Sunday, March 10, 2013

JoScar and Krugman and Sachs!

Joe Scarborough and economist Jeffrey Sachs wrote an opinion piece in yesterday’s Washington Post (here), in which Scarborough continued his month-long obsession with Paul Krugman that began when Krugman was a guest on Scarborough’s MSNBC show.  In the original discussion on Morning Joe, Scarborough talked about the great, accelerating and unsustainable rise in federal spending that he claimed has been rampant over the last few years: Scarborough is a conservative, and this idea that spending is out of control, that it is (as Scarborough said elsewhere) “exploding”, is an accepted view in his world.  But Krugman corrected him, telling him that while there was a substantial increase in spending early in the recession  (in 2008 and 2009), federal spending has been fairly flat since then, and total government spending (including state and local) has declined. 

In this dispute I’ll come down (with a reservation) on Krugman’s side, which will surprise no one, but I’ll add a caveat on Scarborough’s side, which may surprise my friends.   But I’ll put that question off for the moment.  Because what I want to write about here is an assertion right at the top of the Scarborough/Sachs opinion piece. Krugman wrote a response to the column here, and again here; Mark Thoma responded here.  So I’m late to this discussion.  I meant to say something right away, but work other responsibilities have delayed me.  But there is one point to make that I think has been underplayed in all the discussion.  It’s the reaction I had immediately when I read the very first line of the Scarborough/Sachs column, which says:

Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong.”

The emphasis is mine. 

Now, Dick Cheney did say that deficits don’t matter, but  Krugman most emphatically did not.  Just the opposite.  In fact, between the two of them, it’s Scarborough that claims that deficits don’t matter in any extended sense, that is, apart from their impact on the national debt. But Krugman, and many others, would say that deficits and surpluses do matter very much, and have significant economic impacts not only on debt in the long run but on general economic activity in the short run.  This is an important and misunderstood point.

A bit later in the piece, Scarborough and Sachs say this:

“It has become part of Keynesian lore in recent years that public debt is essentially free, that we needn’t worry about its buildup and that we should devote all of our attention to short-term concerns since, as John Maynard Keynes wrote, “in the long run, we are all dead.” But that crude interpretation of Keynesian economics is deeply misguided; Keynes himself disagreed with it.”

Yes, Keynes did disagree with it, and so does almost everyone else, including Krugman. Krugman has said in many places that he is concerned about debt in the longer run, and deficits do add to that long run burden.   In fact he explicitly said so in the link that Scarborough and Sachs provide.  He says:

The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail…once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base.”

But the important point is that for Keynes, and Keynesians, that is not the only impact of deficits and not the only way that deficits matter, and that while deficits “matter” in the long run by adding to the debt, they also “matter” in the short run by adding to demand.  And while austerity may matter in the long run by decreasing the future debt, it also matters in the short run by decreasing demand, and as a result decreasing economic activity.  Debt as a share of GDP may even rise, since GDP declines under austerity.  Both the numerator and the denominator in that fraction are important.

Scarborough, though, seems to see the impact on debt as the only way that deficits matter. Scarborough is not alone in this; many (very good!) conservative economists claim that deficits crowd out other spending, and have little impact on overall demand even in the short run, and that therefore deficits have no positive short run impacts to counter their negative long run impact on debt.  But the alternative view, the one that is promoted by Krugman and others, is that in the short run deficits, in the absence of any counteracting force or policy, increase total demand, and so they stimulate the economy, while surpluses do the reverse. What Krugman has argued repeatedly is not that the long run debt issue doesn’t matter, but that the short run positive impact of deficits right now, while unemployment is still high and we are up against the lower bound on interest rates, matter more. 

Now, on the facts of spending over the last few years: contrary to almost universal belief among both conservatives and progressives, while federal spending did grow in 2008 and 2009 it has not “exploded” in the last few years.  In fact, it been fairly flat since the end of 2009.  Here’s the graph from FRED, showing the natural log of federal spending since 1959, which is as far back as this series goes:

The gradual upward slope is a result of many things, including population growth and inflation, but of course also because of increases in spending on entitlements due to an aging population and rising health care costs, and during the Reagan and Bush II years increased spending on defense.  The thing to look at here is the deviations from that long upward trend.   There was a significant rise in 2008 and 2009, the last year of the Bush administration and the first of the Obama administration. Then the line becomes as flat as it has been in decades.  In fact there since the beginning of this series in 1959 it has never been this flat for this long. 

It’s easier to see this if we look at the graph only in this century.  Here is that shortened graph, with the Bush years trend line added in red:

In this graph it’s clear that even though there was a large expansion of spending in 2008/2009, we are now below the trend of federal spending from the bush years.

But the other side---the Scarborough/Sachs side---of this picture shows up in the graph below, which shows federal spending as a share of potential GDP:

In this graph you can see that spending as a share of potential (full employment!) GDP did “explode” at the beginning of 2008, at the start of the biggest recession since the Great Depression.   In my opinion that was natural and appropriate.  But you can also see that the explosion is long over.  Spending/Potential GDP  has been dropping like a rock in the last few years.  You can attribute that to Obama or to the Republican House at your whim.

Spending as a share of potential GDP is still high, though. It is now, finally, below the peak, which occurred in 1985 under Ronald Reagan.   At the last measured point, at the end of 2012, it was still near the highest it has been since to the beginning of this series.  On the other hand, that last measurement was before the fiscal cliff, which both cut spending in increased revenues, and before the sequester cuts which cut spending even more.

So JoScar and Sachs have---or had, at the end of 2012---some data on their side. 

The direction is wrong for them, though.  We’ll see how that goes over the next few months.    

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