Why The Focus On The Debt? Why Now?

A question that needs to be asked anytime anyone rants about debt/deficit: why the focus on the debt? Why now?

Or as Krugman put it in an interview with Bill Moyers while answering who the Very Serious People are,

"People for whom this, it's axiomatic that the budget deficit is the most important problem. And that what we really, really need to do right now at a time of mass unemployment is worry about the debt to GDP ratio ten years from now. And it's a very hard thing to crack, partly because it's not actually a rational argument. You very rarely, very rarely see on the Sunday talk shows, people asking, "Why exactly are you so concerned about the deficit right now?" That's sort of a given. That's a starting point. Everybody serious understands that, except that if you ask them why exactly, they can't give you a very good answer."

We as a society need to stop accepting without question that the debt/deficit is somehow an urgent matter. Just because it's a numeric value outside of our usual realm of day-to-day household numbers does not make it a crisis.



So what about the converse? Why shouldn't we focus on the debt instead of jobs? Well, rather than duplicating what's already been said well enough by others, here's an excerpt from the Moyers-Krugman interview that answers that question:

"BILL MOYERS: We keep hearing from the right that we're here on the path to becoming Greece, and you say that that's impossible? 

PAUL KRUGMAN: Yeah. We, even if, suppose that people decided, investors decided they don't like U.S. government debt, it can't cause a funding crisis because the U.S. government prints money. It’s even hard to see how it can drive up interest rates because the Fed sets interest rates at the short end, and why exactly would the long run rates go up if you don't expect the Fed to raise rates? It could lead to a weakening of the U.S. dollar against other currencies. 

But that's actually a good thing. That would make U.S. exports more competitive. That would actually boost our economy. So it's, actually impossible to tell that story, as far as I can tell. And yet, it's not, again we're mostly not in the realm of rational discourse here. It's one of those things where people say it, they hear other people saying it. And they don't actually try to work it through. 

And it plays a big role, I'm sorry, in influencing our public discussion. Interestingly, people who actually have money on the line, that is people who are buying bonds, just keep on driving U.S. interest rates ever lower. So actual investors don't care about this stuff. But our political class does. 

BILL MOYERS: Why don't they care? 

PAUL KRUGMAN: Because first of all, because I think at some level investors understand what I'm saying. That it's very difficult to see any reason why the Fed would raise short term rates, which it controls for years to come. And in that case, long term debt even at a pretty low interest rate is a reasonable investment. Hard to see how a financial crisis actually develops against the United States, U.S. government, which is in this you know, has all the luxury of printing its own currency. 

And investments are always about compared to what, right? If you if you say, 'Well, the U.S. is a dangerous place to invest,' I don't think it is, but particularly where is the safe place that people are going to invest? You know, what is this other asset that they're going to buy? And it doesn't really exist."

67 Republicans And A Hurricane

Jon Stewart to the Republicans who voted against replenishing the national flood-insurance program: "This is just a simple down-the-middle, black-and-white, cut-and-dry, warm cup of what would Jesus, or any other human being that isn't an asshole, would do. And you blew it!"

The Daily Show with Jon Stewart
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Big Government in 1975 And In The Lesser Depression

Whether our current level of government is big or small, not everyone has always written about "Big Government" as if it were necessarily a bad thing. Here's Hyman Minsky from "Stabilizing an Unstable Economy", writing about the impact of Big Government towards avoiding deep depressions,

"Big Government, with its potential for automatic massive deficits, puts a high floor under an economy's potential downward spiral. Although this high floor is important in itself, it is particularly important in a world with business and household debt because corporate gross profits and household savings are essential to validate such debt.

Without the emergence of a huge government deficit in 1975, the debt-carrying capacity of business and households would have been severely compromised. Such compromising, due to an iterative, downward spiral of income and profits, led to the debt deflation and deep depressions of the past. The sectoral budget impact of Big Government that sustains business profits is precisely what makes such a cumulative interactive decline impossible."

The Lesser Depression

Impossible is a strong word, and arguably a bit overboard. Given that Minsky would say we have "Big Government" and the experience of the Lesser Depression starting in 2008, it seems rather clear that a sufficiently large financial crisis without sufficient mitigation from increased discretionary spending can indeed still create such a decline even with our size of government. However, "Big Government" certainly slows the decline. (And even an under-sized increase in discretionary spending -- one not large enough to make up for the output gap -- can still help bring about an anemic recovery ... if not the robust recovery we'd see from an appropriately scaled fiscal mitigation.) As larger government create resistance to decline, it partially stabilizes the economic system. That's likely more or less what Minsky meant in describing the beneficial impact of big government, even if he may perhaps have employed a touch of hyperbole when making that point.

"Reining in Entitlements"? Consider the Motive

From "Policy Implications of Capital-Biased Technology: Opening Remarks", Paul Krugman says,

"We should keep this line of argument in mind — and when somebody talks about the need to rein in entitlements, we should always ask whose interests, exactly, are being served."

Words of wisdom. When anybody wants anything changed, always consider why they're choosing that approach rather than another. Just because we're spending X amount doesn't mean we need to be spending less rather than raising more ... or raising it differently. If one buys the idea that spending X amount is somehow inherently bad in and of itself, one has just plain failed to consider the full picture. That doesn't make spending exactly X necessarily good either ... it just means that it one shouldn't consider X bad merely because X is at some arbitrary level.