So, we can pay for the Green New Deal? Great!
If the bond market is pricing for a future of secular stagnation and has been for "8 of the past 12 years," can I assume that the 6.5% annualize rise in the stock market over that same period is a reflection, not in the growth of the economy, but of the transfer of wealth from the producing class to the rentier class?
3
RE: during AOC’s second term in the White House
This made me laugh (and a possibility I wouldn't mind seeing, myself . . . ).
And with your willingness to spend money like this, you almost make me think you the Neo-Keynesian are secretly reading those nice Post-Keynesian MMT people late at night under the covers with a flashlight (which, once again, I wouldn't mind seeing myself--I'm more "Post" than "Neo" in my Keynesianism. I have the sense Dean Baker has wandered into that territory and I love his Beat the Press blog. . . ).
And, if I didn't offend or irk you there, hopefully, at least. I was able to make you laugh. . . .
4
a reconstituted public health system
2
Could someone please explain the below questions on the wonkish bit for me, thanks!
"If nothing else changes, d will eventually stabilize at 2 — debt at 200 percent of GDP." Is this from using dynamic programming and the fixed point theorem? Is there any other easier way to obtain this result?
Also, "Also, “eventually” would be a long time. That little debt-dynamics equation has a convergence rate of .02, hence a half-life of 35 years." What equation would explain the half life period, anyone?
Otherwise a thought-provoking article.
3
@Darshan
It’s just the steady-state solution to the equation he have. The intuition is that as time runs, the debt situation gets better, because the nominal GDP growth rate exceeds the nominal interest rate — think of it as inflating away the debt (though it’s actually a combo of nominal and real growth).
Countervailing this improvement is the budget deficit, running at 4% of GDP (in this example). Since that is fixed as a share of GDP, eventually the “inflating away the debt” effect balances out the budget deficit’s impact. Ironically this occurs only once the debt gets large enough (200% of GDP here).
1
@Mike - Many thanks!
1
Ya gotta spend money to make money.
3
@Doug Broome,
Agreed. The thing is to "spend money" on productive items - like infrastructure, education, medical, etc. - and not tax breaks the disproportionately reward the few people at the top (a/k/a the 5%) for doing what they already did.
2
Hi Paul, let's couple your theories with an obvious need for investment such as to avert catastrophic global warming. In such a scenario, the economy comes out ahead!!! (I could write more explanation points, but you get my drift.)
5
Hi Paul. If you couple your thoughts on stimulus with essential investments such as related to combating global warming, it makes your case even more compelling. In this case, there are investments that are mandatory and also stimulating, and therefore have a high multiplier. (How do you quantify the value of arresting global warming and come up with a multiplier?)
3
I agree, more so if you consider that the US owns the global reserve currency (no alternative in sight) and the printing press. I'd think this helps to keep inflation low since a significant chunk of your primary emission will end up stored or invested in other markets, helping global growth as well...
2
One thing you can be sure of the President and his crack team of economists are all over the place on this. I believe you have said all it would take for the Trump house of cards to fall would be a worldwide crisis. Does a worldwide economic and health crisis qualify? Various sectors of the economy are in free fall now and soon to be joined by others that are going to need immediate assistance or go into default. All that money used from the tax cut for stock buybacks is probably back to its original cost basis or worse. Your vision is most likely off of Trump's radar. Trump has no established experienced team of nonpartisan experts in place to call upon for advise. If Team Trump = tt, then tt = b(a +d).
1
Paul, you sound like an MMT proponent. Almost. Until you start doing math, then the crazy just.... goes away.
You make a strong case here, and as it's the exact opposite of what the deficit hawks want. I approve.
3
No economics background but no wonkish disclaimer necessary. Actually has content and is not just another Trump slam. If you do want another thing to dislike about Trump, no one has explored if he twerks. Also if Colin Jost is reading this, please, write a series of sketches where Putin decides to go legit and become a US citizen and influence the US elections with a vote instead of memes. I envision him singing the I want to live in America song from West Side Story. Maybe he's afraid he'll have to pay for all the free breadsticks at Olive Garden.
Completely agree with the absolute necessity of permanent government investment spending in an age of secular stagnation. The case for debt financing is also convincing but not absolutely necessary. The problem I have with this proposal is that is offers a way to avoid tax increases on the wealthy, which is necessary to slow and reverse pretax income inequality.
The most misunderstood aspect of the progressive income tax, as well as most of the proposed wealth taxes, is not that they could raise large amounts of tax revenue that could then be spent on public investments. The main reason for progressive taxation is to prevent continuously rising income and wealth inequality. It has been shown using basic economic models that capitalism without redistribution eventually results in all wealth being owned by a single family after a mere few hundred years.
https://voxeu.org/article/what-would-wealth-distribution-look-without-redistribution
The continuous increase in wealth concentration since 1980 was not due to the superior investing skills or the business acumen of the top families but mostly because they were extremely wealthy to start with and secondly because they were lucky. This is the fact that true believers in pure capitalism don't want to face. They want us to believe the myth that financial success is the reward of skills and hard work. That's only partly true for most people and mostly untrue for those who started out with a fortune like you know.
2
@Doug Rife Regarding ordinary income, we have progressive taxation. But when it comes to capital gains taxes, this is not so. IMHO, we should just treat capital gains income as ordinary income.
3
The article’s bottom line (2% deficitial US spending) is simple, clear - even for non economists - and completely needed & doable - especially in light of the revolutionary technological developments of the last 20 years, and especially in America (giant, autocratic, with currency, defacto, also global).
The offered idea, however, is not new. Essentially, it’s version of the classic Keynesian governmental spending proven successfully wherever implemented (the Roosevelt's new deal, the Marshall and the Eisenhower's infrastructure projects, etc.)
And, as for the ‘wonky’ part?
Well, guys, here, in my humble opinion, there is no reason to trying too hard to understand... The main purpose of this part, I guess, is to simply to distract readers off the recent dazzling professional U tern performed by professors Krugman and Summers regarding the ‘deficit problem’. Let’s not forget - just a short time ago the two denounced the similar Stefani Colton's and Bernie Sanders's MMT as ‘Voodoo economics’...
1
@Yair can you point to anything Sanders has said about supporting MMT? If so I will be disappointed. Bernie has always been pretty straightforward and I've never seen him fall for a Ponzi scheme before.
The difference between what Krugman is suggesting and MMT is that MMT proponents insist that 'debt doesn't matter', then when challenged, bluster, then give over and admit that no, they can't print unlimited amounts of money without devaluation, but then offer no solution to the problem or how to calculate the limit. Krugman provides an outline and plausible sample rates.
1
@RG
Another relevant resource:
https://www.politico.com/story/2019/02/06/alexandria-ocasio-cortez-budget-1143084
(Ocasio-Cortez boosts progressive theory that deficits aren’t so scary)
Both Kelton & Cortez work VERY CLOSE with Bernie. Sometimes, in a campaign, a candidate can't say EVERYTHING... In such cases, look at what his guys are saying...
@RG
See here
https://www.voanews.com/usa/adviser-sanders-presidency-could-start-300-billion-us-jobs-program
BTW, misspelled 'autocratic US', should be 'Autarkic'... Sorry
Great article. There is one issue that I observe that would be a negative factor that should be added to this equation, that is the capability of motivating Americans capable of performing work to take the jobs at a reasonable wage. In my opinion, most Americans are lacking the knowledge, skills, and desire to effectively contribute to the model.
@Henry H Hi Henry, You may want to take a look at Paul Krugman's column on March 30, 2014. In this column he explains why he believes the skills gap argument is overblown. It's interesting. You can also find it on page 166 of Arguing with Zombies.
Krugman’s case can make good sense without understanding all of the variables or why the formula is valid. (What’s “primary balance”? interest payments on the debt?)
But the point is no better than the politics that provides for efficacy of public policy that supports such a case, which seems to require that a plurality of Big Money accept significant tax increases, which in turn calls for an ethos of noble plutocracy overriding predatory plutocracy—and sanctification of long-term thinking (in a financial economy obsessed with short-term returns).
