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April 25, 2015

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Fighting the fiscal phantom

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These are difficult times for the deficit scolds who have dominated policy discussion for almost three years. One could almost feel sorry for them, if it weren’t for their role in diverting attention from the ongoing problem of inadequate recovery and thereby helping to perpetuate catastrophically high unemployment.

What has changed? For one thing, the crisis they predicted keeps not happening. Far from fleeing U.S. debt, investors have continued to pile in, driving interest rates to historical lows. Beyond that, suddenly the clear and present danger to the American economy isn’t that we’ll fail to reduce the deficit enough; it is, instead, that we’ll reduce the deficit too much. For that’s what the fiscal cliff — better described as the austerity bomb — is all about: The tax hikes and spending cuts scheduled to kick in at the end of this year are precisely not what we want to see happen in a still-depressed economy.

Given these realities, the deficit-scold movement has lost some of its clout. That movement, by the way, is a hydra-headed beast, comprising many organizations that turn out, on inspection, to be financed and run by more or less the same people; dig down into many of these groups’ back stories and you will, in particular, find Peter Peterson, the private-equity billionaire, playing a key role.

But the deficit scolds aren’t giving up. Now yet another organization, Fix the Debt, is campaigning for cuts to Social Security and Medicare, even while making lower tax rates a “core principle.” That last part makes no sense in terms of the group’s ostensible mission but makes perfect sense if you look at the array of big corporations, from Goldman Sachs to the UnitedHealth Group, that are involved in the effort and would benefit from tax cuts. Hey, sacrifice is for the little people.

So should we take this latest push seriously? No — and not just because these people, aside from exhibiting a lot of hypocrisy, have been wrong about everything so far. The truth is that at a fundamental level, the crisis story they’re trying to sell doesn’t make sense.

You’ve heard the story many times: Supposedly, any day now, investors will lose faith in the United States’ ability to come to grips with its budget failures. When they do, there will be a run on Treasury bonds, interest rates will spike and the U.S. economy will plunge back into recession.

This sounds plausible to many people because it’s roughly speaking what happened to Greece. But we’re not Greece, and it’s almost impossible to see how this could actually happen to a country in our situation.

For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that the United States will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy still is depressed.

Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, actually would help rather than hurt the U.S. economy right now: Expected inflation would discourage corporations and families from sitting on cash while a weaker dollar would make our exports more competitive.

Still, haven’t crises like the one envisioned by deficit scolds happened in the past? Actually, no. As far as I can tell, every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency or a country that, like Asian economies in the 1990s, had large debts in foreign currencies. Countries with large debts in their own currencies, like France after World War I, have sometimes experienced big loss-of-confidence drops in the value of those currencies — but nothing like the debt-induced recession we’re being told to fear.

So let’s step back for a minute and consider what’s going on here. For years, deficit scolds have held Washington in thrall with warnings of an imminent debt crisis, even though investors, who continue to buy U.S. bonds, clearly believe that such a crisis won’t happen; economic analysis says that such a crisis can’t happen; and the historical record shows no examples bearing any resemblance to our current situation in which such a crisis actually did happen.

If you ask me, it’s time for Washington to stop worrying about this phantom menace — and to stop listening to the people who have been peddling this scare story in an attempt to get their way.

Paul Krugman is a columnist for The New York Times.

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  1. I have two thoughts for Mr. Krugman to ponder: QE to infinity and a strong US dollar. How do the two go together? They don't.


  2. The Kool-Aid tastes great...

  3. If you want to criticize the thinking of someone who holds a Nobel Prize in economics -- not to mention endowed chairs at Princeton AND the London School of Economics -- it's going to take a little more than a snarky one-liner about a children's beverage.

    Dr. Krugman seems to have two main points: (i) that there is absolutely no evidence to support the notion that we are at risk of rampant inflation if we fail to immediately address our deficit; and (ii) there is ample evidence that adopting austerity measures will risk a new recession.

    If you disagree with his conclusions, that's fine -- but kindly explain why you think he's erred. Name calling is not persuasion.

  4. There is no excuse for America to be a debtor nation. What kind of a super power has to go around begging and causing yet unborn Americans to be harnessed with an unaccountable debt? If I print money in my basement I get arrested. If you run out of money, can you continue to keep charging the tab up, up and away without ever paying it back while sticking someone else with the bill? A fine example to teach our children".

    What Mr Krugman failed to explain is that small business in America continues to be decimated by our Presidents foolish policies or is that by design? Other nations will eventually dump the U.S. dollar as it becomes worthless and this will hurt all Americans.

    The first Amendment protects my free speech when I use words like Kool-Aid, if you disagree with my opinion that's your choice.

    Nobel Prize isn't what it once was" one was awarded( Nobel Peace Prize) to Mr Obama who now has given himself tyrant- like authority to kill Americans with-out due process and used weapons of war in Libya when and where there was no direct threat to America or Americans. Our Peace President along with the Saudis and Turks are funding another war in Syria. Our Peace Presidents foreign policy is dangerous, costly and shameful " the same as his predecessor.

    Emthree- are you a Economics professor drawing a check from the government or related to Paul Krugman?

  5. Dr. Krugman's Nobel is in an esoteric sector of international trade not economics per se. In the last decade most of the economic theories Krugman subscribes to, which are based on Keynesian economics, have been rebutted by Nobel winners in economics who superceded Keynes. Don't take my word, reseach the Nobel winners.

    BTW, Krugman's adherence to Keynesian economics had a "dead" cat bounce in 2009/2010 when the stimulus and TARP hit. Krugman was wallowing in the glory. But it was very shortlived. In 2011, with an onset of flat growth and consistent high rates of unemployment, it all unravelled. Sadly, Krugman, the last of the Keynesians, still holds to the same wrong theories.


  6. I would argue that Dr. Krugman is a political pundit who happened to have won a Nobel in economics. Not an economist who dabbles in politics.


  7. The reason why we have a bad slow recovery is because people listen to the Krugnuts of the world. The cut (real cut) spending people predicted a long slow recovery with high unemployment. Krugman predicted a fast recovery and much lower employment.

    Carmine, please note. Krugman doesn't talk about the stuff which caused him to win the Nobel prize. He's laughed at in the academic field now for his nutty populist writing. Your argument is also an appeal to authority fallacy.

  8. whoops scratch the last sentence i misread your post