Krugman Is Wrong: The United States Could Not End Up Like Greece

[abelenkpe]

Krugman Is Wrong: The United States Could Not End Up Like Greece

http://www.cepr.net/index.php/blogs/beat-the-press/krugman-is-wrong-the-united-states-could-not-end-up-like-greece?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29


It does not happen often, but it does happen; I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments:

"But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt."

Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece.

(snip)

The deficit hawks want to scare us with Greece in order to push their agenda of cutting Social Security, Medicare and other programs that benefit the poor and middle class. This is part of their larger agenda for upward redistribution of income.

(more at link)

---------------------------
Please read. Very important info to help counter claims that austerity is needed!

[yurbud]

1. which counters austerity? Krugman or his critic?

[abelenkpe]

5. Article written by dean baker

And Krugman actually agrees with him, Baker was just concerned that something Krugman said would be misconstrued as supporting austerity. Article is well worth reading.

[yurbud]

11. thanks. the biggest problem is most Americans don't know what austerity or neoliberalism is

and in the time it takes them to catch up, irreversible damage will be done.

[wtmusic]

2. Take on Krugman at your own peril.

This objection is weak on a number of levels.

Deficit hawks don't all want to kill Medicare. The more reasonable ones want to address taxes first, especially corporate and top 2% taxes. That's addressing the deficit through downward - not upward - distribution of income.

The prime rate has not been lower in 55 years, so what is lowering interest rates supposed to accomplish? With a monumental trade deficit and no jobs, there's no way to pay back loans - even if the interest rate were zero.

Of course we can start printing our own money, and of course inflation would go through the roof. But a falling dollar also means goods are expensive. The cost of everything we import (at this point, almost all durable goods we buy) will skyrocket as well. Whether austerity is needed or not - we've got it.

And we end up worse potentially worse than Greece, because we stuck a band-aid on a gaping wound and made the problem worse.

[abelenkpe]

6. Do not agree

So you know more than Dean Baker? Believe we should enact austerity measures? Support slashing social security and Medicare?

[wtmusic]

12. Read my post.

"Deficit hawks don't all want to kill Medicare. The more reasonable ones want to address taxes first, especially corporate and top 2% taxes. That's addressing the deficit through downward - not upward - distribution of income."

[abelenkpe]

13. I read your post

and yes there are a few reasonable deficit hawks but they are completely drowned out by the louder as hell deficit hawks who are eager to kill medicare and social security. Robert Reich recently has a post on how the republicans are using the economic crisis to wage war on the middle class, many others have pointed this out as well. Not that I'm particularly pleased with the way things are being handled but we need to do a better job of countering the message used by the deficit hawks on the right that are looking to use the situation to their advantage by scaring everyone into thinking we need to pursue austerity.

Have you ever watched FOX? It's painful but they are a propaganda machine working hard to scare the begeesus out of viewers telling them that rampant inflation is around the corner ready to jump out and eat their children because teachers and firemen and police unions are laughing it up on lavish tax payer funded salaries drinking champagne....

OK not exactly like that, but you get the idea.

[wtmusic]

14. They're exploiting a weakness as they do so well.

And unfortunately, it is a gaping weakness. The deficit is out of control - there's no Democrat who's paying attention who can deny it. Around this board people were freaking out when Dubya ran deficits which were 1/3 of Obama's.

You and I know that the problem isn't pensions. But until Obama can bring himself to say the "t" word, he's at the Republicans' mercy on this issue.

[Pit Stains]

21. No deficit hawk is reasonable if they are calling for cuts in the middle of a recession

econ102.

[girl gone mad]

15. Krugman has made a fool of himself on this topic, yet again.

Galbraith, Mosler, Auerback, Lambert, Wray, Harrison and Mitchell all have done well enough rebutting the errors.

You could start here:

http://www.correntewire.com/paul_takes_another_swipe_mmt

[wtmusic]

16. Ah yes: Paul Krugman, the Nobel Fool.

What errors has Paul made? There is a difference of opinion as to what will happen if the Government prints money to finance its debt.