I’m reminded of philosopher Samuel Scheffler’s recent book, _Why Care About Future Generations?_ (Maybe a decent short answer is: Aren’t we glad our ancestors were, in effect, paying forward?)
It’s clear to me that electing Biden will restore an ethos of nobility to political leadership—maybe even turning around the global trend of autocracy in recent years.
But without a Democratic Senate, we’re sunk. And a Democratic Senate requires getting out the vote of folks who would never suspect that they should support a candidate who understands long-sighted nobility effectively.
Unfortunately, we gotta have showmanship to get out the vote. We need an exciting WOMAN VP running mate for Biden. Warren hasn’t ever tried to attack Biden (unlike Harris). I want to see a Biden/Warren ticket.
3
@gary e. davis from Wikipedia:
""Primary balance" is defined by the Organisation for Economic Co-operation and Development (OECD) as government net borrowing or net lending, excluding interest payments on consolidated government liabilities." I don't know either :-).
I hope you are right about Biden. I personally feel most of the candidates who have dropped out are better. Younger, sharper, better ideas, etc.
I agree that Biden desparately needs a qualified VP. A woman would be great. I don't think the VP should be chosen on the basis of that person never debating against Biden, however. Although I do like Warren.
1
@Matt Fulkerson
Stacy Abrams has indicated interest.
Those low interest rates are hurting our savings. I fail to see how any of us benefit from such low rates. What I don't understand is why credit card interest rates remain so high. Something is very out of whack here. Maybe a column on that would be useful too. I keep on getting the feeling that we're being robbed coming and going.
5
@hen3ry We only see “low rates” because the rates described are for multi-million dollar Fed transactions. At such a large scale, the bank is willing to scratch your back if you end up paying hundreds of thousands in interest.
As for credit cards, the “loan” is not only short-term but also minuscule compared to the Fed disbursements. If a credit card company needs 100,000 customers to exhaust 1x Fed disbursement, that business costs more overhead and is much more risky.
For the financial sector, its better to have 1 big development and 1 big loan rather than constantly hunt down 100,000 middle class debtors who may or may not be able to pay.
@hen3ry Simple. We ended usury laws to limit credit card rates. Or rather congresscritters did at the behest of Mastercard and Visa.
Some parts of economics are really simple.
2
Excellent article.
It seems the T-Bill rates are generally better predictors than most. As such why not put some autopilot rules in the mix:
- When the rates indicate the economy is getting hot (inflation warning) reduce the infrastructure investment. Restore the spending when it cools a bit
- When the rates indicate things are getting really bad, go more extreme and distribute cash --- either payroll tax changes or better quick Earned Income Tax Credit payment. (The less you make the quicker you spend which is what is needed when things are bad).
Also, stop auditing EITC recipitants and audit the rich.
1
Question for Mr. Krugman:
Has the coronavirus done to the global economy what Smoot Hawley had done; i.e. isolation and trade disruption, especially coming on the heels of a tariff and trade-war based trade policy?
1
When money is free or very cheap, government should borrow and invest to correct existing problems as well as improve future prospects. This makes sense to me.
6
@Fred The government borrows money for every single deficit year. We are already taking brand new $1 Trillion loans every year without paying any of them back.
2
What if inflation roars back.
2
I believe what Dr. krugman is supporting here is supply side economics for people that don't hate poor people.
What are the chances that the administration would be receptive to an idea like this?
I noticed that they're going to be inviting "wall street" economists to the wh to discuss interventions. Of course the ideas that come from them will be ones that heavily favor themselves rather than the broader macro economy.
I guess it would be foolish to think they would invite Krugman and Summers?
2
The consumer society will consume the entire Earth resources.
It's the pure mathematics.
If the number of humans increases rapidly and the consumption per capita increases even faster, then the question is not IF but WHEN.
To slow the deadly process, the prerequisite is to rid off the consumer mentality.
To accomplish this objective, it's necessary to balance the federal budget to deprive the economy from this turbo charger that overheats both the economy and this planet.
If we cannot control our greed, it will destroy our Earth.
If the real source of consumer ideology is the capitalism, then the socialism is the only way toward the survival of the humanity.
The socialism is just a contemporary name for the pure faith.
Only the faith can subdue the human greed and the consumerism...
Only the faith can protect our environment, have no doubt about it.
1
Sounds a little vague
1
@Kenan Porobic There are ways to consume without harming the environment. Like going to hear a good concert.
Discontinuity is pretty much of a sure thing - the only certainty is change. Expecting more of the same to just go on and on and proposing an hypothetical scheme for dealing with the hypothetical situation makes for an interesting wonkish column but considering coping with coronavirus would be make for a better piece.
2
Dr. K,
You concept is a good one. The supporting analysis is very convincing. Probably needs a little more historical examples but I strongly recommend that you take this analysis to a broader audience and frame the thesis in terms of the global system. The potential for a global recession is very high.
I totally agree with your last paragraph.
The net is drawing tighter for humans. Civilization is becoming more and more complex and increasingly fragile. In ancient times, there were separate civilizations. Sometimes, they fought each other, sometimes, they lived in peace. Sometimes, a civilization would collapse, but the other civilizations survived. The Mayan civilization collapsed because of their slash and burn agriculture, but the Aztec and Inca civilizations survived, at least until the Spanish conquistadors invaded them.
And Earth survived. Yes, there were local environmental catastrophes – the Mayas, the Anasazi, the Easter Islanders – but the World, as a whole, went on.
Today is different. We have a global, highly interactive civilization. What one country does affects the rest of the World, as evidenced by the oncoming environmental catastrophe from fossil fuels. To avert catastrophe to all of humanity, we must act together to transition to non-fossil energy as soon as possible. Nations and individuals must begin to act in the interest of all of humanity, not just their personal interest.
4
@james jordan Regarding your last paragraph, IMHO we need a carbon tax and also enough incentives to speed along the transition to renewable energy. Paul Krugman is talking about infrastructure spending generally, but when this is aligned with transforming the economy to be carbon free, and averting the worst effects of global warming, the argument is that much more powerful.
How would you even quantify the multiplier effect? You'd have to take into account money not spent on increased natural disasters.
If there is a single ounce of patriotism left among the Republican and Democratic lawmakers and the White House incumbent, they should enact the law mandating the federal government to print the amount of money needed to instantly pay off the national debt and balance the future federal budgets if our lawmakers are incapable of collecting enough taxes to pay for the benefits they voted for...
@Kenan Porobic
I am curious what do you think that would accomplish. an injection of that much cash over a short period of time would certainly cause hyperinflation. What problem is it solving? Who is being hurt by that debt right now that needs relief? What is that debt stopping us from doing? National debt and personal debt are not at all the same thing. If you are interested in this subject there has been much written about the economics of public debt and much of it is very counter intuitive if you are only used to thinking about personal or business budgets.
4
Dr. K,
I like the concept.
2% may be too little and too late for reducing the threat of global warming. For the U.S. we are talking about only 400 Billion dollars and if we are talking about all of the nations on the planet, which I believe we should, it would amount to about 2% of 83 Trillion or 1.7 Trillion for an annual investment to build a new non-fossil energy source of energy. With the potential to save by 2050 about 10 Billion population of our own species from a terrible existence.
It would be a good investment but we need to convince a lot of people that it would be a good investment in the R&D, testing and build out of a global system. Millions of new systems for installing solar, much more efficient solar materials, thousands of machines to process the atmosphere and industrial process gasses to capture greenhouse gases and sequester them in new more stable formations.
When you think about the % of our capital that we are investing in military conflict avoidance, investing 2% in new non-fossil infrastructure could substantially improve the quality of living, water, agriculture, nutrition, homes, sewage distribution and treatment and heating and cooling of homes, health care, etc., it would appear that it would be a piece of cake to sell the governments of the World on putting 2% of their annual GDP into this effort.
If we can't create very cheap electricity to power our logistics, desalination, syn fuels, industries, we need to hang brains out to dry.
