Deficit Falconry

Ezra Klein gives us James Galbraith weighing in from the mews on deficit hawkery. Here are some excerpts that seem particularly relevant to the current situation:

EK: What are the policy implications of this view [that government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy]?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.

EK: That does it for my questions, I think.

JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.

The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes.

On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.

Thanks to Nick Krafft for pointing me to this. Why the mindless devotion to reducing deficits when unemployment is at 10%? billy blog nails it, I think. Everyone understands that if they do this with their own personal finances, they are grasshoppers not ants, spendthrifts, profligate ne'er-do-wells. And so they would be (although I can't help but wish that this wave of temperance had o'ertaken households, say, 6 or 7 years ago and with regard to their own and the government's deficits). But individuals are not governments, they are households. And even households would and do run deficits to tide them over a temporary downturn.

Here's Paul Krugman on whether the US is so profligate that we're Greece. He thinks not. He's right that the US must rein in health care costs, but we should also rein in investment banks and stop creating unfettered moral hazard. Reining in bankers seems way more important and immediate to me than reining in health care costs. After all, as Galbraith points out, when we're spending 30% of GDP and everyone else is spending 12%, "we can always buy Paris and all the doctors and move all our elderly there."

I wonder if we could sell them our investment bankers? Give them our investment bankers? Pay them to take our investment bankers?

Probably not.

Comments

[rjs]

the debt as a % of GDP was much higher during WWII:

http://delong.typepad.com/sdj/2009/06/the-debt-and-the-deficit-in-historical-perspective.html

we dont hear many poor complaining about the deficit; those who consider it an issue all seem pretty well off...if they think todays deficits are a problem, theres an easy solution...during WWII, those with incomes over $200,000 were taxed at 95%; the debt ratio was brought down during the 50s with a tax as high as 92% on the rich; and the highest tax bracket remained in the 80s through the 60s...

[Rodger Malcolm Mitchell]

You said, "He's right that the US must rein in health care costs,[..]"

He's wrong. There is no reason why then US must rein in health care costs. Quite the opposite. The US should increase health care coverage (i.e. costs), because that benefits Americans and adds money for economic growth.

There is absolutely no truth to the debt hawk propaganda that "we can't afford it," or the deficit is "unsustainable" or any of the other platitudes related to people, businesses or local governments, but not to a monitarily sovereign nation like the U.S.

Rodger Malcolm Mitchell
http://rodgermmitchell.wordpress.com

[The Raven]

Get Zeus to strike down our investment bankers for hubris?

[rjs]

dean baker seems to have it nailed:

The Deficit Problem Is Not “We, the People,” It is “You, the Incompetent Elite”
New York Times columnist David Leonhardt told readers today that the problem of the debt is “we, the people.” Is that so? Was it we the people who were too dumb to see an $8 trillion housing bubble and recognize that its collapse would wreck the economy? No, that was the job of the great Maestro Alan Greenspan and his sidekick Ben Bernanke, the brilliant scholar of the Great Depression. It was also the job of all the economists who do research and opine to the public on the macroeconomy. Virtually all of these highly educated highly intelligent economists either did not see the bubble or insisted it was not worth their time. Our deficit today is due to the collapse of this bubble. If there had been no bubble and the economy was still chugging along with 4.5 percent unemployment, the budget would either be balanced or close enough that no serious person would be expressing alarm (check out the pre-crisis CBO projections).

http://www.cepr.net/index.php/blogs/beat-the-press/the-deficit-problem-is-not-we-the-people-it-is-you-the-incompetent-elite