keywords: None
Views: 3970
Comments: 12
Shah Gilani writes: Paul Krugman, the Princeton University economics professor, Nobel Prize winner, and regular New York Times op-ed contributor says, "Debt matters, but not that much." Not only is he off the reservation on this one, but he's completely fallen off his high horse. In the real world, debt actually matters a lot. In a Houston Chronicle opinion piece last week, Krugman, riding his horse - whose name might as well be Liberal Conscience - trampled conservatives under the guise of an economics lesson that derided "deficit-worriers" for wrongly seeing "America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments." According to Krugman, that's a bad analogy and "the way our politicians think about debt is all wrong, and exaggerates the problem's size." Decide for yourself. Either debt matters a lot, or not that much... The World According to Paul Krugman Professor Krugman calls all the conversation in Washington about debt and deficits a "misplaced focus" and says all of the economic experts "on whom much of Congress relies have been repeatedly wrong about the short-run effects of budget deficits." He derides the fears that deficits will cause interest rates to soar by pointing out that they haven't moved. What he doesn't say is that they haven't moved because they're not free to move. The fact is that the U.S. Federal Reserve has corralled the free market in interest rates by knocking short-term rates to almost zero through successive open market operations and extraordinary quantitative easing measures. Mr. Krugman mocks those waiting for rates to rise and notes that while they wait "rates have dropped to historical lows." Maybe what he doesn't realize is that the Fed's actions themselves have been nothing short of historical. The crux of Mr. Krugman's supposition that debt doesn't matter much is based on his bashing of the popular analogy comparing America's debt problems to those of a mortgaged homeowner. All of which Krugman claims is "a really bad analogy in at least two ways." He says, "First, families have to pay back their debt. Governments don't - all they need to do is ensure that debt grows more slowly than their tax base." "Second," he says, "an over-borrowed family owes the money to someone else; U.S. debt is, to a large extent, money we owe ourselves." He goes on to say that the debt from World War II was never repaid and didn't make postwar America poorer. In fact, the Professor points out, "the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history." Krugman is Flat Out Wrong First off, the homeowner analogy is excellent--not irrelevant. Mr. Krugman is wrong when he says that homeowners have to pay back their debt. The truth is they don't have to. Just like the government, as long as their creditworthiness is intact and money is available, at whatever cost, homeowners can refinance their mortgages over and over. That's no different than how the government rolls over its own debts. We saw this phenomenon play out in stark reality during the housing bubble. Not only were homeowners refinancing their homes to take out money for consumption purposes, they leveraged themselves to buy more homes to multiply the wealth effect they were already experiencing. In the case of the housing crash, borrowers were counting on rising property values to finance their expanding debts. That's the same as what Krugman says governments should do: make sure debt expansion doesn't outpace revenue growth, in this case taxes. In the end, though, didn't the bursting of the housing bubble prove that debt eventually matters? To me, the housing bubble was a pretty darn good analogy as to what happens when mounting debts aren't repaid. When it happens on a systemic basis, the entire economy suffers. Doesn't our nation's expanding debt and deficit in the face of falling tax revenues and worse, a lower base, portend similar problems on an even larger scale? Of course, Krugman has it all figured out. We just have to grow our debt at a slower pace than our tax base grows. Who knew the answer was so simple... We'll just meet our expanding debt obligations by raising taxes faster. Perfect! Second, to claim that U.S. debt doesn't matter because we owe it to ourselves, and that homeowners' debts do matter because they owe them to someone else, is absurd. It is as if we are all going to say to the government, "It's okay you took all of those taxes from us and spent them on stuff we'll mostly never see, wipe the slate clean, we're good. And all the stuff you promised us that you didn't budget for, or worse, those set aside budgets you stole from, it's okay, we're good, we relieve you of what you owe us." It's just stupid. Also, if you are a homeowner you are paying yourself too, in a sense. While you are paying the mortgage to your bank you are also paying into a capital asset known as your home. You end up with something of fairly equal value, or more when home prices appreciate. The Truth about Debt But we screwed that all up because debts do matter. Too much debt leads to depreciation