Our Questions For Paul Krugman, Brad DeLong, Niall Ferguson, And The Tea Party

The Business Insider ^ | 6-6-2010 | Henry Blodget

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Our Questions For Paul Krugman, Brad DeLong, Niall Ferguson, And The Tea Party

Henry Blodget
Jun. 6, 2010, 4:16 PM

Paul Krugman makes a persuasive case that cutting government spending now to reduce deficits will kill the global recovery.

Niall Ferguson and other debt hawks, meanwhile make a persuasive case that, over the long term, our ballooning debt and deficits are taking us to hell in a handbasket.

To some extent, we think these two camps are yelling past each other, each ignoring an elephant in the room.

Krugman & Co. don't offer a compelling explanation for how we'll work our way out of our long-term problems, especially if we increase spending now to combat the recession. And austerity advocates rarely acknowledge the short-term pain that will come from cutting spending in the midst of a weak recovery--pain that Krugman says will actually exacerbate the debt-and-deficit problems because it will reduce tax receipts.

Brad DeLong

After we wrote about this issue earlier, Professor Brad DeLong of Berkeley weighed in, basically arguing that the spending Krugman is advocating--$100 billion--is a "rounding error" in the context of our long-term debt-and-deficit problem. And if Krugman really is talking about $100 billion (chump change), we would agree with that. But our recollection was that Krugman thought the first stimulus was too small by half, which would put his preferred spending increase at something closer to $1 trillion.

Professor DeLong also pointed out that US lenders don't appear to be worried in the slightest about our debt-and-deficit problem--as evidenced by the paltry interest rates they're willing to accept to lend us even more money. And so what the Tea Partiers are essentially advocating, DeLong says, is proactively cutting spending and increasing short-term pain because of something the markets might SOMEDAY worry about.

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Posted earlier:

Paul Krugman: Lost Decade, Here We Come

[LS]

Ultimately, De Long is right in that we are NOT seeing any immediate pain. Given our debt and deficits, we should be looking at 15% interest rates.

But the problem with that analysis is that the math always wins---later rather than sooner sometimes, but inevitably. As Prof. Charles Calomiris points out, a crisis like this can "snuck up" on people and manifest itself pretty quickly (i.e., Greece which "seemed" to "happen overnight.") In reality, the math was staring people in the face all along.

In a sense, Ronald Reagan was fortunate that the nation had already started to experience the effects of bad policies just as he was implementing the correct solutions to those: but would he have been re-elected if interest rates had been, say, 5 points lower? Or unemployment lower?

I reiterate, I think the math is inexorable, but we may be in Greece, which is to say, like the man falling off the Empire State Building, all the way down he'd say "So far so good."

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Europe too:

Roubini: Europe, You Have Zero Growth To Look Forward To

[Oceander]

In large part our putative "lenders" don't have much choice because the U.S. dollar is, for better or for worse, the only available reserve currency around; the Euro might have challenged that position, but no longer, given the Europeans' wimp-out on Greece. That means that, just like the housing bubble crash, which was so violent in large part because it was so heavily propped up by government policies, the U.S. dollar's status as a reserve currency, and the below-cost borrowing it lets the US do, will most likely also blow up precipitously instead of simply folding more gracefully under steadily increasing interest rates.

In short, the fact that we can still borrow at below-cost rates is nothing to be happy about, because it means that we are essentially going to be complicit in our own national death when the cozy arrangement blows up. The fact that Krugman thinks otherwise merely demonstrates the total poverty of his thought once he gets outside of the narrow little specialty into which he was trained.

[grumpygresh]

Grow the GDP by cutting taxes on the producers. This will improve the GDP to debt ratio by improving the GDP. It will over the long term also have the potential to reduce debt by increasing revenues through greater employment and wealth creation. We also need to reduce entitlement spending especially for those in the middle class. As the middle class spends its own money on health care and education, increased efficiency and competition will lower costs and improve access and quality as these services become increasingly provided by the private sector. The middle class will also have an incentive to become competent and productive workers as well as and wise consumers.
This would be a great time for our country to boldly lower income and corporate taxes. We would receive an enormous capital flow, and an infusion of entrepreneurial talent from Europe and other sclerotic socialist economies. With productivity incentives and new entrepreneurs, the fertile ground will be laid for an economic rebirth.