PAUL KRUGMAN DOES Q&A
In case you missed this – Paul Krugman answered a lot of questions on Reddit yesterday. It’s worth perusing for his views. I found this back and forth between Joe Weisenthal and Dr. Krugman of particular interest:
Question (Weisenthal):
Back in the 2000s, you frequently blasted Bush for running large deficits. However in recent posts and interviews, you’ve said that a country with its own sovereign, un-pegged currency can’t ever face bond vigilantes.
What’s more, the sovereign currency issue seems to be something of a new line of thinking for you, given that initially you wondered why Italy and Japan were paying different rates given broadly similar economic conditions. Now you seem to have found peace with that question, based on the sovereign currencies issue.
Thus in light of this change of thinking, do you still stand by your comments regarding Bush’s deficits?
Answer (nytimeskrugman):
I was clearly too worried about bond vigilantes back in 2003 — and I’ve written on my blog conceding that mistake.
I wasn’t wrong, however, to condemn the Bush deficits. Deficits serve a useful function when the economy is deeply depressed, and in particular when monetary policy is up against the zero lower bound. You should not gratuitously increase debt in normal times, when any fiscal stimulus can and will be offset by Fed policy.
And don’t you wish now that we hadn’t run those unfunded wars and tax cuts? The ratio of debt to GDP would be 20 or 25 percentage points lower, and we’d be feeling a lot more relaxed about current deficits.
I personally don’t think Dr. Krugman is taking the full view here. With the massive current account we were running in the early 2000′s the Bush budget deficits actually helped bolster growth substantially. Had we not been offsetting the current account deficit we would have suffered a massive demand leakage that would have prolonged and probably worsened the 2002 recession….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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28 Comments
He’s still toeing the Keynesian line, but at least he’s willing to own up to prior mistakes
Cullen, while you have a good point about the deficits “covering up” the demand leakage from the current account deficit, don’t you think we could found a better way to structure the public deficit? I mean, the Iraq and Afghan wars didn’t really add anything productive and the bush tax cuts went mostly to the top 1%. Wouldnt it have been better if the deficit spending went towards building/fixing schools (for example), and if the tax cuts were spread out more evenly so that the “99%” recieved more of it?
It’s a myth that the Bush era tax cuts went mostly to the top 1%. Total dollar wise, yes. But when the lower 40-50% income individuals are paying zero, that has to happen with any tax cut.
But the dirty little secret of is that the Bush cuts actually made the tax code MORE progressive.
The top few percent are now paying a larger share of total income taxes after the tax cuts than they did before.
http://sovereignmind.wordpress.com/2010/09/16/the-bush-tax-cuts-for-the-middle-class/
“it’s a myth” except for “total dollars yes”??? LOL. I don’t know where people spend percentages…. I spend actual dollars myself.
The rich got a helluva a lot richer in dollars. Give someone with $1 million in annual income a 1% tax break and they take home an extra $10,000. Give someone with a $50,000 income a 10% tax break and they only take home $5,000. But the GOP will tell you that the middle income earner got 10x the tax break as the millionaire earner. And that is a load of s*** as the actual dollars will tell you that the rich guy got TWICE as many real dollars.
What’s more, there are a lot more middle income earners, so add up 100 million people and their $5,000 tax break, vs. 100,000 and their $10,000 tax break and oh look at how much more the middle class got than the rich. More BS. And my numbers are really generous – in reality the Ryan budget would stuff hundreds of thousands of dollars more into the richest of the richs’ pockets while providing minor dollars to everyone else – and then effectively taking away those minor dollars by cutting programs that they rely on.
Your article is one of the few that references these statistical allusions but then still goes on to make the same excuse that the Rich didn’t actually get most of the dollars. Horse hockey as usual.
Hangemhi, I will only repeat once more that you can’t give a tax cut to someone who doesn’t pay taxes. There are no politics associated with that statement. It’s just a fact.
So when taxes are used as a stimulus policy tool, 40-50% of the population are out of the equation. Nothing discriminatory about it, it’s just a fact.
And if you believe taxes should be more progressive, then you should applaud the Bush tax cuts, because that is the effect they had. But no, you’re not going to hear that in the political talking points of either side.
Jaymaster:
If you have a W-2 job, you pay taxes. Sure, we call it social security tax, but it’s still a tax.
All income tax discussions should include all income taxes.
If you are self employed, you are keenly aware of the social security income tax bite.
OK, let me rephrase it this way:
Case 1: “Group A” pays 2% of total taxes, “Group B” pays 30% of total taxes.
Case 2: “Group A” pays 1% of total taxes, “Group B” pays 31% of total taxes.
Which group benefits in Case 2?
That is the only point I am trying to make.
Roger,
Sorry, I dropped the above response in the wrong slot!
Yes, the self employment/ payroll “deduction” is an income tax. No two ways about it. But a few thoughts on that.
1: In light of the above discussion, I would expect the cut in payroll taxes to skew the numbers even more in favor of a more progressive total tax scheme. It’s hard to see how lower income wage earners didn’t benefit more from that cut than the top 1%.
2: Of the 40-50% who pay no income tax, I expect a large number of then also pay no payroll/self employment tax. I’ve never seen estimates for that number, but I would love to, if anybody has them.
Those not paying income or SS taxes would include groups such as the unemployed, retirees, undocumented/under the table workers, disabled, etc.
3: From an MMT/MMR perspective, I was THRILLED to see the payroll tax brought into play on the tax cut front. I never thought I would see the day. IMO, this is an awesome tool for immediately cutting taxes when the economy needs stimulus, and raising taxes if inflation surges and money needs to be sucked out of the economy/destroyed. It should have a much faster impact than manipulating the general income tax.