2
@james jordan The good news is that renewable electricity is already cheap. Add in a substantial carbon tax, and 2% of GDP on, say, clean energy incentives might be enough.
What is at the top of our system if values - the capital or a country and a society?
Are the people there to protect the growth of capital or it is otherwise?
Check the current laws to find the answer on this question.
4
Hi Dr. Krugman, you were my econ professor and many times I've disagreed with what your articles. Here we have an exception though - it is insane not to be borrowing for investment in an environment like this, with real interest rates as low as they are. I don't necessarily agree with the "permanent" part of it - but for sure we seem to keep relying on monetary action when obviously fiscal action is the call of the day. Build infrastructure now!!
1
@Chris For example high voltage DC grids connecting at first the country and then continents, to enable dispersed intermittent renewable electricity to be exploited while minimizing the needed storage.
I'm sorry, but these seems perfectly straightforward to me.
Are we here to build a society or squirrel money away in a tree?
Are we here to have the capability of quickly developing anti-virus meds or have individuals with more than one mega-yacht?
Are we progressives or conservatives?
We clearly have a system powerful enough to pull this off and this seems like a mechanism that could safely do it.
But we've worked out way to this reasoning. It's not a radical idea, in the big scheme of things.
4
During the 1990s Federal spending dropped from 22% of GDP to 18%, taxes went up for everybody and interest rates went up. The result was a booming economy. Austerity is the key to prosperity.
@Joe Public And then the internet bubble burst!
A lot of the 90's growth was venture capital and it turns enough resulted in productivity improvements to help in later years. Too bad a lot when into trying to figure out how to deliver 40 lbs dog food bags via overnight delivery at a discount and still make money (ha, ha!)
Interesting. One initial reaction: with the economy at or near full employment, how would this work. Productivity growth would have to increase, right? Maybe but productivity is something of a secret sauce.
1
It’s also easier to imagine catastrophic climate change than the end of capitalist production. Economists struggle to tinker with a system on the ropes, of which current situation is a clear indication. Covid 19 is the unconscious displacement of this fear. That the crisis originated in China is not a coincidence with the massive disruption of ecosystems and its effects on millions of people who only decades ago lived of sustainable agriculture. However without China it is very difficult to imagine the inequality and concentration of global wealth of the last 40 years. The global value chains don’t really much without China’s production.
3
“ What this tells us is that the bond market isn’t just pricing in a global recession driven by the coronavirus, but that it expects the Fed funds rate to be near zero a lot of the time looking forward. That is, the market sees a future of secular stagnation, in which the economy is in a liquidity trap, that is, a situation in which monetary policy loses most of its traction, much if not most of the time. We were in a liquidity trap for 8 of the past 12 years; the market now appears to believe that something like this is the new normal.”
Right, the US, Japan, and many European countries were already in an industrial recession during 2019. Covid 19 becomes the metaphor and catalyst of this process as deceleration in China was happening before it was named. Now, financial corporations are sitting in a lot of money they don’t invest in fixed capital while many zombie non financial corporation prolong their phantasmagoric existence by borrowing cheaply and subsist as BBB debts.
That is unsustainable in the long run due to the inter related nature of today’s economy. If China goes in recession, the possibility of a crash here is very likely. Financial corporations cannot keep the con for too long without real value being created in the globe at the rate it demands to survive. Prolonged low growth is a symptom of uncompetitive capitals ready to collapse at any moment. And with them the illusions which sustain their ideology.
Make the zombies profitable by fiscal policy?
1
deficit spending on infrastructure is a great idea. unfortunately with level of corruption present in the US these days it is highly unlikely that the spending proposed here will ever produce anything of value to society.
2
What about repayment of principal?
@Yasa As long as the outstanding principal is not growing as a percentage of GDP (and that's what Krugman demonstrated in his toy example), principal is not repaid....it is rolled over. That is, when a bond expires, new bonds are issued to repay the old principal. The debt is always there, but its principal is an ever shrinking fraction of the economy's GDP.
6
@Marke Thank you! That explains it.
2
The basic problem with the capitalism is that's designed to protect itself, not a country it was created in.
That why the wealth funds have never been larger but the US national debt is at historically high level.
That's why the US industrial base has been exported overseas as well as the national proprietary know-how.
That's why the open border doctrine was created and the domestic laws declared as irrelevant.
It's very interesting how this intricate dance between the capital and a host country is going to unfold in the future...
1
It seems to me that US needs a Capital budget that funds investments and R&D. States borrow money for same.
1
This is certainly better than the Fed giving 100 billion dollars a day via Repos to hedge funds to speculate.
7
You said early on, "This won't be adopted," which is correct because the GOP plan is not broad opportunity and general prosperity, but increasing wealth inequality and return to government by oligopoly (without a king,) and economy with a permanent aristocracy and underclass, similar to Britain in ~1810.
Am I right?
5
Paul I have utmost respect for you. so tell me how doe your proposal differ at base from mmt, which you have attacked?
2
@rhporter Good question. Personally, I think Mr. Krugman’s proposal is much simpler to understand and explain than MMT, particularly with respect to explaining why a larger deficit doesn’t matter. I also think his framework is very well suited to developing metrics and control mechanisms to prevent deficits from spiraling to a level that will cause concern (controls and monitoring are in my opinion crucial requirements for such a structure to work because a loss of confidence will be a cliff event, ie it will happen without warning and the results are likely to be catastrophic). But I would really like to see Mr. Krugman’s take.
I think this is a really interesting idea that I hope policy makers review carefully. Done well I think it has the potential to set the world on a high-growth trajectory that will spread the benefits more equally. Looking forward to more on this topic.
2
I think about it all differently, are far simpler. Start with a belief that the US cannot exist in total isolation from the economic forces of the world in perpetuity. With that principle, then turn to the infrastructure the US has built to collect taxes which is superior to any country. Hence as long as we have the capability to collect taxes, and a willingness to pay them (another US phenomenon compared to the world) US government spending is not a problem because the world will continue to do business with the US. If however, we start to reject the payment of taxes and hence our debt, it will all come crashing down. Otherwise, spend baby spend.
2
Why not impose 1960s levels of progressive income tax rates and just spend the added revenue? Of course, one supposes that public spending would be more economically rationale, e.g., productivity enhancing, than the rush to asset accumulation and consumer display fed by low interest rates.
7
@San Ta
1960’s tax rates were more confiscatory than progressive. A 94% marginal income tax rate doesn’t generate much revenue; it’s only meant to discourage astronomical salaries.
According to MMT (which is essentially what Krugman is suggesting here), taxes aren’t necessary to raise government revenue. The government should issue whatever currency it needs to fund its agenda and use the tax code to regulate inflation and extreme levels of wealth inequality.
2
We couldn’t summon the political will to borrow for stimulus spending when there were negative interest rates— literally paid to borrow money. People still hollered about austerity and the debt. Kudos to you for fighting the good fight.
7
Rates will spike with repos, with inflation. reset time for those quants.
Thank you, Mr. Keynes.
2
In a rational world, this suggestion would be picked up immediately.
It bypasses ancient fights over “capitalism” vs. “socialism,” terms that long ago grew meaningless for any but propagandists’ purposes.
It also replaces concern about “growth” - an increasingly unsustainable concept in a world with finite resources - with concern about economic stability, and sustainability.
I believe you are quite correct in stating that the liquidity trap Japan never got back out of is actually a model for the future world economy as well.
We have to shift our priorities towards sustainability, and this is a strategic decision that would go far beyond all the usual sloganeering and empty debates that the empty middle, right and left are all engaged in.
It’s also not that hard to understand, for us slightly educated and intelligent few, and has the added benefit of transforming the world while the majority of mouth-breathing, infighting ignoramuses are still slugging it out uselessly with each other.
The question is, how to get it implemented without arousing their dim witted suspicion??
