In this column in today's New York Times, Krugman begins with a tweet of Rand Paul noting the last time the US was debt free was 1835, then writes
Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.
Now before I go on, economic theories should be tested by applying them to the data that is available to us from history. That in fact is what Thomas Piketty did with his recent blockbuster book, and that is what has NOT consistently been done by many advocates of austerity or their intellectual forebears in the Chicago School and the Neo-Classical consensus that has unfortunately come to dominate modern economics. What reference there is to historical data tends to be cherry-picked, and often fails to remind us that a basic concept of economics,
Ceteris Parebus, holding all other things equal, can mean even in those examples cited the proponents of the approach may be ignoring factors that in fact were very significant in the results upon which they base their arguments.
In this column Krugman takes a different approach. This is seen in two consecutive paragraphs, one serious, and one pointing out the ridiculousness of the opposing approach:
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.
Please keep reading.
There are several key parts of Krugman's argument in this column. Allow me to attempt to present them directly.
First,
The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates.
This is a point that Krugman has made before - given how low interest rates are, it is a good time to borrow for things like infrastructure, spending on which has NOT increased at the rate of population growth. Here as an educator I note that just to bring school buildings up to code would take hundreds of billions of dollars, and to properly equip them for modern technology substantially more.
Further, one needs to examine why interest rates are low. Krugman provides a concise and coherent explanation - it is in part because money has moved heavily into government debt for its safety, especially after the disasters of the mortgage-backed securities. Krugman addresses this clearly in two paragraphs:
Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.
But all of that supposedly brilliant financial engineering turned out to be a con job: When the housing bubble burst, all that AAA-rated paper turned into sludge. So investors scurried back into the haven provided by the debt of the United States and a few other major economies. In the process they drove interest rates on that debt way down.
But having such low interest rates can actually be a real problem, and here Krugman refers us to the words of Narayana Kocherlakota, the departing president of the Minneapolis Fed, who points out that this is a problem, because when government interest rates are low, the central bank loses a key tool (cutting interest rates) to stimulate a lagging economy. Further, the lack of return on government debt can encourage people to move into riskier sectors of the market in an attempt to get a better rate of return, perhaps even more "Wall Street hocus-pocus."
Krugman argues we need the ability to have higher interest rates in good times (and by implication, the ability to cut in bad times), and cites Kocherlakota as pointing out one way to get there is by increasing government debt.
Here there is a basic principle of economics - supply and demand. Increasing government debt when interest rates are low will lead to a rise in interest rates, but as a result of the increased demand by the government for credit. Krugman does not address one issue, whch is the belief by some that the government doing this will "crowd out" private investment. But at a time when corporations are sitting on trillions of dollars of cash, this is unlikely.
Further, the increase in employment as a result of government expenditure on infrastructure paid for by increased buying will have a strongly stimulative impact upon an economy that is still lagging, and as a result provide more revenues to state and local governments who are struggling without it.
Krugman is, as any regular reader knows, a strong critic of the austerity approach, which he considers wrong-headed.
He writes
Not only were governments that listened to the fiscal scolds kicking the economy when it was down, prolonging the slump; not only were they slashing public investment at the very moment bond investors were practically pleading with them to spend more; they may have been setting us up for future crises.
Some of those crises are not so far in the future. Look at what has happened economically in states where this approach has been taken, in places like Kansas and Wisconsin, to cite just two. Some people tend to forget that in slashing government spending through slashing government jobs and/or the compensation to government employees, that the multiplier effect can lead to a devastating impact upon the economy the same way putting more dollars into public spending can lead to a strongly positive impact through the multiplier.
And after having warned us about being set up for future crises, Krugman conclude simply and directly with one final sentence:
And the ironic thing is that these foolish policies, and all the human suffering they created, were sold with appeals to prudence and fiscal responsibility.
Read the entire column.
You will be glad you did.
Peace.