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.