3
The problem is the government has the ExLax touch. I wouldn't want them controlling this much of the economy on a credit card. We have already seen this experiment, remember all those "shovel ready projects" during the financial crisis? How about the $200MM Facebook's Zuckerberg and others handed Newark Mayor Corey Booker for the school system? Seems that money went right down the sewer system that also doesn't work. I know, people will say "it wasn't enough" to which I say "it will never be enough".
No, the government is the absolute worst steward of financial management and efficient production.
So why are you opposing Bernie when he is the only candidate ready to adopt this idea?
5
"... debt at 200 percent of GDP. That’s terrible, right?"
Um, no. Remember back in the good old days, before the banks start handing out 125% mortgages? The rule of thumb was you can afford a house equal to 2 years wages......which is 200% of your Gross Domestic (Household) Earnings. (You should just never get a mortgage which is more than 80% of the value of your house.....except today, if we're going to start deflation.)
Interesting idea, but I can't give him an A+ for exposition. Try this, using simple algebra:
If this year's gdp is g_0 (in real dollars say) and if the economy grows by 2%, then next year's gdp will be g_1= 1.02*g_0.
And if the total debt this year is is d_0 and if the feds deficit spend this year by by 2% of gdp then the total debt next year will be d_1= d_0 + .02*g_0.
The debt to gdp ratio this year is d_0/g_0 and next year it will be d_1/g_1 = (d_0 + .02*g_0)/(1.02*g_0), which equals
(1/1.02)*(d_0/g_0) + .02/1.02
So, as in his example, if this year's debt to gdp ratio is 1 (i.e., 100%) then next year's ratio will also be 1.
After 200-plus years of US history one might figure that we have learned how to tax ourselves. But, we have not. Taxes are wielded by political hacks and other fools, as tools to shape the economy to suit their voters' and patron's wishes. Our political leadership is weak on economics (thanks Doc) and principles. This weakness has led the most powerful nation in history to have a broken electricity grid, large pockets of poverty, polluted waterways, and many more impoverished public needed programs. Instead, we have a hugely bloated military and an ocean of corruption up and down the government. The rich pervert strategic taxation out of grandiose greed in cahoots with mindless politicians, accountants and lawyers paid for with the lost proceeds of the U.S. When will it end? Who knows, but it's can't be soft landing.
4
It’s a race to November 3. Will this economy, long overdue for recession and now seriously weakened by an itty-bitty bug, stay hot to give republicans their one issue to run on? A prediction...this will be the least read or the least finished reading article published today...
Wow. This is fun! All the pseudo-economists feel compelled to comment on a wonkier-than-usual post with even wonkier stuff. Some differential equations please...
1
The question remains “where do you get the people” to utilize the spending during a time of boomer retirements, falling birth rates, and a growing desire to eliminate all immigration?
Maybe AI and robots will be the solution. But most Americans could not run acrobot
Sounds like the financial plan for the Green New Deal.
2
For what it's worth Machiavelli also recommended to spend on public works/infrastructure in urgent, unsettled times. Man had a brain on him.
No, no, no, Professor !
We must invest in billionaires, CEO’s and 0.1% Welfare Queens.
Everyone else can drop dead from Grand Old Poverty.
We must respect trickledown fraudonomics.
13
Congress earns a paycheck and receives generous benefits while spending their days doing nothing but raising money for their next campaign.
Congress has demonstrated zero competency in financial literacy: they cut spending during recessions; increase debts by spending on wars and tax cuts by borrowing; and they refuse to invest in infrastructure and our citizens. They are a worthless bunch of well-paid, lazy, idiots, owned by corporate America.
5
This proposed perpetual debt level is probably not wildy different from the "niche" parts of our military and foreign aid budgets that we rarely worry about paying for in recent decades and that may have only modest positive effect on the civilian economy. In this sense, are we not already doing what the author suggests?
"Just handing cash" to dubious investments seems like a slippery slope or worse (why not spend on anti-poverty programs like EITC?). We are already making many of the less-dubious investments, and elected officials should be able to be convince taxpayers to pay for actually valuable ones.
Selective handouts may sometimes help the economy, but it is probably terrible for our politics and governance. Where such "handed out" cash tends to end up may mean it does far more harm than good in the long run.
Excellent article, and one that could drive some productive fiscal actions that AREN'T tax cuts for the rich.
4
How about reducing the population by subsidizing long term birth control technology thereby reducing the GDP in concert with the falling population. Then stimulus spend on renewable energy, conservation and sustainable agriculture. Couple that with a tax code that is equitable and tax funded healthcare and you might see broad based prosperity with people and planet increasing in health and wealth. A lower GDP divided by a lower population number may make everybody richer.
2
I get it, the dynamics of our economy is complicated and that's why people like Dr. Paul need PhDs. Our current national debt is 1 x GDP and experts think we can go way higher sighting Japan as an example. Maybe we will get away with it and maybe not. Math really can't tell us that since all the variables have not been defined, I am guessing. It is the unknowns that always get us. Remember our currency is not tied to the gold standard any longer and so its value is tied to our confidence in the dollar. Our stock market is much the same way. Once our confidence is shattered so is the all mighty dollar. I'm betting if we wait to fix our national debt and let it reach let's say something like 2 x GDP what might happen? Does Krugman have a formula for that? Remember those nasty undefined variables. And does it work for the largest economy in the world? Remember right now if we pay if off it would cost everyone in this country $70K. Perhaps we should balance the budget and pay as we go. If we don't want to pay for the next war via taxes then maybe we should stay home. Human kind would be better for it.
1
@Rick So, your solution is getting the unemployment rate to 25 percent or greater; i.e., another Great Depression? I don't think that will work.
"...a very good case for putting a sustained, productive program of stimulus in place as soon as possible..."
But REAL stimulus. Repairing bridges, repairing roads, building schools, hospitals, & libraries. Even public art....sculpture gardens & parks. NOT interest swaps, basis swaps, currency swaps, inflation swaps, commodity swaps, Credit default swaps, CDOs (collateralize debt obligations) and most of all, NOT Synthetic CDOs.
6
"Why not put investment-centered stimulus in place all the time?"
Because, if the idea is promoted by Democrats, the Republicans will call it socialism or communism. And the Republicans won't propose it because it's spending money (no matter how wisely) not a tax cut.
Why is it the the Republicans, ostensibly the party of business, seem to have absolutely NO idea of how to grow the wealth of a society. They seem to feel that, rather than getting money to circulate among the entire population of the nation, the way to increase wealth is to stick it in a mattress. Just their mattress. THAT'S why we are in a liquidity trap, that's why we're experiencing secular stagnation, that's why the entire world is about to experience a horrendous bout, NOT of inflation, but of deflation / contraction.
Because, as Krugman has already noted in a previous column, today's big money is tied up in financial machinations, NOT in productive endeavors. Bouncing up & down on a mattress covered with $100 bills is not wealth or creation of wealth.
14
Some interesting economic theory here. I wonder, is there any candidate running who seems likely to employ such a strategy? (hint: it's Sen. Sanders)
4
What if interest rates are falling because investors expect all investments to have lower returns in the future? For example, if coronavirus reduces commuting, travel, and tourism permanently as some people are predicting, then new infrastructure projects would have lower returns than they do today. If that's the case, you wouldn't want to borrow to do infrastructure projects just because interest rates are lower--that would be like buying stocks just because they got cheaper even if the reason they got cheaper is because investors expect lower profitability in the long-run.
1
@HO ...."...if coronavirus reduces commuting, travel, and tourism permanently as some people are predicting, ..."
Did SARS, Ebola, or Plague (which is ongoing) in the US South West alter tourism permanently?
While I don't think much of the man running the show, Covid-19 isn't going to kill 1/3 of the world like the 1918 flu. Of course that doesn't mean we shouldn't test for it & track it to defend against it instead of playing numbers games.
1
"That’s why current proposals for fiscal stimulus, like the one advanced by Jason Furman, basically involve handing out cash — a good idea given the constraints, but a shame given the missed opportunity to invest in the future.". If you give parents cash and they take care of the kids, how is this not an investment in the future?
