March 08, 2013
Joe Scarborough is apparently feeling emboldened by his exchange with Paul Krugman on the Charlie Rose show and is doubling down on his confused anti-deficit tirades. He is back with an oped in the Post, co-authored with Jeffrey Sachs, who should know better.
The piece is a cornucopia of confusion, beginning with the first sentence:
I am not in the defense of Paul Krugman business, but surely Jeffrey Sachs knows that Paul Krugman does not argue that deficits do not matter as a general proposition. What Krugman has argued very vociferously is that deficits do not matter in an economy that is operating far below its potential, as is the case with the United States today. The Congressional Budget Office (CBO) projects that the economy’s output will be more than 6 percent (@ $1 trillion) below potential this year. Projected 2013 output is almost 10 percent below the real level of output that CBO had projected in 2008 before it recognized the impact of the collapse of the housing bubble.
In a period of widespread unemployment and excess capacity, like the present, deficits cannot have the negative effect that they would if the economy were near full employment. In an economy near full employment, the argument would be that deficits push up interest rates. Higher interest rates will have the effect of reducing investment. They will also tend to put upward pressure on the dollar. A higher valued dollar will make imports cheaper, causing us to buy more from abroad. It will also make our exports more expensive, leading us to sell less to foreigners. The result is an increase in our trade deficit.
On the Charlie Rose show Scarborough seemed to think he had hit a treasure trove by discovering that Krugman had warned of this crowding out effect when the government was running budget deficits in periods where the economy was arguably close to full employment. Perhaps he can’t recognize the difference, but is Jeffrey Sachs unable to distinguish the situation of the economy in 2005-2007 from the situation the economy faces today?
The piece then tells us that the stimulus did not do anything to boost the economy:
“Not so long ago, Keynesians guaranteed that Obama’s stimulus plan would move the U.S. economy more quickly toward growth by providing full employment and lowering deficits. We both were skeptical from the start, for good reason. In May 2009, the White House forecast 4.6 percent growth in 2012, an unemployment rate of 6 percent and a budget deficit of $557 billion. The actual outcomes were much worse: growth of 2.3 percent, unemployment at 8.1 percent and a budget deficit of nearly $1.1 trillion.”
Again, it is hard to believe that Sachs does not know that Keynesians, like Krugman and me, yelled at the top of our lungs that the stimulus package was too small at the time it was being debated. And the promise to get the economy back to full employment was based on a serious underestimate of the severity of the downturn, not an overestimate of the impact of the stimulus. Surely Sachs knows this.
In fact estimates from the Congressional Budget Office and independent analysts show the stimulus did pretty much exactly what was expected, it created 2-3 million jobs. The problem was that we needed 10-12 million jobs. Is Sachs completely unfamiliar with this work?
We are then warned about the burden of the deficits and the debt:
“Sadly, our concerns have been borne out. Public debt was around 41?percent of the gross domestic product in 2008. Today it is around 76?percent and still rising. Yet the economy continues to languish.
Nevertheless, a few hardy Keynesians urge the president to raise deficits still further. We respectfully disagree. Doubling down on this dubious policy will move the United States only more quickly toward excessive indebtedness and a possible economic crisis.”
Scarborough and Sachs (S&S) then tell us, “Keynes worried about the long-term buildup of public debt.”
The last admonition seems especially inappropriate since the United Kindom’s public debt was well over 100 percent of GDP when Keynes was advocating deficit spending in the 1920s and 1930s. As far as the burden of debt, it is worth noting that interest on the debt is near a post war low measured as a share of GDP. This is because the financial markets do not share the concerns of Scarborough and Sachs and are willing to lend large amounts of money to the United States at very low interest rates. This means that we are seeing very little burden from the debt.
Furthermore, even if we follow the deficit path projected by CBO, interest payments measured as a share of GDP will just be back to their Bush I era levels in a decade. That is not a trivial drain on the Treasury, but it is small compared to the loss of $1 trillion in output we are seeing each year, along with the lives devastated by the prospect of years of unemployment.
Also, if S&S are concerned about the measure of debt, then we can easily make them happy by simply buying back debt at a discount when higher interest rates cause bond prices to fall. Any bond calculator will show that the price of the long-term bonds issued today at record low interest rates will plummet when interest rates rise, as is generally projected. (Certainly as predicted by S&S.)
If we buy these bonds back at 50 to 80 cents on the dollar in three or four years, we can shave hundreds of billions, possibly trillions off of our debt. This would be a pointless exercise since it would leave our interest payments unchanged, but it should appease the gods of people who worship debt to GDP ratios (a group that apparently includes S&S).
If we want to limit the amount of interest that is paid out to our children (interest payments are redistributional within a generation, not between generations) then we can have the Fed continue to hold much of the debt. Currently half of what we pay out in interest is refunded by the Fed each year. Congress could instruct the Fed to continue to hold its bonds and tighten up monetary policy through raising reserve requirements. Jeffrey Sachs knows this. (Foreign debt is an issue, but that is the result of the trade deficit, which is in turn the result of an over-valued dollar. If the value of the dollar does not change, cutting the deficit will not affect the nation’s indebtedness to foreigners, except insofar as it lower imports by reducing GDP.)
Finally, the piece contains arguments for cutting military spending and fixing the health care system. It is hard to believe that anyone who has read Krugman’s columns would think that this is a point of disagreement. The projected increases in health care costs is of course the source of our projected long-term deficit problems. The Obama administration certainly can be faulted for not doing more in both areas, but even the harshest Obama critic on these points would have to acknowledge that he would face enormous opposition from Congress in going further than he already has.
In sum, we have a lot more rope-a-dope here but very little by the way of substantive argument. This might be the sort of thing that Scarborough does for a living, but what is Sachs’ excuse?
Since some folks asked, I actually did not agree with Krugman at the time that the Bush era deficits were a problem. I was opposed to his tax cuts targeted to the wealthy and I was strongly opposed to both wars, but I did not feel the deficits that we were running at the time were excessive. In my view, they were needed to sustain demand. Remember the Fed may not have been at the zero bound, but at 1.0 percent it was pretty damn close. There is not much difference in the economic impact of a zero percent federal funds rate and 1.0 percent federal funds rate. In principle the Fed could have engaged in QE, but if there were serious discussions of this option at the time, I missed it.
That leaves net exports as an alternative route for boosting demand. This would have depended largely on the willingness of China and other developing countries to allow the dollar to fall against their currencies. I doubt that we would have seen a much greater decline in the dollar if we had been running smaller budget deficits in the Bush years. So unlike Krugman, I was not troubled by the size of the budget deficits in the Bush years, although I definitely would have liked to see them better directed.