Debt, Deficits, and the Penis Game

So Europe is in dire straits financially. (Culturally, too, but that's another discussion.) So many of the worst financial cases have cut government spending, and rightfully so. Paul Krugman has been claiming for what seems like years that spending cuts will suppress economic growth. Yet he has failed to adequately explain why spending increases have failed to spur economic growth or why he insists on playing a game of chicken with the national debt. Remember the penis game from middle school? A bunch of guys in the back of the bus take turns escalating the volume at which they shout "penis" until one is finally caught by the teacher and given detention? That's basically what Paul Krugman is advocating, except in this analogy, detention is analogous to crippling economic malaise and increasing public spending is akin to shouting "penis."

The Austerity Delusion

By PAUL KRUGMAN

Published: March 24, 2011

Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.

Yeah. Europe is pretty much bojanked.

What do these events have in common?

OH! I know this! They all happened in Western Europe, which, as referenced above, is bojanked. All three countries are facing a major debt crisis. All three countries have stagnant economies and extensive social welfare programs. And, most depressingly, there’s a good chance that all of them are beyond the point of salvation.

They’re all evidence that slashing spending in the face of high unemployment is a mistake.

Sigh. It’s the same article he’s been writing for six months. You’d think he’d get bored. I know I am.

Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence,

True. Investors generally tend to respond positively when a bond issuer indicates that it will not continue to give buckets of money to cowboy poetry festivals and experiments about giving cocaine to shellfish.

and that there would be few, if any, adverse effects on growth and jobs;

Patently untrue. Even the strident deficit hawks understand that the formula for GDP growth explicitly includes government spending (GDP = Consumption + Investment + Government Spending + NetExports). In order to make up for the offset to government spending, you need increases in consumption and investment, which are only possible if the spending cuts are accompanied by tax cuts. Government spending is virtually always inefficient. A hypothetical government program that simply buys items and destroys them, despite diminishing the net worth of the country, will add to GDP unless the debt offset is accounted for. (It isn’t.) FYI, that wasn’t a hypothetical government program; it was Cash for Clunkers.

The economy is a miraculously elastic construct, but it takes time to re-allocate the resources that were previously tooled towards inefficient growth. It doesn’t mean we should double-down on the inefficiency.

but they were wrong.

It’s always nice to see a guy winning an argument with his own oversimplified and factually inaccurate paraphrasing of someone else.

It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.

Ironically, the mindless mimicry of failing European social welfare policies is what got us into the debt crisis in the first place.

It was not always thus.

Thanks, Henry Wadsworth Longfellow. You’re using ‘thus?’ Seriously?

Two years ago, faced with soaring unemployment and large budget deficits

So…things were pretty much the same as they are now.

—    both the consequences of a severe financial crisis —

Bullshit. We’d have a large budget deficit even if the economy were humming. (Intellectual honestly compels me to agree that the deficit is, of course, worsened by a poor economy.)

most advanced-country leaders seemingly understood that the problems had to be tackled in sequence, with an immediate focus on creating jobs combined with a long-run strategy of deficit reduction.

If I’m not mistaken, this was also the situation in which George W. Bush found himself in 2001. He did the right thing and lowered taxes. Of course, he never got around to part two (cutting spending) both because he expended all of his political capital on the tax cuts (and the ensuing wars) and because he was a lukewarm conservative.

Why not slash deficits immediately?

Keep in mind, we’ve been trying the “Spend Ourselves Stupid” Theory of Macroeconomic Policy (that’s right, it’s a proper noun) for two and a half years now. The economy still sucks.

Because tax increases and cuts in government spending would depress economies further, worsening unemployment.

The 2008 housing crisis taught us that we need to decouple the overall economy from the fool-hardy, politically-motivated decisions of the government. The entire reason why the subprime mortgage market existed is because it was governmentally supported. Krugman’s argument is that we can’t make the people less dependent on government because the people are already so dependent on government.

And cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.

Easy, tiger, you’re walking in unfamiliar territory for liberals. The converse of this statement is that lost revenue from tax decreases are partly offset by higher revenue as the economy grows. Conservatives have been saying this for decades, (thank you, Art Laffer) and have been blasted by Keynesians like Krugman. We’re all supply-siders now, huh?

So jobs now, deficits later was and is the right strategy.

Yes, but more government doesn’t mean more jobs. It means more government. We found that out with the stimulus. Twice.

Unfortunately, it’s a strategy that has been abandoned in the face of phantom risks and delusional hopes.

Sigh.

On one side, we’re constantly told that if we don’t slash spending immediately we’ll end up just like Greece, unable to borrow except at exorbitant interest rates.