4
"....but Japan has debt exceeding 200 percent of GDP, with no crisis in sight."
You'll forgive me, but the last time we were infatuated with something about the Japanese economy was in the '70s with our fascination about 'just in time' manufacturing programs......which is the reason, in the US, we now have no vacation, no benefits, no retirement, no insurance, employees are now called independent contractors, and working people have been killing themselves with opiates as fast as they can.
14
@Johann Smythe
Relevance? The issue is not about Japanese policies in general. It is about the effect of a high debt to GDP ratio.
3
Sorry, but it’s not just about debt to GDP, which is merely one indicator of a nation’s ability to grow. It’s about a holistic policy towards what kind of society we want to have and leave for future generations. Continuing with neo-liberal economic mumbo jumbo, of which Krugman has been one of the biggest advocates, is NOT the answer. Outsourcing, financial shenanigans of Wall St, etc. are all spent and discredit options. We need to put America and American workers first, then worry about what we should or shouldn’t be doing with globalization. Down with the elite. Up with the people.
2
@Common Sense
That horse is already out of the barn, this is a very global economy. Wall Street only functions on profits and so the American worker has been outsourced to cheaper countries. What American workers need is a return of strong unions, where the profits were shared with the people that made them possible.
1
I think the theory works pretty well but economists have been clamoring for infrastructure spending for a long, long time now. Perhaps there needs to be a political calculation included. (Didn't economics used to be called "political economy" by the way?) Being out here in flyover country all I hear is you can't have lite rail, you can't have mass transit, etc. But when I visit Europe everyplace has mass transit pretty much. I think a lot of people would be concerned that a federal infrastructure program would primarily be about more multi-billion dollar tunnels under the Hudson River or SF Bay while the rest of the country treads water. (Please don't tell me about farm programs - my family left the farm over a century ago.) Remember we would not even have the Federal Reserve as we know it if it wasn't for a built in regional solution.
3
Hiya Kansas,
I will GLADLY sign off on cross-country bullet trains and intra-Kansas lite rails if the trade off is that your farmers stop reaching into my pocket.
Doesn't mean a Hudson River tunnel is less than crucial; it affects more travelers daily, directly and indirectly, than anything in the previous sentence. But I am very happy to hear that you do not think farm subsidies are important; that is common ground on which we can build a modern rail system.
Love,
NY
6
@Alex
actually, i was thinking about something a little more modest along the lines of a few street car lines or lite rail to the airport. BTW less than 1% of the labor force in Kansas are in agriculture.
2
@Alex .....Na....na.....those two farmers, one named Cargill & one named Archer Daniels are going broke faster than Trump. They need what's in your pocket!!
2
This strikes me as the opposite of Volker's war on inflation in the late 70s/early 80s -- this is a war on non-inflation.
4
I just don't get the point of this. The basic problem we face is the distribution of income. How does creating debt confront this problem? The obvious solution to stagnation is to pay for your permanent stimulus by taxing saving and using the proceeds to expand physical, infrastructure, public and private healthcare, and education education. In other words, to do exactly the kinds of things Sanders and Warren are proposing plus paying for them by increasing taxes instead of running a deficit and pretending that debt doesn't matter. The place to start is by
1) rescinding the Bush and Trump tax cuts,
2) adding additional brackets at the top of the income tax structure,
3) eliminating the income caps on Social Security and Medicare taxes,
4) eliminating corporate tax loopholes and increasing corporate income tax rates,
5) dramatically increasing the inheritance tax rates on large estates, and
6) eliminating the special treatment of dividends and of capital gains to the extent that capital gains are not the result of an increase in the general price level and are on assets that have been held for less than five or ten years.
If we did this we wouldn't have to pretend that debt doesn't matter and would be able to confront the distribution problem. http://rweconomics.com/Deficit.htm
7
@George H. Blackford Distribution of income is another problem that PK addresses elsewhere. This is a different problem -- permanent liquidity trap.
3
@Joel826 I don't think so: http://rweconomics.com/ESAD.pdf
1
"because a debt crisis doesn't seem imminent"....
I tink people misunderstand COVID19 as a supply impact. It could shift the demand curve for a big chunk of the economy, for a significant period, as behaviours adjust (travel, entertainment, hospitality).
Couldn't this easily turn into rating downgrades, debt market turmoil, bankruptcy? Ie. Mini GFC
4
Love it. Thank you. I’ll be puzzling over this for a long time.
Sounds MMT with extra math to me. Or let's just say left-Keynesianism for the Samuelson set.
4
Climate change mitigation should be first on the list. The long term effects are probably the most expensive. Like child care, it would pay for itself.
4
This is Forrest. Successful businesses do something like this all the time. They use lines of credit, often seasonally, and also term debt on hard assets. This works if these ongoing loans are helpful in generating positive cash flow most of the time.
5
Yes, infrastructure spending is needed in very large amounts. Printing boat loads of money will help. I see the roadblock of not having the talent to design a modern America as the real danger. Our citizens feel comfortable with the nineteenth century country they live in and fear being moved into the twenty first century. It will take weeks and weeks to print the money but years and years to mint the needed talent.
9
I agree it would be worth trying. But I also think it would be wise to get a handle on the cause of these persistently low rates: Bernanke's global savings glut. Not ironically, I think its cause is a persistent lack of investment spending, both public and private. And there we have to look at the financialization of the global economy, especially what you call shadow banking. Regulation which curtails these sectors, especially hedge funds and private equity, is needed.
8
Another reason to increase government borrowing: the markets are awash in capital with no place to go. Right now, a lot of that money is chasing stocks, inflating what many see as a bubble. Corporate buybacks do the same.
Provide some nice, solid government debt to soak up some of that cash, and you'll help stabilize the markets. And the resulting small rise in interest rates will give the Fed more flexibility in the long run.
Sounds to me like a win all around.
8
Many people express the desire that 'government run more like a business'. This sentiment contributed to the election of our current "super genius" businessman, whose business skills include multiple bankruptcies and dozens of failed brands.
But our governments, at most all levels, think nothing of making investments in 'durable goods' without planning for any replacements, and with only grudging acceptance of necessary maintenance. We built sewers and water systems once, 100 years ago, and complain bitterly when something has to be fixed. No business would try to manufacture in a factory built and equipped 100 years ago - no steel mill or auto company would have the same machines, only repairing and maintaining them when absolutely necessary (and then using the 'lowest bidder' to do the work). Yet this is exactly how our governments handle infrastructure. Hundreds of bridges, thousand of miles of roads built 50-60-70 years ago, maintained mainly to fix breakage only, yet we balk at a program to rebuild our infrastructure. An electrical grid notable mainly for its continuing function, but increasingly inadequate, fragile, and fracturing. Water systems often 100+ years old. Ports built 100 years ago; airports with 40-year old runways and terminals.
A program of continuing, regular investment and infrastructure upgrades is far more 'run like a business' - yet doing this will be an uphill fight in Congress, whereas another tax cut would sail right through...
34
@Jim, exactly the reality we live. As you know, Californians voted on a ballot measure on Super Tuesday: Prop 13. The "Orginal 13" in 1978 was a ruse to save Granny 's house from exorbitant property taxes, BUT in reality was welfare for the rich who owned multiple rentals and business/corporate land. The state hasn't been the same. The recent Prop 13 was a bond measure to improve schools and colleges. It failed. No School Improvements for buildings built again 40- 60 years ago. No on 13 funding? Same suspects from 40 years ago.
2
@Jim Brokaw
In truth the 'run government like a business crowd' are lying to you. What they really mean is that government should be a vehicle for a CEO and bought board of directors to get rich, let the infrastructure fall apart, dump the declining assets on the public, and privatize what still has value to exploit. Just like our recently pardoned Michael Milken did when that model was less acceptable. Unloading marginal assets is marginally acceptable in business but in government it means abandoning the public when the leadership feels like it - infrastructure? who cares, I have my own, health care? check, security, no problem - I can afford it. The rest of running a business is meeting payrolls, paying your bills (sound familiar Mr. Trump? No, I didn't think so), depreciating and replacing assets, treating employees like valued team members. You remember all these things. I'm not alone in seeing through all this as a way to rob the public blind and being applauded by their cronies all the way to the (Swiss, Cayman Islands) bank. I'm good and sick of it.
