KRUGMAN: "The President Surrenders"

[Tigermike 3,425]

The President Surrenders

By PAUL KRUGMAN

Published: July 31, 2011

A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong.

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts.

Republicans will supposedly have an incentive to make concessions the next time around, because defense spending will be among the areas cut. But the G.O.P. has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want. Why expect it to be more reasonable in the next round?

In fact, Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling. Maybe it’s just me, but I see a pattern here.

Did the president have any alternative this time around? Yes.

First of all, he could and should have demanded an increase in the debt ceiling back in December. When asked why he didn’t, he replied that he was sure that Republicans would act responsibly. Great call.

And even now, the Obama administration could have resorted to legal maneuvering to sidestep the debt ceiling, using any of several options. In ordinary circumstances, this might have been an extreme step. But faced with the reality of what is happening, namely raw extortion on the part of a party that, after all, only controls one house of Congress, it would have been totally justifiable.

At the very least, Mr. Obama could have used the possibility of a legal end run to strengthen his bargaining position. Instead, however, he ruled all such options out from the beginning.

But wouldn’t taking a tough stance have worried markets? Probably not. In fact, if I were an investor I would be reassured, not dismayed, by a demonstration that the president is willing and able to stand up to blackmail on the part of right-wing extremists. Instead, he has chosen to demonstrate the opposite.

Make no mistake about it, what we’re witnessing here is a catastrophe on multiple levels.

It is, of course, a political catastrophe for Democrats, who just a few weeks ago seemed to have Republicans on the run over their plan to dismantle Medicare; now Mr. Obama has thrown all that away. And the damage isn’t over: there will be more choke points where Republicans can threaten to create a crisis unless the president surrenders, and they can now act with the confident expectation that he will.

In the long run, however, Democrats won’t be the only losers. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.

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One thing about the current level of indebtedne­ss is that attempting to apply Keynes over and over again – but only the deficit spending part – is that, in effect, you’re arguing that the Keynesian solution is to spend, spend, spend, no matter what the level of debt.

There’s simply no evidence at all that even Keynes would have bought into that sort of argument. Indeed, quite the opposite is true. Lord Keynes never argued for increasing public spending as a matter of course, but rather tempering spending with budget-cut­ting at the appropriat­e time. Properly applied, even Keynesiani­sm tends towards a balanced budget over time. What we’ve done over the past three decades isn’t Keynesiani­sm, it’s a perversion of it. We’ve spent like drunken sailors attempting to stimulate the economy, but we’ve never actually gotten around to cutting budgets and paying down the debt in the good times. We’ve simply accepted the new level of increased spending as the baseline.

Keynes said that in recessions or depressions, the government should use deficit spending to pump more money into the economy. This extra spending would increase the money supply, and stimulate the economy. In addition, the government could cut taxes, allowing people to keep more of what they’d earned.

In good economic times, he said the government should operate at a surplus. That would keep the economy from heating up too fast, and set aside a store of money to be spent in the recessionary times. It would also reduce the money supply, and erase the inflationary pressures bought about by increasing the money supply during the recessions. Taxes could also be raised to help make up the previous budget shortfalls.

So, in a perfect world, the budget would balance, over the course of a business cycle. You’re still trading present good stuff for future bad stuff, but in relatively tiny increments. You really aren’t supposed to do it $14 trillion at a time.

Durbin: Debt Deal Will Be The Death Of Keynesian Economics

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If Keynesianism is dead, it’s mainly because congress has spent it into the grave.

[au2004ece 30]

People like Krugman are amazing. He advocates stimulus after stimulus after stimulus. He believes that no stimulus is big enough and that the reason that all stimuli of the past have failed is because they were not big enough.

He never considers that stimulus plans just don't work because all they do is transfer demand from one point in time to an earlier point in time. They don't increase anything, except for debt. So, you get a short term bump and then a long term drag that is bigger than the short-term bump.