US deficit to GDP is roughly twice what Malaysia's was before its financial markets collapsed in 1997. Apparently printing your way out of debt is now an accepted as a legit technique and something which can go on indefinitely. Malaysia and the Phillippines thought the same thing in 1995.

It apparently bugs some ideologically-driven economists that Krugman very analytically and accurately delivers good and bad news. It's amusing to me that some around here use the same arguments Republicans used against Democrats under Dubya - "Deficits don't matter!" - a scant four years later.

I'll take it plain without spin, thanks.

[girl gone mad]

17. Scott Fullwiler, Associate Professor of Economics at Wartburg College..

From http://www.nakedcapitalism.com/2011/03/scott-fulwiler-paul-krugman%E2%80%94the-conscience-of-a-neo-liberal.html">Paul Krugman—The Conscience of a Neo-Liberal?:

Krugman makes three incorrect assumptions about what MMT policy proposals actually are while also demonstrating a lack of understanding of our modern monetary system (as is generally verified by volumes of empirical research on the monetary system by both MMT’ers and non-MMTer’s). These are the following:

Assumption A: The size of the monetary base directly (or indirectly, for that matter) affects inflation if we’re not in a “liquidity trap”

Assumption B: MMT’s preferred fiscal policy approach or strategy—http://www.epicoalition.org/docs/functional_finance.pdf">Abba Lerner’s functional finance—is Non-Ricardian

Assumption C: Bond markets alone set interest rates on the national debt of a sovereign currency issuer operating under flexible exchange rates

Assumptions A and C are central to the Neo-Liberal macroeconomic model. Assumption B is a common misconception about MMT and a common perception of Neo-Liberals about the nature and macroeconomic effects of fiscal policy (i.e., Neo-Liberals often believe that activist fiscal policy is Non-Ricardian).

While MMT’ers argue that all three assumptions are false, one does not need to necessarily agree. The point is that to critique MMT on the basis of assumptions that are inconsistent with MMT is to actually not critique MMT at all. It is a straw man.

I explain these assumptions and how they relate to Krugman’s two posts as I go through the text of both. Krugman begins:

Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.

Of course, Krugman grants in his follow-up (below) that MMT’ers don’t say this at all, perhaps due to the many responses to this post pointing out his error, as this is simply a straw man that makes Assumption B—more on this below.

I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.

Again, MMT’ers don’t say it is, either.

The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail. As long as those conditions DO prevail, it doesn’t matter how much the Fed increases the monetary base, and it therefore doesn’t matter how much of the deficit is monetized. But this too shall pass, and when it does, things will be very different.

Krugman here is using the basic Economics 101 view of a liquidity trap, where interest rates and spending are unresponsive to continued increases in the monetary base. Paul Davidson has explained numerous times that this mainstream conception of a liquidity trap is not at all what Keynes was after, though I won’t go into that specifically here.

The MMT point here, instead, is that changes in the monetary base NEVER matter per se, at least not in terms of causing anything. Recall what the monetary base is—the outstanding quantity of currency (physical “money” held by the households and businesses, or in bank vaults) and reserve balances held by banks in reserve accounts at the Fed.

http://www.nakedcapitalism.com/2011/03/scott-fulwiler-paul-krugman%E2%80%94the-conscience-of-a-neo-liberal.html">more...

Miles and miles of text were written on this subject over the weekend and today. You can follow the links if you are interested. These writers will do a better job of explaining MMT than I can and are also good about answering questions in the comments sections.

[wtmusic]

18. Then OP directly contradicts MMT.

"The Federal Reserve Board could in principle buy an unlimited amount of debt simply by printing more money. This could lead to a serious problem with inflation, but it would not put us in the Greek situation of having to go hat in hand before the bond vigilantes."

vs.

"The MMT point here, instead, is that changes in the monetary base NEVER matter per se, at least not in terms of causing anything."

