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."

Emperor, Please Put On Some Clothes

The emperor is most certainly stark naked before the public he's called together to see his "new clothes".

Who is this emperor? Today's emperor is more of a committee. The power players on the committee are the current office holders from the Republican party. Who sold them the clothes and are also the committee's most trusted advisers? That would be the "Chicago" school of dubious economists and similar Very Serious People who've claimed that we should fear nothing from cutting government spending because -- with the wonderful magic loom of "not crowding out" -- every item we remove from government spending will be replaced by an equal item of resurging private spending. For example, as recorded by Menzie Chinn, there's the claim from Mr. Brian Riedl of the Heritage Foundation that,

"Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another."

That there's some invisible clothing, that is. See, if you're a Very Serious Person, you'll see the magic clothing because only those silly, unworthy folks can't see the special invisible clothing that comes from reducing crowding out. Really. You believe us, right? Because if you don't, you must be one of those silly, unworthy folks.

Enter the child in the crowd, in this case played by various credible economists with good track records for accuracy: e.g., Paul Krugman and others who read our situation right and generally accurately predicted how things would play out from each move that's been taken. These folks -- like the child in the classic story -- have been unconcerned that pointing out the emperor's factual nudity might cause them to be seen as silly, unworthy folks by the powers that be. They see that the emperor is stark naked ... and, well, he's wrinkly and it's unappealing ... they're seeing sights that they'll never be able to un-see no matter how hard they try ... so they're going to darn well point it out in the hopes that he'll cover himself up with something real instead of these fake, imaginary garments from the Very Serious People.

I'm sorry, but Ricardian Equivalence is no substitute for honest clothing. Crowding out isn't going to be a significant factor in a demand-depressed economy such as the one in which we currently live. We can not expect that private spending will step up to fill the void if we cut government spending at this point. We can only expect that to leave us naked.