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Thread: Why is Krugman wrong?

  1. #1
    Senior Member CroMagnon's Avatar
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    Why is Krugman wrong?

    Says we should be spending our way out of this recession. That 100% debt to GDP is not a problem. Not where he'd like to be, but in light of the current situation not a reason to fear going further into debt temporarily.

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    Re: Why is Krugman wrong?

    I find economics fascinating and confusing, so I read a lot of economists. I'm not sure what I believe, but for an example of the other argument you probably want to look at stuff by Kenneth Rogoff. This article might be a good jumping off point. I think that Krugman had it right that "nobody understands debt" -- I'm just not sure that he shouldn't be including himself.

  4. #3
    Senior Member PauliF's Avatar
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    Re: Why is Krugman wrong?

    It is how we got out of the great depression and every other recession. Spending

    We are living in THE age of abundance. There is no shortage of any resource cept for money. Of course no one understands it. It makes no sense.
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  5. #4
    Senior Member Piemaster's Avatar
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    Re: Why is Krugman wrong?

    Money is not a resource, it's an exchange mechanism. The debt problem isn't that "we haven't got any money", that's kind of misleading the average layman. The problem is that governments are systematically spending more money than they are prepared to procure from their citizens. You can spend your way out of a recession if you save during boom periods, but no governments have done this and so almost every government in the world is heavily in debt to the private sector. Spending more money now might work to pick up the economy in the short term, but it just creates an even bigger debt crisis further along. The only way to solve the problem is for governments to stop spending more money than they have and preferably to create a surplus to pay back the debt they have previously incurred.

    (Edit: Sorry I ninja-edited you to expand my point)
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  6. #5
    Senior Member PauliF's Avatar
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    Re: Why is Krugman wrong?

    Exactly. Which is precisely the reason that the lack of it being used as the reason for austerity when there is an abundance of actual resources is insane
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  7. #6
    Senior Member Piemaster's Avatar
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    Re: Why is Krugman wrong?

    Quote Originally Posted by PauliF
    Exactly. Which is precisely the reason that the lack of it being used as the reason for austerity when there is an abundance of actual resources is insane
    That doesn't make sense, you are looking at two completely different things and trying to offset them. Reminds me of the $27 restaurant problem.
    "I believe in coincidences. Coincidences happen every day. But I don't trust coincidences."

  8. #7
    Senior Member CroMagnon's Avatar
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    Re: Why is Krugman wrong?

    Quote Originally Posted by nsidestrate
    I find economics fascinating and confusing, so I read a lot of economists. I'm not sure what I believe, but for an example of the other argument you probably want to look at stuff by Kenneth Rogoff. This article might be a good jumping off point. I think that Krugman had it right that "nobody understands debt" -- I'm just not sure that he shouldn't be including himself.
    I am by no means a Krugman subscriber. I haven't read enough, nor do I understand enough, to feel certain about either side. In the recent interview K suggests we should be spending (borrowing) approx 300 billion a year (in addition to what we already borrow) that would be sent to the states to rehire teachers, police, fire and infrastructure projects. This would be done until there are clear signs of recovery in the private sector and then we would go into austerity mode and cut the defecit. So he's not saying we can ignore the debt and spend without fear. His claim is we're in a crisis and a crisis is precisely when govt should be spending. Sounds all good, except as Pie points out I have little faith the spigot will actually be closed.

    I'm also not convinced that govt spending can be used like water to prime a pump. What happens when the water is shut off?

  9. #8

    Re: Why is Krugman wrong?

    Quote Originally Posted by CroMagnon
    I'm also not convinced that govt spending can be used like water to prime a pump. What happens when the water is shut off?
    Well, it is certainly the case that economies respond to Government actions. I don't think anyone seriously disputes the idea that spending is a stimulus to stagnated economies. We have tons of evidence of the truth of that dating back a long way. It is also the case that a dynamically expanding economy is a huge boost to closing deficits, see Clinton's administration for pretty convincing evidence of that. It is likely that tightening spending would have a deflationary effect on the economy in a boom time, it just wouldn't matter as much then. You can think of spending (or reducing taxes) as a similar measure to lowering interest rates and taxing (or reducing spending) as a similar measure to raising interest rates. Krugman's thesis is primarily that we should be pumping up the economy during slowdowns by spending more and reining in the economy during good times by correcting deficits then.

    Of course, I have no confidence that they will address the problems during good times. They tend to just look at the improving revenues and think "sweet, everything is going great now." There is also always the concern that at some point the deficit itself becomes an overwhelming anchor on the economy. Rogoff would argue that 90% is that point and that we can't keep going.

  10. #9
    Senior Member CroMagnon's Avatar
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    Re: Why is Krugman wrong?

    My question is whether borrowing for stimulus is worth it the long run. Short term you deffinitely see a bump, but, even assuming govt's saved during boom times, does it make sense over making cuts and taking our medicine now? If it does make sense, then the entire problem lies with politicians (and the electorate) for not doing what we should in good times. It makes me think of the fed. One of it's purposees is to control money supply to either cool down or heat up the economy, but there are too few constraints. Bernanke can print up as many dollars as he wants or Obama will let him. (I realize it's a bit more complicated than just printing, but that is the end result) I think the fed is a better tool than trying to manipulate money supply by devaluing the currency via the gold standard. There is just a limited supply of gold, but in both cases, govt borrowing or the fed printing we are beholden to humans "doing the right thing". In the long run we may be better off not relying on that.