Printing more money, absent other influences, causes inflation. This is not rocket surgery, it's Econ 101. They can argue obtuse economic theory until they're blue in the face - "miles and miles of text", as you put it, but this is all excuse-making for digging us deeper into a hole for political reasons. And lenders are extremely non-partisan - they don't care what side of the fence you're on, as long as your check is good. When the check's no longer good, we're all f*cked.

On one point MMTers are conspicuously silent - the $395B we pay annually as interest on the national debt, the second largest expenditure to defense. That's up about $30B every year Obama's been in office.

[girl gone mad]

24. Your econ 101 sounds to me like Milton Friedman bullshit.

"Inflation is always and everywhere a monetary phenomenon"

I don't subscribe to that particular cult, and I sincerely hope you didn't bet money on that belief.

"Printing money" does not directly lead to inflation. You also need to account for rates of employment, productive capacity, private sector deleveraging and demand, among other things.

[bemildred]

3. I love this quote:

"There are literally no examples of an advanced economy doing this in the absence of a cataclysmic event like a war, natural disaster or collapse of the political system. Inflationary pressures build gradually through an overheated economy.

We can rely on smooth change unless something dramatic happens. This sounds like a job for Obviousman.

[abelenkpe]

7. Yeah

Kinda like building a nuclear reactor next to the ocean and downplaying the chance of a tsunami, or drilling in the gulf with no real plan for emergencies. Or thinking that republicans aren't willing to invent a catastrophic violent event....


The point is that there are other alternatives to fixing this mess that doesn't put the burden on the backs of workers and I'm surprised that members of DU would prefer the doomsday scenario favored by libertarians.

[bemildred]

9. He needs a better argument, and a better point.

It's not that I disagree with him about policy, but I think the precautionary principle is just good sense, and his argument ignores it. And it's not about Greece here, and it's not going to be about Greece

[AtheistCrusader]

4. "the crisis would not take the form of the crisis in Greece."

You're right. You're totally right. It's going to be worse.

[abelenkpe]

8. Potentially nt

[bemildred]

10. Frenzy in Washington grows over nation's debt

Not since Ross Perot unleashed his wonky charts has the nation's heavy debt load received so much attention.

Suddenly, it seems, Washington is consumed with the urgent task of lowering the annual deficit and preventing a European-style debt crisis, which experts warn could be but a few years away.

Six senators, meeting behind closed doors, have spent months drafting a bipartisan blueprint that would propose substantial changes to the way the federal government taxes, spends and provides such core services as Medicare and Social Security — all aimed at trying to reduce the nation's annual $1.4-trillion deficit.

Complaining that the White House has not offered a comprehensive strategy, House Budget Committee Chairman Paul D. Ryan (R-Wis.) is preparing his own battle plan, due out next month.

http://www.latimes.com/news/politics/la-na-congress-deficit-20110328,0,432365.story

[roamer65]

19. Krugman is right. They already have stopped buying our debt.

It is the reason for QE1, QE2 and the upcoming QE3. The QE mops up the unwanted Treasury paper in order to keep interest rates low and the bond markets afloat. As the appetite for Treasury paper decreases (and it will) QE will grow larger, swelling the money supply further. This is the reason gasoline costs you $4 a gallon and the commodity markets are going berzerk...aka monetary inflation.

[Pit Stains]

20. Inflation isn't having that large of an effect on gas prices.

I know that is the latest fox news talking point they are dishing out to detract from wall street speculation, but it isn;t founded in reality.

Republicans are driving up gas prices and have been for decades with their deregulation religion. And once again they are pushing for higher gas prices by slowing laws that would reduce speculation.
http://www.bloomberg.com/news/2011-04-15/u-s-house-republicans-move-to-delay-derivatives-rules-18-months.html

[Name removed]

22. Deleted message

Message removed by moderator. Click here to review the message board rules.

[girl gone mad]

23. Correct, and today's action in the markets should put any doubts to rest. n/t

[guardian]

25. And YOUR credentials are what?

Why should I believe your over Krugman?