and deleveraging, which leads to lower demand, lower production, fewer jobs and a lower tax base. The last piece of Krugman's argument that our World War II debts were never repaid and that the huge deficits to pay for the war effort led to an extraordinary peacetime expansion is also frighteningly off the mark. Of course, the savings bonds issued to fund the War have matured and been paid off. And the portion of our national debt brought on by the War was paid off a long time ago. Just because the U.S. continues to add to its deficit and has to continually rollover debts doesn't mean that we're rolling over debts from 70 years ago. Mr. Krugman's own argument even addresses that. Rising incomes and our rapidly expanding economy in the postwar period generated a vastly rising tax base and led to prosperity. But, that had nothing to do with deficits not mattering. That had everything to do with soldiers returning home and being educated under the G.I. bill, being able to find work in revved-up manufacturing facilities, and the ensuing baby boom that would lead to a substantial increase in the population and tax base. A Political Axe to Grind There are a lot of problems with Professor Krugman's argument that deficits don't matter. But, the biggest problem I have is that instead of addressing deficits in an organic, holistic and objective way, Mr. Krugman addresses these important issues from his political perspective rather than a purely economic perspective. Bashing conservatives who say deficits matter and spending cuts along with a smaller government are the best way to solve our long-term fiscal problems, and arguing that "responsible governments -- that is governments that are willing to impose modestly higher taxes when the situation warrants it" are the answer to deficits that don't matter much, is polarizing at best and dangerous at worst. What economists should be advocating is an apolitical approach to both our short-term and long-term problems. We need smaller deficits over time and a smaller, more responsive government in the long-term. In the short-term, we need real infrastructure spending, not quantitative easing for banks to increase their bonus pools. We need a massive investment in education and we need an industrial policy that promotes manufacturing and job growth - not the exportation of our capital to less developed countries where labor cost advantages fatten up public corporations that don't pay enough U.S. taxes and hide the money from Uncle Sam in the loopholes Congress digs for them. Both deficits and politics matter. And if we don't figure out how to bridle both we are all going to end up in the dirt being trampled by stampeding emerging economies everywhere.
Poster Comment: I'm sure dummy DwarF will come along, proclaiming that his "two years of graduate work" in economics make him the expert... and that debt doesn't matter at all. Feh.
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#1. To: Capitalist Eric (#0)
We were told by the capitalists during the previous administrations that debt can be considered an asset, as it creates income.
"ROTFLMAO... Perfect! She longs... for someone to Teabag her. a man that squats on top of a women's face and lowers his genitals into her mouth during sex, known as "teabagging" She aches for it"... ~~~JWpegler. Head Tea Bagger and Tea Party supporter extraordinaire, explicitly expressing his fantasies in public about other posters.
You claim to be working on your PhD in economics and still don't know what it's about.
Economics is a social phenomenon and in no way a “science”, no matter how desperately its high priests would like to have it believed otherwise. It is, instead, a branch of anthropology and the sooner that is recognized and accepted, the better off human-kind in general and the world of academic economics, in particular, shall be proximity1 We probably will see widespread civil disorder in the 1980s, as a direct result of our faltering economic system. Ron Paul
I thought he said he finally settled on engineering.
"ROTFLMAO... Perfect! She longs... for someone to Teabag her. a man that squats on top of a women's face and lowers his genitals into her mouth during sex, known as "teabagging" She aches for it"... ~~~JWpegler. Head Tea Bagger and Tea Party supporter extraordinaire, explicitly expressing his fantasies in public about other posters.
Are you suggesting he dropped out of the PhD program - that he quit?
Economics is a social phenomenon and in no way a “science”, no matter how desperately its high priests would like to have it believed otherwise. It is, instead, a branch of anthropology and the sooner that is recognized and accepted, the better off human-kind in general and the world of academic economics, in particular, shall be proximity1 We probably will see widespread civil disorder in the 1980s, as a direct result of our faltering economic system. Ron Paul
Bullshit. The Fed controls one rate, the discount rate, and maintains another, the Fed Funds rate. Every other interest rate, from bills to bonds, is set in the market.
