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Saturday, February 09, 2013

Kick That Can???

Paul Krugman doesn't think the sequester should go into effect. But where, really, is the severe economic damage he foresees? The cuts this year are around 100 billion, which is very little.

We all know that we have to cut defense. In June, when this will be hitting, the housing construction cycle will be in full swing, and we will be four years out of recession. June 2009 was a long time ago. What is he even talking about here?
Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts, which would hit with full force. ... 

Realistically, we’re not going to resolve our long-run fiscal issues any time soon, which is O.K. — not ideal, but nothing terrible will happen if we don’t fix everything this year. Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.
If we have to cut over the longer term, and we do, then cutting gradually is the only way to do it. There will never be a year in which we can cut massively and not throw the US into recession. Nor do the sequester cuts come even close to dealing with our problems. When this is implemented, the US will still be massively deficit spending. 

The reason bubbles inflict such severe economic damage when they burst is that a substantial part of the economy is predicated on the bubble - and when the inevitable happens, it is not just the bubble collapse but all the other intertwined economic pieces that collapse and cause catastrophe. No economy can make such massive adjustments suddenly.

I no longer understand what Krugman is thinking, or even if he's thinking. If it has to happen, do it gradually. Four years after the end of a recession does not qualify as "recovery", and since we had at least some of the inventory cycle correction last year, the impact this year of these changes should be blunted.

We are in a long slow low-growth cycle, and there is nothing anyone can do about it, except perhaps really open up the energy production field. That will give us longer term growth and a manufacturing advantage we desperately need. 

Of course we need to let the sequester go into effect. Otherwise we are courting disaster.

Comments:
Or cut the same amount as the sequester, but in a targeted way rather than across the board. For example, we built up the Army and Marines for a pair of land wars. With those wars winding down, and with a shift to a Pacific strategy that demands air and naval resources, it makes no sense to make the defense cuts across the board; they should be targeted to fit the strategy. Of course, this requires Congress to actually BUDGET instead of operating on endless continuing resolutions ...
 
I agree we need to let the sequester go into effect. $100 bil off of $1.2 Trillion is gradual. Keep in mind that is what is on the balance sheet. What is off balance sheet is what always shows up to bite you. For example, Illinois pension plans are $200 bill underfunded (you think they might want some FEDERAL assistance with that?), and they are still using an 8% expected return. Illinois raised their income tax from 3% to 5% last year, WITHOUT any solution to the pension funding. Well, the rumor that State Farm Insurance (based in Bloomington IL) is building a campus in a Dallas suburb that will house up to 5,000 people wouldn't have anything to do with it at all. Remember when Bush was GOING to cut the deficit by half, then Obama was GOING to cut it by so much. It never happens, kind of like going on a diet.
Learner2
 
I am at the point of being a "Krugman Contrarian". If Krugman wants to do something, the smart play is to do the opposite. I realize that is overly simplistic. But, we cannot continue to pile on the debt we are piling on every year. Frankly, $100 billion against a $1.2-1.5 trillion deficit is small ball.
 

Krugman is firmly stuck in Keynes World (cue the Mike Myers parody).

In Keynes World, it's a travesty of policy-making that we're not already at full employment. All we have to do is spend, spend, spend, and the "money multiplier" awarded to government spending will juice the economy to whatever level we desire, while the Fed keeps inflation under control through the magic of interest rate manipulation.

To keep the debt under control, we just need to jack up rates on "the rich". Everybody knows they don't consume with so high a percentage of their income, in fact they're savers and therefore a drag on the economy. Again, it's a travesty of policy that we allow them to keep so much of their income. After increased government spending increases the rate of economic growth, we can sit back and watch these higher tax rates bring revenues flooding into the Treasury. Deficit closed!

I'm sure I've missed some details, but I think this is a pretty fair representation of the outlines of Krugman's point of view. Sadly, it seems to me that the Administration also lives in Keynes World.

 
WSJ - but there is no legislative compromise possible, it seems, so we are stuck with the sequester or nothing.

Surely the sequester is better than nothing? Because this is a gradual approach, at least.
 