2
If you want to avoid the liquidity trap, change the law, let the federal government print $22 trillion and pay off all the creditors who will suddenly be flooded with cash and forced to invest rapidly everywhere.
That would enable the federal government to invest about $500 billion it spends on servicing the interest on national debt in rebuilding the national infrastructure.
It would be the very patriotic thing to do but we are in chronic shortage of the patriotism too...
5
@Kenan Porobic - If the government can print $22 TRILLION (actually it wouldn't need that much) to pay off all the creditors without causing excessive inflation, why can' it simply create the $500 billion (actually we should spend even more) to rebuild our infrastructure?
1
Very interesting...
You provide the public with the only realistic option how to eliminate the national debt of $22 trillion dollars and there are 3 likes.
Some irresponsible celebrity says something extremely stupid and there are millions of comments and arguments...
1
@Kenan Porobic
Yah - if it doesn't play well on Fox it isn't "patriotic."
The GOP has postured Patriotism as their brand, and when you have news sources effectively brainwashing a significant fraction of the population, you may not be able to fool all the people, but you can fool enough, enough of the time to make a good living off it.
1
A great idea. Too bad that so many people can't hear great ideas, or can hear them only as some sort of threat. By the way, in response to a previous post, spending on efforts to reduce and mitigate climate change surely belong within "infrastructure", and certainly are as urgent as any spending can be.
12
Although Krugman does mention it, this piece understates the social, scientific, and economic value of such a stimulus. The most obvious being the ability to invest in mitigating climate change by investing in alternative energy. Things like a high speed rail system would improve travel conditions for many if not most (as well as reduce traffic and CO2). More spending on scientific research could identify solutions to many problems. Improved health, safety, and living conditions for many would substantially increase quality of life more broadly and probably mitigate against other costs.
20
In his career as a Professor, Professor Krugman’s thesis would elicit support or criticism from other competent political economists on either side of the liberal/conservative divide.
First there was Keynes , then came the Milton Friedman counter revolution.
The Times is a reasonable venue for other economists to criticize Krugman’s hypothesis or to extend it with additional empirical—fact based—evidence. The dialectic of thesis, antithesis leading to synthesis has been accepted in rational debate for centuries.
5
The US economy has been, for a large percentage of years since 2000, and now continues to be thoroughly hyperstimulated by very low interest rates and huge government deficit spending.
If you want to do infrastructure spending to stimulate, it can only be done by swapping infrastructure for one or both of the above stimuli.
This argument ignores the fact that transfer payments (particularly those payments from working age to retirees) are growing significantly faster than GDP.
I am reasonably sure that most Americans believe that investment in infrastructure (rail, air, communications, education, etc) is money well spent.
However, the ageing demographics of the country are resulting in the spiralling burden of transfer payments.
When FDR introduced Social Security, there were 30 taxpayers for every one retiree. Now there are three. And soon it will be 2:1.
We’re leaving a tremendous burden on the younger generation....just like in Japan. Infrastructure investment is wishful thinking. Although well intentioned, SS, Medicare, Medicaid and the ACA have effectively mortgaged the future of our children...
2
Complete garbage.
This sounds like the arguments made over twenty years ago, that helped spur the Republican efforts to kill the old for profit in the 90s. It retains traction among those utterly ignorant of basic economics, but who find the idea of pitting the young against the old entertaining.
Such “transfer payments” could be easily mitigated by not excluding anyone over 60 from the workforce, which, despite the illegality and moral bankruptcy of the practice, is extremely widespread, and highly arbitrary.
If you don’t like the “burden” of the old, don’t exclude them from the economy and then complain they’re costing so much to support. This is the common, self-inflicted wound of the young and naive, and is utterly laughable in its hypocrisy.
@Chin C
No mention of the military?
Strange.
i read this as an example of how contemporary economics puts its faith in one thing: "g". (thank you, adam smith.)
"g" is growth in the economy ("productive capacity"), which fundamentally means growth in population. (economists have found a "productivity paradox" in the expectation that multiplying computers, connectivity and robots will make up for fewer workers.) and here is the gist of krugman's argument: so long as we have enough population growth to offset interest rates, we're cool.
the argument is littered with qualifiers such as "maybe" and "eventually" and "probably" in the face of "fairly strong evidence" that world economic growth is shuddering to a standstill. ceteris paribus, "bad times will be a very frequent occurrence."
and the equation (and argument based on it) is based entirely on ratios -- interest rate, growth rate, debt to GDP, interest on debt to GDP, change in the ratio of debt to GDP -- in other words, the difference between two ratios -- and "(r-g)d" which is just a ratio by way of a factor. my own limited mathematical experience is that any equation built entirely on ratios is exceedingly prone to blow up.
rather than declare zero growth means "bad times," economists should turn to finding good times in the inevitable. the dismal science is already dismal enough, since its motto is "grow forever, or die."
8
@drollere
Excellent points. This idea of negative growth and quantifying into positive human conditions is on point to the fundamental problem, in my view, with policy driven by purely traditional metrics. Traditional economic math is good. Understanding the desired result for the common good and mitigating with better systems of governance over economic policy is even better.
3
Neat article. And, if I'm not mistaken, it explains, at least in part, how the U.S. "paid" for WW II. We just grew and inflated the economy out of it through Cold War related deficit spending. Nominal dollar national debt was much higher by the end of the '60's than it was at the end of WW II, 354 billion vs. 259 billion. It just made up a smaller proportion of total GNP due to moderate inflation and strong real growth after 1945 - 114% vs. 35%.
I also have a question. How much of the world's decent into secular stagnation do you think is attributable to the overwhelming concentration of wealth in the hands of so few people? The only thing that money's doing is chasing after the highest returns it can get in financial markets. It's doing nothing, or at least a lot less than it could, to make the real economy stronger. Shouldn't getting the wealth held by the richest 1% down to say 20% from 40% put a lot more wealth and income in the hands of people who would invest and spend it real economic assets? And wouldn't that go a long way toward relieving secular economic stagnation?
36
I think a tremendous amount has to do with wealth distribution but a lot of the wealth that the upper echelons have are not worth as much because it is not as useful and artificially inflated by tax policies that raise the cost of living of Americans to sustain that wealth. Unless we address that it will be hard to remain competitive and use that infrastructure in a positive way. We have to put more leverage I. The hands of indivisible they can get education, take care of loved ones who are ill. Plans that don’t have self correcting measure to limit the inflationary impact on their industries even in absence of national inflation will put too much capital in industries for a decreasing return.
2
@mather - Your analysis of post WWII is mostly correct, but when you point out that it was because the debt ratio went down, I disagree.
The debt ratio also went down after WWI. In October of 1929 is was only 16%. And then what happened?
What is important is that the nominal dollar national debt went DOWN after WWI (it shrank almost 40%) and it went UP after WWII (from 1946 to 1973 it increased 75%).
@mather I don't think this is exactly how the US paid for WW II: http://rweconomics.com/_themes/htm/WW2.htm
1
If you're a normal human being reading this post, it makes perfect sense even if you don't understand the wonky charts and math. The message of a more humane and rational way of doing things still comes through.
Trouble is, the politicians running the place are not normal human beings in that their fealty to the donor class of plutocrats has literally removed them from reality. The only norms they seem to care about are the rhetorical ones that Trump violates each and every day. It's that he is just so darned vulgar about trampling over the poor and working class.
Never mind just him and a possible President Joe not welcoming Paul Krugman's suggestion for a permanent stimulus. House Speaker Nancy Pelosi invoked the spirit of her guru, the late billionaire austerian Pete Peterson when she successfully restored the "PayGo" rule last year. Only three of her Democratic members (including AOC) dissented from the requirement that all new deficit spending be offset by cuts to other programs. Exceptions would be made for emergencies like pandemics but of course then everything goes back to abnormal as soon as is inhumanely possible.
