The idea that a liberal economist who criticized Bush's deficit spending policies, but now supports Obama's over spending is not earth shattering news. What changed Mr. Krugman's views? His ideology? Is he being controversial for the sake of playing the media commentary game? Or, has the economic conditions changed to a point that would warrant a flip-flop on massive deficit spending? These questions are interesting to discuss.
The idea that a liberal economist who criticized Bush's deficit spending policies, but now supports Obama's over spending is not earth shattering news. What changed Mr. Krugman's views? His ideology? Is he being controversial for the sake of playing the media commentary game? Or, has the economic conditions changed to a point that would warrant a flip-flop on massive deficit spending? These questions are interesting to discuss.
There are many blogs that have pulled a few quotes from the interview with Australian Broadcasting Corporation during his press tour for his The Great Unravelling in 2004. The quotes are use to criticize Mr. Krugman's current support for Obama's spending spree. Below we look at 90% of what Krugman said in the interview.
Tony Jones, the reporter/host of the network's program Lateline conducted the interview. During the interview, Mr. Krugman gave some really harsh criticism on Bush's deficits that seem identical to criticism leveled at Obama today by conservatives. Here is the first example...
TONY JONES: Paul Krugman, history proved your predictions right over the Asian financial crisis.
You're now warning essentially that the engine of the world economy, the United States itself, is heading for a South American style financial crisis.
What's the evidence for that?
PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there.
It's comparable to the worst we've ever seen in this country.
It's biggest than Argentina in 2001.
Which is not cyclical, there's only a little bit that's because the economy is depressed.
Mostly it's because, fundamentally, the Government isn't taking in enough money to pay for the programs and we have no strategy of dealing with it.
So, if you take a look, the only thing that sustains the US right now is the fact that people say, "Well America's a mature, advanced country and mature, advanced countries always, you know, get their financial house in order," but there's not a hint that that's on the political horizon, so I think we're looking for a collapse of confidence some time in the not-too-distant future.
This interview was conducted on November 03, 2004. Mr. Jones questions him on his "not-too-distant future" comment which Krugman states would be 2014, or only four years from now. With his position of supporting the deficit spending today, I wonder why this "date" isn't an issue anymore. Here's what he said back then...
PROFESSOR PAUL KRUGMAN: What I envision is that at some point, we have about 10 years now until the baby boomers hit the United States.
The US even more than other advanced countries has a welfare state that's primarily a welfare state for retirees.
We have the huge bulge in the population that starts to collect benefits and earn the next decade.
If there isn't a clear path towards fiscal sanity well before that, then I think the financial markets are going to say, "Well, gee, where is this going?"
I think, where in that 10 years the crunch comes, I don't know.
I think there's a real possibility that next year or one or two years from now, when they see that actually the same irresponsible tax cuts as the solution to everything continue, we might have a crisis that soon but more likely towards the end of the decade.
What seems odd, is the tax cuts increased the deficit/debt, thus moving even further away from what he was calling for a need to "fiscal sanity".
The conversation then shifts towards the "current account deficit". Wikipedia describes Current Account as
The current account balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.[1]
A bonds question leads to Current Accounts problem....
TONY JONES: Actually the bond market's quite interesting because for the present moment there seems to be a huge influence on the US economy from the Asian central banks.
Is that risky?
PROFESSOR PAUL KRUGMAN: Well sure.
Although, I'm not sure that it's particularly riskier than a lot of other things. But yeah, we have this, I didn't say this, but we've got twin deficits.
We've got a huge budget deficit and an equally large current account deficit.
And if you ask, "How are we financing the current account deficit?", well that's a story.
A few years ago it was foreigners investing in the United States.
It was Daimler buying Chrysler, it was people investing in the strength of the US economy.
These days it's Asian central banks buying up US Government debt because they're trying to keep their currencies weak against the dollar and this can't go on forever.
The reporter then went on to talk about how Republican's view Mr. Krugman as "scare mongering." A term that is being thrown around today by Democrats at Republicans. Krugman defends this criticism with a more reasons on why he against deficit spending.
TONY JONES: Your detractors - and there are quite a few of them on the Republican side of the equation - they're accusing you of scare mongering?
PROFESSOR PAUL KRUGMAN: The first thing to say is to look at what some of those same people were saying in the middle of the Clinton years when the deficit was substantially smaller as a proportion of GDP and they were carrying on about what a bad thing it was.
The other thing is the comparison.
The only time post war that the United States has had anything like these deficits is the middle Reagan years and that was with unemployment close to 10 per cent.
A lot of that was a cyclical thing which would go away when the economy recovered.
Also the baby boomers were 20 years younger than they are today.
If you look at the actual fiscal situation, it's much, much worse than it was even at its worst during the Reagan years. One way to say this is we have social security which is a retirement program which viewed on its own is running a surplus.
If you take that out of the budget then we're running at a deficit of more than 6 per cent of GDP and that is unprecedented.
Krugman clearly is against deficit spending at this particular point in time. He's definitely in the "Bush hater" camp, but is that really what drives his opinion? He's an author, columnist and on-air commentator. Perhaps, he just being controversial for the sake of getting ratings? Or, he's an economist that changed his opinion due to changes in the economy. Unemployment at 10 percent is a huge problem, but is it the sole reason to switch a view that he seemed so against?
There is an interesting historical point he does not cite. He never mentions the economic effects of 9/11 which had a huge local and and national impact. The airline industry needed a bailout to stay alive and many business's in New York City failed or at the very least had devastating losses. Didn't that economic circumstance justify deficit spending?
We now know that the economy in 2004 was slowing beginning to decline. Job growth was stagnate and unemployment was on the rise. Is this a perfect time for deficit spending to spark growth?
Bush cut taxes which increased the deficit along with two wars. Krugman has been a critic of those decisions. Obama is deficit spending for job creation by supporting industries and agencies losing money. These spending policies are supported by Krugman.
Both Bush and Obama policies have and are increasing deficit spending and the National Debt. Meanwhile, Krugman's warning of 2014 with the costs of aging baby boomers is still a looming problem that continues to be pushed off until another day.
Today, liberals accuse conservative of fear mongering, while, conservatives accused liberal of fear mongering when Bush was deficit spending.
At the very least, Krugman's interview is a good starting point for a debate on deficit spending. Is he right and wrong? Right and right? or Wrong and right? Why?