I'll believe that a corporation is a person 1 second after Texas executes one...
Dick Cheney Said, "The Debt Doesn't Matter, Reagan Proved That"
Never swear "allegiance" to anything other than the 'right to change your mind'!
My graduate work was, in fact, in geopolitics and political economy with a focus on Europe and the Middle East, Junior. That said, Krugman has a Nobel and is claiming that it doesn't matter that much. I believe that it does matter when there are no creditors to be found. /tamponbreath
I'll believe that a corporation is a person 1 second after Texas executes one...
Wrong. Wrong again. You think you think. Wrong. You both FAIL, consistently. “Contemplate the mangled bodies of your countrymen, and then say 'what should be the reward of such sacrifices?' Bid us and our posterity bow the knee, supplicate the friendship and plough, and sow, and reap, to glut the avarice of the men who have let loose on us the dogs of war to riot in our blood and hunt us from the face of the earth? If ye love wealth better than liberty, the tranquility of servitude than the animated contest of freedom, go from us in peace. We ask not your counsels or arms. Crouch down and lick the hands which feed you. May your chains sit lightly upon you, and may posterity forget that you were our countrymen!” -- Samuel Adams --
Cheney and Herr Dumbass aren't capitalists. They're corporatists. Dingaling prefers to ignore that distinction.
“Contemplate the mangled bodies of your countrymen, and then say 'what should be the reward of such sacrifices?' Bid us and our posterity bow the knee, supplicate the friendship and plough, and sow, and reap, to glut the avarice of the men who have let loose on us the dogs of war to riot in our blood and hunt us from the face of the earth? If ye love wealth better than liberty, the tranquility of servitude than the animated contest of freedom, go from us in peace. We ask not your counsels or arms. Crouch down and lick the hands which feed you. May your chains sit lightly upon you, and may posterity forget that you were our countrymen!” -- Samuel Adams --
It does matter and that's why we have to raise taxes and cut Medicare and Social Security through more means testing and health reform to cut costs. We take care of those programs and we won't have a long term debt problem. All that's needed is political will.
Yahoo, so you and I could work together on a comprise to do this. If your retirement income puts you in the top 20% income level in the U.S., you will be means tested out of receiving those benefits. This is what Australia does. So, how do we do this here? What is your approach???
Wrong again, but then when are you ever right?
"ROTFLMAO... Perfect! She longs... for someone to Teabag her. a man that squats on top of a women's face and lowers his genitals into her mouth during sex, known as "teabagging" She aches for it"... ~~~JWpegler. Head Tea Bagger and Tea Party supporter extraordinaire, explicitly expressing his fantasies in public about other posters.
#2. To: Capitalist Eric (#0)
I'm sure dummy DwarF will come along, proclaiming that his "two years of graduate work" in economics make him the expert...
#3. To: lucysmom (#2)
You claim to be working on your PhD in economics and still don't know what it's about.
#4. To: mininggold (#3)
I thought he said he finally settled on engineering.
#5. To: Capitalist Eric (#0)
What he doesn't say is that they haven't moved because they're not free to move.
#6. To: mininggold (#1)
We were told by the capitalists during the previous administrations that debt can be considered an asset, as it creates income.
#7. To: Capitalist Eric (#0)
(Edited)
I'm sure dummy DwarF will come along, proclaiming that his "two years of graduate work" in economics make him the expert... and that debt doesn't matter at all.
#8. To: mininggold (#3)
(Edited)
loonybitch: You claim to be working on your PhD in economics...
loonybitch: and still don't know what it [economics] is about.
dingbat: I thought
dingbat: ...he said he finally settled on engineering.
#9. To: Brian S (#6)
Dick Cheney Said, "The Debt Doesn't Matter, Reagan Proved That"
#10. To: Capitalist Eric (#0)
(Edited)
Debt Matters
#11. To: NewsJunky (#10)
(Edited)
cut Medicare and Social Security through more means testing
#12. To: Capitalist Eric (#8)
Twins?
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