You'd think, wouldn't you, that all the critics of single payer health care would finally realize that allowing 80 million people to remain underinsured or lack any coverage all is not only cruel to them but injurious to the economy. The louder the centrists shriek "but how you gonna pay for that" at presidential debates, the more abnormal they sound.
54
@Karen Garcia
America's political game of dice: whichever side they fall on, the house wins. Until a majority of voters come to that realization, propaganda of the kind we are treated to in this publication and on our cable news will continue to hold sway, no matter how outrageous or cruel to one third or more of the American public. It wasn't that long ago that all we were discussing was the propensity of the low-information conservative voter to consistently vote against their own interests. Here we are now...
14
@Karen Garcia What are the risks of getting rid of pay-go?
This make sense both from the economic point of view and repairing the crumbling infrastructure structure of the country. One aspect that I disagree with the author is making it permanent that prevent adjustment when conditions change like a sharp increase in long term interest rates. A better approach is making it the default mechanism that can be adjusted should circumstance change above a threshold pre defined level.
1
We unfortunately continue to be limited in our thinking about what the term, “infrastructure” really means.
It refers to everything that makes a viable society sustainable, equitable and humane. It is the foundation upon which everything else can be built.
It includes energy, a clean and sustainable natural environment and resources, a manageable and reliable food, air and water supply globally, housing, education and healthcare.
With degradation of all of that, such as has happened at an alarmingly accelerated pace over the last three years under Republican ignorance and incompetence (we have essentially been without any real government during this time), very simply, civilization quickly collapses.
Restoration will be extremely difficult at this point; it may be too late.
11
Given that 80% of the stock market is owned by less than 10% of the population, this would be much more beneficial than stimulating buying-dips.
Given that 80% of the stock market it owned by less than 10% of the population, this will never happen.
2
Every column now K is inching towards MMT, but he still ignores these two importants facts:
1. Thru the FED the federal gov can produce as much money as it wants out of thin air.
2. The federal gov MUST supply the money we need to conduct commerce and so that banks can make loans. This money gets to the private sector by deficit spending.
1. implies that the federal gov need not ever borrow from the public. As one woke economist has said, "The sale of Treasury bonds is merely a service the gov provides for risk free savings."
History vividly shows the importance of 2. ALL 7 times, the federal deficit was not large enough to prevent the net flow of money OUT of the private sector, we have fallen into a financial crisis with disastrous results.
The first 6 times the out flow was caused by taxing more than spending, i.e. a federal surplus. In 1817-21, 1823-36, 1852-57, 1867-73, 1880-93, and 1920-30 this took so much money out, we had a depression in 1819, 1837, 1857, 1873, 1893 and 1929. BTW this ia ALL of our depressions.
The 7th time, the outflow was caused by the current account deficit (which took money OUT) was larger than the federal deficit (which put money IN). Except for a brief period in 2003, this happened in 1996 to 2008. We only avoided a 7th depression by the FED pouring TRILLIONS into the banking system, but the result was not pretty.
If we want a growing economy we must ADD money to it. The only entity that can do this as needed is the federal gov.
6
@Len Charlap
"Every column now K is inching towards MMT, but he still ignores these two importants facts:
1. Thru the FED the federal gov can produce as much money as it wants out of thin air."
One important distinction: Krugman ignores it now. He didn't when he was toying with the idea of a trillion dollar coin back in 2011. https://en.wikipedia.org/wiki/Trillion-dollar_coin
Paul is a neoliberal most of the time, with pseudo-progressive tendencies during hard times.
5
What about inflation? There's this little equation:
P = (MV)/S
where P is prices , M is the amount of money in the economy, V measures the frequency that money changes hands usefully, & S is the dollar amount of the amount of stuff, goods & services, we can produce in some time period.
A word on V. If the government gives Scrooge McDuck a Billion for advice on the comic book market, M increases by a Billion, but if Scrooge puts the bucks in his basement, & forgets about it, that doesn't affect P at all. That Billion has a V of 0.
Conservatives cannot understand an equation with more than 2 variables. To them it looks like:
P = M.
You print more money, you debase the currency, prices go up. End of story. Of course this might happen if S and V remain constant, but in point of fact, the causes of most, if not all excessive inflations since WWI has been S getting too small--shortages,
The anchovy harvest failed in 1972. There was a shortage of livestock feed. Then came the oil embargo. Prices rose.
After WWI, Germany did not have enough arable land to feed its people, nor money to import food. There was a severe shortage of food. Over 1,000,000 people died from starvation. Food prices exploded causing excessive inflation. Only then did the gov print too much money.
But what usually happens when the gov gets the new money to the people who need it & will spend it, by the genius of capitalism, S increases & inflation is held in check.
10
@Len Charlap
Mr. Cherlap is, I believe, a (retired?) mathematician who understands the numbers, appropriate history, & MMT (apparently - i.e. no MMT expert has ever disputed what he says about it, as far as I know, and I always look for his comments).
He's also non-reactive, putting him in the minority in these pages.
5
Krugman is largely correct. Virus effects themselves likely to be short term. But they could be the catalyst for tumbling the current fiscal house of cards. If so, fiscal stimulus through infrastructure building is clearly the appropriate path forward. Financing, especially for now should be mostly long long term to better manage interest rate costs. Set cost benefit priorities to reduce political bias. An independent agency to select projects? Krugman also implicitly presents a model for gauging the appropriate size of the cumulative deficit. Tax reform is necessary as well to keep the deficit in bounds. Need to go beyond fixation on corporate taxes, which nonetheless need to stay competitively low. Reconsider a modified Value Added tax (VAT) as well.
I’m shocked, shocked that President Trump didn’t come up with this idea. However, I’m sure our “very stable genius” of a president will have a firm grasp of it, moments into your explanation. Then, he’ll take credit for it.
.
1
Given historically low interest rates, and crumbling roads and bridges, it seems an obvious time to borrow money to fix things. Same thing for education: public funding for students to expand their skills seems an obvious action.
Of course, this ignores the “velvet rope economy” described elsewhere in today’s NYT. Things are great for the 1%, and they’ve heavily invested in politicians. This means anything that might level the playing field a bit is a non-starter. Example: why do deficit hawks only worry about the cost of social programs, and not massive tax cuts or military weapon systems?
30
@John M that's what i was gonna say!
The case for permanent stimulus?
Well over 100 million Americans who work multiple low-wage jobs and can't afford rent and basics without living in a multigenerational home. Those include former 99ers (unemployed due to the Great Recession, new college graduates during the Great Recession).
Millions of elderly having to work through their seventies and later.
No healthcare or healthcare that is too expensive to use for nearly 90 million Americans
Millions of disabled whose social security payments don't even cover housing.
Overdue infrastructure needs throughout the nation.
Climate change and the need to completely change how we use power and fuels.
Trade agreements that have left our nation without the ability to gainfully employ more than a third of the nation.
Fiscal policy that allows for the legal hiding of cash and assets overseas and absolves corporate entities from the single most important duty of citizens: paying taxes.
This is the intolerable situation that conservatism and triangulation created and then perpetuated and it is going to take long term stimulus and fundamental policy changes to get back to FDR.
Whichever case you prefer, Biden's centrism will not allow for a return to FDR - only a return to the forced centrism of 2016, which condemns the 100+ million Americans who live at or below poverty to a fate of deprivation.
45
The things I wrote about above depict the underlying conditions with which we've lived, clearly, during the last decade, with the build-up occurring over the previous several decades since Nixon.
My stance on the COVID19 and all the other crises we can expect is simple: we should never have come to this point and everything, from here on out, hinges upon the most proactive climate policies that Sanders proposes, including dealing with threats, such as the corona virus, aggressively and immediately. That means not only funding the CDC accordingly, but also including resources for the military to have the ability to create solutions on the fly and not rely on Pharma for a cure. It just takes too long.
