Friday, March 8, 2013

Krugman says deficits don't matter? This is news to me.

This article by Scarborough and Sachs is very strange (like a lot of what Sachs has written recently, actually). This interpretation of Keynes as somehow not on the same page as Krugman is especially confused:
"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... Keynes worried about the long-term buildup of public debt and called for balancing the budget over the course of a business cycle — allowing deficits during downturns to be offset by surpluses during good times."
It's a little more nuanced than actual surpluses in growth years - Keynes wanted a capital budget. But the thrust of this claim is fine.

Bizarrely they paint Krugman as out of step with this view and point to his Bush-era concerns about the deficit as the good-old-Krugman that used to be reasonable.

It seems to me if you worry about deficits more during non-depressionary periods and you worry less about deficits during depressionary periods then it is precisely Keynes's nuanced position that you are taking!

Now its true we could have entered this crisis with lower debt levels than we've had, and I don't think anyone disagrees that better behavior (as Krugman advocated!) during the Bush years would have put us in an even better position now. But that doesn't mean that deficits are the wrong stance right now, nor does it change Krugman's fundamental argument (proven right again and again for the last five years) about the impact of deficits on interest rates.

The biggest cause of deficits today (not the long-term imbalances - that's a different can of worms) is the depression. Fix the depression and you fix the deficits. Tighten the fiscal stance and you make it harder to fix the depression and harder to close the deficits that none .

1 comment:

  1. "Fix the depression..."

    That appears to be outside the scope of what humans can currently do.


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