The Bush tax cuts made the income tax more progressive but the overall tax code less progressive. When you cut the income tax, which is progressive, and don’t cut the payroll tax, which is regressive, then you make the tax code less progressive. This is the case unless the income tax cut makes income taxes much, much more progressive. The idea that the Bush tax cuts were progressive is a conservative myth. If you want a progressive tax cut, look at Obama’s payroll tax cut.
Jerry,
In 2003, the home as ATM went back into full swing. The private debt accumulation was masking any demand leakage. Consumer demand was strong. And Greenspan assured us there was no bubble.
Yes, dropping bombs on people is a particular unproductive way to run deficits.
So is running an inefficient war driven by “humanitarian” scruples. Simply driving out (or killing) the native population from Iraq’s oil areas and taking the oil outright is soooo much more profitable.
Krugman made similar remarks on TV last Sunday on the “This Week” show. He said to George Will that Bond Vigilantes are not powerful in a country that borrows in its own currency. I nearly fell off my chair! He is clearly coming around.
Maybe. The real test will be if he says the same thing in 2013 in the event his man loses the election this year. My bet is that if Mr. Mittens goes to the WH next year, Krugman will be talking about “bond vigilantes” again. He might even start talking about hyperinflation.
Actually, Krugman was partially right on the bond vigilantes. He just underestimated the anti-bond vigilantes (gov, +strategics, +flight to safety). Now if Krugman would just admit that (gov) bonds are not borrowing vehicles but rather (MMR) monetary operation vehicles, then we can all live happily in the bond/anti-bond world, free of government spending myths.
I’m confused. I thought we had a huge current account surplus because the Chinese could purchase substantial amounts of Treasury bonds. Sometimes my thinking on this is backwards. I don’t understand your analysis. The Chinese selling us goods and buying bonds costs us jobs. We covered it up with construction fueled by debt creation.
Trade policy and the U.S.’s acquiescence to the Chinese currency peg are quite different from monetary policy and have little to do, directly, with the Treasury market.
The large current account is primarily due to a decline in competitiveness, not China buying our bonds. The imbalance occurs as a result of the declines in competitiveness. So yes, current accounts are not great and they’re not sustainable in perpetuity, but they’re not caused by China’s bond buying. Running a budget deficit to mask the demand leakage can potentially help us dig our way out of this. But you can’t necessarily print your way to prosperity. Sort of like you can lead a horse to water. Ultimately, as Kaldor and Godley worried, there’s a very real chance that the continued budget deficits just make us less and less competitive. Circuses or Rome and what not. I don’t think there’s a huge risk of that in the USA (though there are elements of it), but it doesn’t mean it’s not out there….
How can you have it both ways? The mechanisms by which persistent budget deficits make the USA less competitive are obvious and clear, so how can persistent deficits that mask the demand leakage help us “dig our way out of” our uncompetitive position?
Budget deficits don’t have to make the USA less competitive. It depends on the forms of spending. Paying people to sit on their couches all day long is a good way to achieve that for instance….
“Paying people to sit on their couches all day long”, which is exactly what the bulk of government spending is for; that, and clowns at Vegas “conferences”, loan guarantees for highest-cost solar panel mfg, double hip replacements on 85 year-old ladies, and cruise missiles to blow up the boggie-men living in caves.
US Government spending (deficit spending) is NOT productive, and theorizing on how said deficit spending might be “ok” were it spent on productive activities is interesting but irrelevant to the situation at hand.
who makes those cruise missiles? I’m not yanking your chain, I need some for my private Army.
In a world free of government spending myths one can also believe that slow gradual deflation is also not to be feared. Let prices decline slowly. When consumer prices fall the real wealth of households (small businesses) tends to rise. If slow gradual deflation can be managed small business will begin to hirer and consumers will begin to spend more as deflation makes households richer. It’s unlikely that households today will increase their savings, which means that they will spend any improvement in their real incomes. Like Reagan, slow it down to let it rip later.
Please define “substantially”…
Hi Cullen,
I hold the utmost respect for you, as I’ve learned a tremendous amount from you in the short few months I’ve discovered your site. I feel, however, that you are underestimating the “behind the scenes” geopolitical shenanigans going on between foreign central banks and the US government/FED (I agree they should be considered a consolidated entity). The “behind the scenes” I speak of has to do with the strategy by large foreign bondholders (foreign central banks and governments) to keep the money flow (not money creation, just money flow) to the United States by playing a game of who can hold the most US bonds. I don’t disagree that the US government can print its way out of anything, but I believe that the foreign central banks/governments are purposely gobbling up US bonds to keep a dysfunctional International Monetary System afloat that is on the precipice of collapsing (timing is impossible, but the risks are great and could only require an unforeseen “accident” to trigger). I’d like to ask, have you read any of Triffin’s work? If you have, what are your feelings towards his writings over the last several decades?
Also, if MMT believes that the US can “set its own interest rate”, then why did US bond rates rise from 1946 to 1982 from 5% to 14%. If I’m not mistaken, an MMT’er would say the government allowed this to happen, but isn’t it true that during the ’70s, private buyers of US bonds dried up and the only buyers were foreign central banks allied with the US and that the US started to issue Treasury bonds in foreign currencies? Only when the FED set the short rates much higher in 1979 did they finally crush the market’s inflation expectations. Is this not true?
Kind Regards,
Dink
I am not an MMTer….
My apologies, Cullen. I should have known better, as I said I’ve only been here a few short months and sometimes forget you are an MMR’er.
“I personally don’t think Dr. Krugman is taking the full view here. With the massive current account we were running in the early 2000′s the Bush budget deficits actually helped bolster growth substantially. Had we not been offsetting the current account deficit we would have suffered a massive demand leakage that would have prolonged and probably worsened the 2002 recession….”
Yes, he is learning. Still more to absorb . . .