8
@Rima Regas
I like the idea of rescinding tax cuts if the recipients don't do what they were supposed to do, i.e., invest. If you are going to use the tax code to influence behavior, then failure to change means losing the cut.
My preference is to eliminate ALL deductions for everyone. There should be no way to reduce your tax bill. Most of the tax cheating is on the deduction side; much less is on the income side.
8
I note that you also believe that Single Payer is the most effective healthcare system but it is also impossible because the political establishment won't hear of it.
The world would be a much better place if you stopped being "realistic" and just joined the rest of us to fight for what you believe in.
7
Also check out our stagnant growth rate. Obviously the policies of the past 40 years that have redirected society's surplus into private hands have created imbalances in investment that have destroyed growth. The private sector and capital markets might be good at some things but they are not that good
And the imbalance is simply too huge to be addressed incrementally. The only thing incrementalism does is postpone the reckoning and preserve the power of our hopelessly incompetent elites.
5
Right now, approximately 8% of the federal budget is spent on debt interest. The economy, among other things, goes in cycles. What happens when interest rates rise?
1
@hk, federal debt service is currently 1.36% of GDP. https://fred.stlouisfed. org/series/FYOIGDA188S
But that does not account for the fact that the FED returns the profit it makes to the Treasury. This includes the interest paid in the Treasury bonds it holds. This has been running at a little less than $100 Billion each year. http://www.latimes. com/business/la-fi-
federal-reserve- profit-20160111-story.html
When you take this into consideration, this brings the cost of federal debt service well below 1% of GDP, which is not only trivial, but which is very low by historical standards.
The interest on the debt is not a red herring; it is a large purple tuna.
3
@hk - Federal debt service is currently 1.36% of GDP. https://fred.stlouisfed. org/series/FYOIGDA188S
But that does not account for the fact that the FED returns the profit it makes to the Treasury. This includes the interest paid in the Treasury bonds it holds. This has been running at a little less than $100 Billion each year. http://www.latimes. com/business/la-fi-
federal-reserve- profit-20160111-story.html
When you take this into consideration, this brings the cost of federal debt service well below 1% of GDP, which is not only trivial, but which is very low by historical standards.
The interest on the debt is not a red herring; it is a large purple tuna.
PS The federal government does not have to pay interest if it sells its bonds to the FED.
3
Good!
Over the last many decades, monetary expansion has fed some combination of consumer spending, corporate buy-backs, and increased financial assets of corporations. With Krugman's proposal, at least more of it will be invested in useful assets -- infrastructure and, just maybe, education. And it would be less destabilizing.
What's not to like?
76
Regardless of Paul’s math, it is very obvious that extremely important investments by government aren’t being made: call it infrastructure if you like, but it isn’t just roads and affordable housing. It is health care, senior care, child care, education, and may we add, affordable reliable internet and phone service. And also actual, real, factual, significant reporting of events and squashing of propaganda like Fox, phoney social media accounts, and disinformation on Twitter, Facebook, YouTube etc.
Government has many responsibilities, and most of them are not being attempted, nevermind achieved. Paul might have fingered how to pay for them, but as he admits, fat chance of implementation, whether Trump or Biden gets in.
94
More public investment is a good idea for several reasons and is exactly what Keynes called for at least in bad economic times - he definitely did not favor the idea that interest rates could do the job (see the end of Ch. 12 or the last chapter of The General Theory). However under current conditions most of this can be paid for with higher taxes on corporations and the rich. The money that corporations get from both tax cuts and low interest rates has clearly been used to buy back their own stock rather than constructive investment. The availability of excess money for speculative and strictly financial purposes is an actual harm. Krugman himself among many others has called attention to the excessive financialization of the world economy.
It is generally considered that WW II did good things for the US economy. The economy during the war was largely socialistic, as the government temporarily directed a great deal of investment and output. The US and the world again face a huge crisis in global warming and another collective, essentially socialistic, response is probably required. Such a temporary response might have similar beneficial effects on the economy.
56
@skeptonomist - Please read my top level comment. The federal government does not need to borrow or tax to pay for government operations.
3
I think instead of promoting a spending policy per se that is tied into GDP, why don't we promote a spending policy that is tied into reality for the defense budget ?
Surely there would be a realignment where there would be HUNDREDS of BILLIONS allotted every year that would have gone to defense that could now go for education, heath care, paid sick leave, maternity leave, day care, etc, etc, etc.
There should be column after column promoting THIS.
63
@FunkyIrishman yes. I believe that the USA's bloated military not only burns through cash but also warps minds both in the USA and elsewhere in ways that make people less safe.
16
Although increasing investment and stimulating the economy through government spending are part of the solution, they are not its essence. At the core of the solution is that demand for savings exceeds supply at a 0 interest rate. Government debt should therefore rise to supply these savings to the households.
Higher government debt is the solution, not the problem.
1
@John - I agree, but too much savings is bad for the economy. It takes money that could be usefully used in commerce and puts it in places that are not so useful, e.g. bank vaults, financial speculation, etc.
The problems with the stagnant Japanese economy are mostly due to excess saving.
8
How about giving the Fed some kind of knob to adjust tax level, with an additional mandate like "maintain interest rates as low as possible consistent with avoiding the zero lower bound"? (if it isn't obvious how this is connected, never mind)
5
Agree it sounds like Mmt-Lite... but it's so obviously a good idea it has zero chance in congress.
20
Would our current workforce and immigration policy support the execution of these funded infrastructure projects without major delays and cost escalation? I am a practicing engineer for over 40 years. Our industry currently doesn’t have the staff to design what is on the books now and contractors don’t have the skilled workforce to execute. This includes all the advances to date with AI and machine learning. There would need to be a major emphasis on transforming the job market to execute these much needed improvements.
6
@Pete, you spoke, "Our industry currently doesn’t have the staff to design what is on the books now and contractors don’t have the skilled workforce to execute."
So what? How about the companies hire and train the people? That's not exactly a novel approach, and in fact quite common in other parts of the world. Businesses, well, actually the people who run the businesses, seem to have this idea that only people who have 100% of the necessary skills right now are valuable.
If there was an expectation of a long-term stream of core investment, versus the current famine with an occasional burst of spending, perhaps there wouldn't be a dearth of skilled workers.
19
Isn't this part way toward Modern Monetary Theory?
2
It isn't always too clear what is meant by MMT, but as far as I am aware it doesn't differ from normal economics in its analysis, but rather in its suggestions.
MMT argues that the government should spend and print money to ensure full employment, then tax if inflation surges.
What Krugman probably suggests is that when the economy is in a liquidity trap, it should raise spending and debt to get the economy out. The federal reserve can manage the interest rate still to manage inflation and stabilize economic growth. Note that no monetization of debt is involved.
11
@Richard H
Yes! Let's hear from Stephanie Kelton (Bernie's econ advisor in 2016) &/or someone else authoritative over at the MMT store.
Any *sane* Ericsonian economists want to weigh in - Rogoff, maybe? (Yes, the spreadsheet. Let's let that one go for the moment).
(Please no goldbugs - I said sane)
2
@Joel - By all means! People can start with
https://www.nytimes.com/2017/10/05/opinion/deficit-tax-cuts-trump.hty
Here is a random quote:
"When the government spends more than it gets in taxes, a “deficit” is recorded on the government’s books. But that’s only half the story. A little double-entry bookkeeping paints the rest of the picture. Suppose the government spends $100 into the economy but collects just $90 in taxes, leaving behind an extra $10 for someone to hold. That extra $10 gets recorded as a surplus on someone else’s books. That means that the government’s -$10 is always matched by +$10 in some other part of the economy. There is no mismatch and no problem with things adding up. Balance sheets must balance, after all. The government’s deficit is always mirrored by an equivalent surplus in another part of the economy."
BTW Kelton's book "The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy" will be out on 6/9.
I can recommend it sight unseen.
5
I have always found the opening paragraphs to your wonkish columns to be some of your best work, personally. But this is one for the top 5, I think. The rest of the column is of course also great.
24