  11. #10
    Senior Member Damien's Avatar
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    Re: Why is Krugman wrong?

    Is it better to look at the debt as a dollar figure or as a percentage of GDP? As a dollar figure, it is increasing basically exponentially but as a percentage of GDP, it doesn't look so bad compared to some earlier time periods. My main concern with the debt is the interest being paid on it, and in my simplicity, I often liken it to a household with a credit card balance. If my credit card balance has increased 100 fold over the last 20 years, yet my income has done the same, should I be more worried about it than I was 20 years ago? Its a little bit ridiculous comparison to make because if my income (GDP) was increasing at that rate, I personally would make paying off my debt a priority. But somehow with the Federal Government this issue always seems to take the back burner. I understand what Krugman is saying, but I think that if we need to spend our way out of this recession there has to be hard and fast rules that say "okay, once we hit these numbers (unemployment, whatever), we are officially in a boom economy and deficit reduction has to be the priority - AT LEAST as much as government spending is in a recession." It seems like no matter how good the economy gets, there are always politicians saying that it can be even better if we just spend a little more, and I have a problem with that.
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    Senior Member Damien's Avatar
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    Re: Why is Krugman wrong?

    Rogoff thinks that our current debt is an anchor on the economy and taking on more debt will further destroy the economy. Krugman believes that we have to increase the debt in order to boost the economy. These are both smart guys, and they are saying opposite things. This happens in Economics all the time (Keynes and Hayek for example). I'm an Economics major and frankly I've given up trying to figure out what the right thing is to do. Minds much more brilliant than mine can't even come to a consensus, although I usually find the arguments on both sides sound and compelling.
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  13. #12
    Senior Member Piemaster's Avatar
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    Re: Why is Krugman wrong?

    Quote Originally Posted by Damien
    It seems like no matter how good the economy gets, there are always politicians saying that it can be even better if we just spend a little more, and I have a problem with that.
    That's basically the score. The problem is one fundamentally with democracy itself. Managing debt/borrowing is a long-term problem, but all the incentives we give to our politicians are short term. What's important to a politician is not making the right decisions for the economy (or anything else) but just giving the appearance of having done so at the time of the next election. No politician wants to effectively martyr themselves by making a sound decision now that another administration will reap the rewards from in 5, 10 or 20 years time.

    We, as the electorate, have to ultimately share the blame too. National debt is a hidden problem that we will happily put out of sight and out of mind and leave for our children to deal with, as long as we can have that new school, better healthcare or better national security right now. And we lap up our economic policy according to what we want to believe. I can't speak for the US, but in the UK I doubt 5% of the electorate knew (or cared) what a fiscal stimulus was 5 years ago. But then certain politicians started telling people that if we spend more now (and so don't actually have to close that hospital or reduce welfare payments) then it might actually help us in the long term and now millions of people who have never studied economics in their life are preaching it as gospel like they're the second coming of John Maynard Keynes.
    "I believe in coincidences. Coincidences happen every day. But I don't trust coincidences."

  14. #13
    Senior Member PauliF's Avatar
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    Re: Why is Krugman wrong?

    Quote Originally Posted by Piemaster
    Quote Originally Posted by PauliF
    Exactly. Which is precisely the reason that the lack of it being used as the reason for austerity when there is an abundance of actual resources is insane
    That doesn't make sense, you are looking at two completely different things and trying to offset them. Reminds me of the $27 restaurant problem.
    Ha ha. The system makes no sense. My analysis is self evidently entirely correct.
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    Moderator Bullajami's Avatar
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    Re: Why is Krugman wrong?

    Quote Originally Posted by nsidestrate
    I don't think anyone seriously disputes the idea that spending is a stimulus to stagnated economies.
    In addition to being more effective at stimulating the economy, lowering taxes is inherently more fair than increasing spending. I would also add that while reversing tax breaks might be difficult, undoing a spending program is virtually impossible.
    Quote Originally Posted by nsidestrate
    Of course, I have no confidence that they will address the problems during good times. They tend to just look at the improving revenues and think "sweet, everything is going great now."
    +1
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  16. #15

    Re: Why is Krugman wrong?

    Quote Originally Posted by Bullajami
    Quote Originally Posted by nsidestrate
    I don't think anyone seriously disputes the idea that spending is a stimulus to stagnated economies.
    In addition to being more effective at stimulating the economy, lowering taxes is inherently more fair than increasing spending. I would also add that while reversing tax breaks might be difficult, undoing a spending program is virtually impossible.
    This is not the generally accepted view amongst economists. Not that you can get extraordinary consensus from them, but I think the vast majority of economists would agree that reducing taxes has a stimulating effect but that the effect is significantly less effective that an equivalent increase in spending. The primary reason for this is that some amount of tax reduction will be saved instead of spent, reducing the net benefit of the cut in term of stimulating the economy. You can argue that it has other positive effects that supersede this disadvantage to be sure, but I don't think you will find many economists to support the notion that it is more stimulating than spending increases.

    I also don't follow your argument that lowering taxes is more "fair." How are you evaluating the fairness of each measure?

    I do agree that it is easier to make tax cuts stick than reversing spending increases.

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