Krugman off-base on economic recovery projection(Read article summary)
Economist Paul Krugman said, Tuesday, that the US has a clear path to economic recovery.
We just stepped off the planeâŚ Weâll have to catch our breath and open our eyes before we have anything to say about ChinaâŚ
In the meantime, letâs look back at what is happening in Europe and America.
Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when weâre alone. And far from home.
Maybe weâre wrong. Maybe weâre leading thousands of loyal Dear Readers astray. Maybe the Great Correction isnât what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt.
What a relief it was to find Krugman in Tuesdayâs International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, weâd have to re-think our position.
âAmerica is not Greece,â he says. So far, so good. His geography is correct.
It is all downhill from there.
Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee.
The US is running about the same size deficit as Greece; but donât focus on that, says Krugman. The two places are not the same, he insists. Because the US has a âmuch lower debt level.â
Heâs wrong about that. If you add to the US national debt the debts of Fannie Mae, GM, and all the other financial holes, which the government will ultimately have to fill, the crater is about 120% of GDP â the same as Greeceâs debt.
âEven more important,â he writes, âis that we have a clear path to economic recovery.â
Oh. Whereâs that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles. There are now nearly as many people relying on the US government for food as the entire population of Spain. There are about as many people unemployed in the US as the entire populations of Greece, Portugal and IrelandâŚcombined. And there are as many people who have gotten negligible income gains asâŚwellâŚthe entire population of America.
Without more income, how can Americans increase spending? Without more spending, how can the economy really grow?
The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend. And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman canât tell the difference. But government spending generally produces negative real growth.
Nevertheless, Krugman explains that IF the economy improvesâŚand IF the administration cuts deficitsâŚand IF the new health care program doesnât cost more than the Obama team says it will â heckâŚeverything will work out just fine! With a few tax increases, of course.
Then, he tells us that, yes, over the long run weâre going to hell in a handcart. But that problem can be solved by a âcombination of health care reform and other measures.â
Finally, heâs right about something. Enough âother measuresâ and youâve got the problem licked.
What other measures? Well, the deficit is now at about 10% of GDP. So, all youâve got to do is to cut spending by 11% of GDP and youâve got a surplus. Letâs see, where are we going to cut $1.4 trillion dollars? Thatâs cutting out 100% of the defense budget. And 100% of Social Security too.
And if you donât do thatâŚyou get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then youâre Greece.
What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. Theyâll think that the US can borrow as much as it wants for as long as it wantsâŚ
In The Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is âzero.â He says deficits donât lead to trouble. The US has been running deficits since the â70s, he points out.
And look at the Japanese, he adds. Theyâve been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And theyâre still able to borrow at practically zero interest.
Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasnât.
A man jumped off the 65th floor of a skyscraper. As he went by the 11th floor, the secretaries heard him remark:
âAll right so far.â
The US is all right so far. So is Japan.
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