Neil, it simply MUST be more than that. There is considerable misrepresentation in the column.

I'm not sure whether he's fooling himself or trying to fool his readers. It is true that the 1.2 trillion included in the 2011 bill would, if CUT IN ONE YEAR, completely close the deficit, as well as putting us into a very deep recession. But the cuts scheduled for this year are minor.

He appears to be trying to either convince himself or his readership of something that is not true. This is NOT simply Keynesian economics run amok.

Note that if he were really worried about the effects of a 100 billion dollar cut, he'd have been freaking out over the nearly 120 billion dollar payroll tax increase.
 

The "money multiplier" is supposedly, what, 4X or so? 4*100B/15T is about 2.6%, enough to put us in recession. So in Keynes World, that's a big problem.

As to why he didn't whine about the payroll tax increase, I could be charitable and say that he was more concerned about the SS/Medicare trust fund. Or I could be uncharitable and point out that Krugman's analysis of the same data will change from week to week depending on the policy position of the Democrat Party.

 
Basically, people like Krugman just can't imagine life where the government is one tiny bit smaller than it is now. There's not a single program that should be shut down. There's no programs that could be combined to save money. Everything has to be kept exactly as is.

I would like to see sunset laws on all legislation passed and I can think of several government agencies that should be shut down all together. (Can anyone tell me what the Department of Energy has actually accomplished?) And our representative in the House wants to see a 10% cut in the salaries of all Congress critters, the Prez and the Vice Prez. I'm in favor of that one too.
 
Politicians printed money long before Keynes or Krugman; they're just the fools that attempt to justify it.

It's politically impossible to make even marginal cuts, thus we'll print until the dollar is busted.
 
Bad news, Neil - check this out.

It's hard to see why the effect of spending cuts would be different than the effect of a tax increase.

Okay, let's pretend that the tax increases on the "rich" are different. You still have to deal with the payroll tax increase which is a greater withdrawal of money from the system than the scheduled sequestration.

Whatever the current money multiplier of federal spending now is, it is below 1.5. That's certain.

I personally tend to go with Barro and assume a multiplier of 0.8 to 0.9 for most types of government spending. short article. Right now it is clearly less and clearly negative, because there simply must be a strong relationship between the M1 Money Multiplier and any assumed multiplier for government spending.

If you want to be Keynesian about it, the current situation reflects the need of the average household for more money (i.e. more savings), and therefore additional government spending will drain away into the swamp of debt paydowns. The Keynesian corrector is for government to boost incomes, which lessens the need for savings, thereby increasing velocity and boosting the money multiplier.

It is a farce to claim a Keynesian tenet that would somehow support the idea that the payroll tax increase would have less of a negative effect than the smaller sequester cuts.


 

Haha! You fell into my Keynesian trap! The payroll tax is required to maintain confidence in SS/Medicare, which reduces the need to save for retirement and thereby boosts consumer spending. Budget cuts, on the other hand, are an outright cut in consumption, especially when they're being funded primarily by money-printing at the Fed.

Touche!

 

As for the multiplier, we all know that government expenditures are FAR more efficacious and do more good than the same spending by individuals. Therefore, the government multiplier must be FAR higher than M1/monetary base.

 
Any of you ever read "The Phantom Tollbooth" as a kid? They had this stuff called "subtraction soup" -- the more you ate the hungrier you got, until you finally starved yourself gorging.

That's our government.
 
Tj
Isn't that the definition of a positive feedback (unstable) system? Positive feedback = meltdown as anyone living near Chernobyl will tell you. It's just a matter of when.
 
Krugman is a fcking moron.

I beg your indulgence, it had to be said.
 
I know he's an f-g moron, I just wonder WHY?

But you know, I'm probably overthinking this. Maybe it's as simple as not wanting to revise those GOP vs Dem GDP growth charts he so loves.

This 8 year term is going to blow a hole in that thesis.
 
The WHY is simple: he does not believe anything can be considered malinvestment. If he won't believe Wall Street can malinvest, he certainly won't believe government can malinvest.

In the conscience of a liberal, everybody deserves a trophy.
 
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