Undoubtedly, Greece is the eventuality of a government that borrows beyond its means. The only reasonable counterargument is that our debt ceiling is comparatively higher than Greece’s. That may be, but do you really want your government to play that game of brinksmanship with the fiscal stability of the country and the financial wellbeing of all of its citizens in the balance? There’s truly nothing to be gained from it, which, I suppose, is why rational people think Paul Krugman is batshit crazy.

On the other, we’re told not to worry about the impact of spending cuts on jobs because fiscal austerity will actually create jobs by raising confidence.

Keep in mind these are the people that said that expiring the Bush tax cuts would have no impact on jobs.

How’s that story working out so far?

Considering that we haven’t enacted any austerity measures in the United States, it’s a little premature.

Self-styled deficit hawks have been crying wolf over U.S. interest rates more or less continuously since the financial crisis began to ease,

It eased? Most of the college graduates I know are working as bartenders or in call centers. They’ll be glad to know the crisis has “eased.”

taking every uptick in rates as a sign that markets were turning on America. But the truth is that rates have fluctuated, not with debt fears, but with rising and falling hope for economic recovery. And with full recovery still seeming very distant, rates are lower now than they were two years ago.

Seriously. The Fed sets the rates. That’s what “Open Market Operations” are. It’s pretty much the only tool for directing monetary policy that the Fed actively uses.

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.

...So our economic stability is ensured so long as the people that you’re deriding continue to do the things that you’re deriding them for? Thanks, asshole.

But that’s not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts.

Spending cuts are necessarily not short term. When you consider that federal budgeting is done with benchmarking, by cutting spending, you are not cutting a year’s worth of expenditures; you are cutting a spending perpetuity. With the low rate that the government borrows at, that means that the $100B of cuts that the Republicans promised (but have foolishly failed to achieve) have a (very roughly) $3.3T Present value to the long-term debt.

Just ask the Irish, whose government — having taken on an unsustainable debt burden by trying to bail out runaway banks —

Yeah, but that’s a terrible comparison. We would never do something that stupid. Wait…

tried to reassure markets by imposing savage austerity measures on ordinary citizens.

So spending cuts are akin to taking money out of the pockets of citizens…like tax increases…which you support.

The same people urging spending cuts on America cheered. “Ireland offers an admirable lesson in fiscal responsibility,” declared Alan Reynolds of the Cato Institute, who said that the spending cuts had removed fears over Irish solvency and predicted rapid economic recovery.

That was in June 2009. Since then, the interest rate on Irish debt has doubled; Ireland’s unemployment rate now stands at 13.5 percent.

Keep in mind that in June 2009, we all thought the world economy would recover rapidly. Even so, Reynolds’ prediction about Ireland is looking significantly better than Obama’s predictions about the unemployment-suppressing effects of the stimulus.

And then there’s the British experience. Like America, Britain is still perceived as solvent by financial markets,

…ehhhhh…sort of.

giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.

I’m picturing Dana Milbank wearing a pink leotard and tutu.

But she hasn’t: British growth has stalled,

They downgraded from a 2% GDP growth to 1.6%. Go Speed Racer, Go!

and the government has marked up its deficit projections as a result.

Keep in mind that their deficit as a percentage of GDP (12%) is still, embarrassingly, higher than ours. The ratings agencies are also threatening to downgrade.

Which brings me back to what passes for budget debate in Washington these days.

A serious fiscal plan for America would address

By address, you mean cut. Because if you don’t, then that wouldn’t be very serious at all, would it?

the long-run drivers of spending, above all health care costs,

I agree. Let’s cut Obamacare. Entirely.

and it would almost certainly include some kind of tax increase.

I told you this guy loved him some tax increases.

But we’re not serious: any talk of using Medicare funds effectively is met with shrieks of “death panels,”

Actually it’s more like “repeal Obamacare first.” Then we’ll fix everything else.

and the official G.O.P. position — barely challenged by Democrats — appears to be that nobody should ever pay higher taxes.

You just spent an entire column talking about how you need to promote economic growth in a down economy to increase federal revenues. Now you take the one thing that everyone agrees suppresses economic growth—taxes—and claim that they’re necessary? Do you even re-read these articles before submitting them, or are you just trying to see how much progressive bullshit you can churn out in the guise of economics before someone calls you on it?

Instead, all the talk is about short-run spending cuts.

Also known as elimination of waste.

In short, we have a political climate in which self-styled deficit hawks want to punish the unemployed

No, you argued that the deficit hawks would damage the overall economy, not hurt the unemployed specifically. The “poor hit hardest by downturn” storyline is just so cliché.

even as they oppose any action that would address our long-run budget problems. And here’s what we know from experience abroad: The confidence fairy won’t save us from the consequences of our folly.

Here’s what Portugal (barely mentioned), Ireland (totally screwed before the austerity measures), and the UK (which still has a colossal budget deficit) taught us: we never should have emulated the fiscally suicidal Western European style of social spending. We’re Americans. It’s time to start acting like it.