Krugman still advocates that Japan ended its stimulus programs too early when they went into recession in the 1990s, but Japan stimulated themselves to a debt to GDP ratio of 225% that has dragged down the Japanese economy and kept it in a recession for 20 years. I guess that's what Krugman wants for the US.

[RunInRed 16,991]

From J.P. Morgan...

Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

https://mm.jpmorgan.com/stp/t/c.do?i=19642-7A9&u=a_p*d_645537.html*h_-1ni8eo3

The price of austerity, indeed.

[AFTiger 282]

[au2004ece 30]

From J.P. Morgan...

Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

https://mm.jpmorgan.com/stp/t/c.do?i=19642-7A9&u=a_p*d_645537.html*h_-1ni8eo3

The price of austerity, indeed.

See: To Keynesians, no stimulus is every big enough or long enough. That's their reasoning why stimulus plans always fail.

[RunInRed 16,991]

Question: What do you think the effect of pulling government spending out off the economy is? Stimulus but also the cuts that are being made as part of the debt ceiling deal?

[au2004ece 30]

Question: What do you think the effect of pulling government spending out off the economy is? Stimulus but also the cuts that are being made as part of the debt ceiling deal?

First, let me cover what a stimulus does.

A stimulus causes a short-term increase in economic activity because it shifts demand from the future to the present.

A stimulus causes a long-term decrease in economic activity because it does not increase demand after the shifted demand is "paid back" by reduced demand in the future, plus it saddles us with debt that decreases future demand because we have to spend money on paying debt instead of other things.

Cutting spending is the opposite of a stimulus.

Cutting spending will cause a short-term decrease in economic activity because it shifts demand to the future.

Cutting spending causes a long-term increase in economic activity. The amount of overall demand remains the same, but there is no or less debt that sucks away future demand.

[RunInRed 16,991]

So what do revenue decreases without equal spending decreases do? What about government defense spending on Wars, etc.? Your logic and math seem selective to your ideology...

[Auburn85 434]

au2004ece has been on record more than once about ending the wars and dramatically reducing the role of Defense. Probably more so than several Democrats in Congress.

We need to get back to using the literal definition of the word "cut."

Neither Reid or Boehner's bill cuts over $800 billion over a decade. Descretionary spending continues to increase over a decade.

It's almost like saying I'm going to pass a 25% salary cut for Congress over 10 years, but give them a 2.5% raise every year in that same time period.

[au2004ece 30]

So what do revenue decreases without equal spending decreases do? What about government defense spending on Wars, etc.? Your logic and math seem selective to your ideology...

Government defense spending doesn't produce anything and clearly reduces economic activity. So therefore it should only be used when the decrease in economic activity caused by the spending is less than the potential decrease in economic activity caused by an enemy.

I have learned this over the last several years. The recession has a way of making things clear that didn't seem clear before.

I did always believe that Bush spent too much money and he should have cut spending to pay for the tax cuts.

[RunInRed 16,991]

I hear you but you can't tell me that Defense spending - and I certainly have my beefs with the ballooning Defense budget - doesn't generate economic activity...

[bigsixfive 336]

Internet what?

[cptau 169]

Defense spending works much as other federal spending. Troops are paid and they spend money on goods and services. Defense contractors are paid and they pay their employees who then buy goods and services. Their stockholders make money which is spent or invested. So the argument is whether govt defense spending is more or less efficient than govt civilian spending.

What hurts defense spending is that much of it is spent off shore buying goods and services in other economies. Civilian govt spending usually is here, but also goes off shore as foreign aid, etc... The US govt has spent billions in germany and other western european countries since 1945 rebuilding war damage and equipping and stationing troops there. Was it worth not having a European war for over 65 years?

The recent debt ceiling deal is nothing but a promise to slow the future rate of spending increases. It's like giving a drunk a bottle of whiskey after he promises to

back off on future increases in drinking. Not going to happen.