Daily Archives: March 27, 2011 @ 4:24 pm (Sunday)

Wall of Shame

Posted on by

Unsustainable budget threatens nation

March 24 (Politico) — Repeated battles over the 2011 budget are taking attention from a more dire problem—the long-run budget deficit.

Divided government is no excuse for inaction. The bipartisan National Commission on Fiscal Responsibility and Reform, under co-chairmen Erskine Bowles and Alan Simpson, issued a report on the problem in December supported by 11 Democrats and Republicans — a clear majority of the panel’s 18 members.

As former chairmen and chairwomen of the Council of Economic Advisers, who have served in Republican and Democratic administrations, we urge that the Bowles-Simpson report, “The Moment of Truth,” be the starting point of an active legislative process that involves intense negotiations between both parties.

There are many issues on which we don’t agree. Yet we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.

This is just plain wrong, of course, but look at the list of supporters, below, disgracing themselves.

While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008.

There is absolutely no applicable theory or evidence to support any of this. Any presumed supporting evidence or theory always applies to a gold standard or other fixed rate regime, but is always entirely inapplicable to our current non convertible currency/floating exchange rate regime.

“The Moment of Truth” documents that “the problem is real, and the solution will be painful.” It is tempting to act as if the long-run budget imbalance could be fixed by just cutting wasteful government spending or raising taxes on the wealthy. But the facts belie such easy answers.

The commission has proposed a mix of spending cuts and revenue increases. But even this requires cuts in useful programs and entitlements, as well as tax increases for all but the most vulnerable.

All this can do is lower aggregate demand, which means reduced real output and higher unemployment in general. How do any of these economics professionals think that producing less, including less real investment, addresses our very real needs?

The commission’s specific proposals cover a wide range. It recommends cutting discretionary spending substantially, relative to current projections. Everything is on the table, including security spending, which has grown rapidly in the past decade.

So do they think that current Social Security payments result in a too high standard of living for our seniors? I don’t see any of them flying on private jets to sporting events on their Social Security? In fact, current levels of Social Security payments are just barely enough to keep them from needing to eat out of garbage cans. And there certainly is no shortage of the real goods and services they consume, particularly with unemployment so high and the output gap in general so wide?

It also urges significant tax reform. The key principle is to limit tax expenditures—tax breaks designed to encourage certain activities—and so broaden the tax base. It advocates using some of the resulting revenues for deficit reduction and some for lowering marginal tax rates, which can help encourage greater investment and economic growth.

The commission’s recommendations for slowing the growth of government health care expenditures — the central cause of our long-run deficits — are incomplete. It proposes setting spending targets and calls for a process to suggest further reforms if the targets aren’t met. But it also lays out a number of concrete steps, like increasing the scope of the new Independent Payment Advisory Board and limiting the tax deductibility of health insurance.

How about taking a look at the real goods and services we devote to actual health care, and making decisions accordingly? Seems that used to be what economists did, before they got lost in finance to the point of absurdity?

To be sure, we don’t all support every proposal here. Each one of us could probably come up with a deficit reduction plan we like better. Some of us already have. Many of us might prefer one of the comprehensive alternative proposals offered in recent months.

Yet we all strongly support prompt consideration of the commission’s proposals. The unsustainable long-run budget outlook is a growing threat to our well-being. Further stalemate and inaction would be irresponsible.

Do any of them see the current budget leading to an irreversible excess of aggregate demand? If they do they never mention it. In fact, I’ve yet to see a long term inflation forecast from anyone that shows an excess of aggregate demand looming.

We know the measures to deal with the long-run deficit are politically difficult. The only way to accomplish them is for members of both parties to accept the political risks together. That is what the Republicans and Democrats on the commission who voted for the bipartisan proposal did.

Because they are afraid we could become the next Greece they are trying to turn us into the next Jonestown.

Feel free to repost and distribute, thanks.

We urge Congress and the president to do the same.

I urge them to recognize taxes function to regulate aggregate demand, and not to raise revenue per se.

Martin N. Baily

Martin S. Feldstein

R. Glenn Hubbard

Edward P. Lazear

N. Gregory Mankiw

Christina D. Romer

Harvey S. Rosen

Charles L. Schultze

Laura D. Tyson

Murray L. Weidenbaum

Share

Harvard’s Mankiw- a disgrace to the economics profession

Posted on by

CAUTION: BE SEATED WHEN READING

COMMENTS BELOW:

It’s 2026, and the Debt Is Due

By N. Gregory Mankiw

March 26 (NYT)

The following is a presidential address to the nation — to be delivered in March 2026.

My fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means.

A rookie, first year student mistake. Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us. The currency is the means for achieving this. Dollars are purely nominal and not the real resources.

We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.

The hard reality is that for a given size government, there is a ‘right level’ of taxes that corresponds with full domestic employment, with the size of any federal deficit a reflection of net world dollar savings desires.

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security.

Yes, they decided they would like our elderly to be able to enjoy at least a minimum level of consumption of goods and services that made us all proud to be Americans.

They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embracedhealth care reform with subsidies for middle-class families.

Yes, they elected to make sure everyone had at least a minimum level of actual health care services.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

The real cost of this ‘expansion’ (which was more of a reorganization than an expansion of actual real resources consumed by the elderly and consumed by actual healthcare needs) may have consumed an increasing share of real GDP, but with continued productivity this would have been at most a trivial amount at current rates of expansion.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Yes, they are consuming real goods and services produced by others. The important consideration here is the % of the population working and overall productivity which he doesn’t even begin to address.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

Still no indication of what % of real GDP he envisions going to health care and real consumption by the elderly.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

At least he gives real economic growth a passing mention. However, what he seems to continuously miss is that real output is THE issue. Right now, with potential employment perhaps 20% higher than it currently is, the lost real output, which compounds continuously, plus the real costs of unemployment- deterioration of human capital, broken families and communities, deterioration of real property, foregone investment, etc. etc. etc.- are far higher than the real resources consumed by the elderly and actual health care delivery. Nor does he understand what is meant by the term Federal borrowing- that it’s nothing more than the shift of dollar balances from reserve accounts at the Fed to securities accounts at the Fed. And that repayment is nothing more than shifting dollar balances from securities accounts at the Fed to reserve accounts at the Fed. No grandchildren involved!!!

Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.

This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk.

This is all entirely inapplicable. It applies only to fixed exchange rate regimes, such as a gold standard, and not to non convertible currency/floating exchange rate regimes. This is nothing more than another rookie blunder.

Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

With our non convertible dollar and a floating exchange rate, the Fed currently sets short term interest rates by voice vote, and the term structure of interest rates for the most part anticipates the Fed’s reaction function and future Fed votes. Nor is there any operational imperative for the US Government to offer longer term liabilities, such as 5 year, 7 year, 10 year, and 30 year US Treasury securities for sale, which serve to drive up long rates at levels higher than otherwise. That too is a practice left over from gold standard days that’s no longer applicable.

As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.

As above, the US Government is under no operational imperative to issue Treasury securities. US Government spending is not, operationally, constrained by revenues. At the point of all US govt spending, all that happens is the Fed, which is controlled by Congress, credits a member bank reserve account on its own books. All US Government spending is simply a matter of data entry on the US Governments own books. Any restrictions on the US government’s ability to make timely payment of dollars are necessarily self imposed, and in no case external.

So where do we go from here?

WE DON’T GET ‘HERE’- THERE IS NO SUCH PLACE!!!

Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.

This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.

Mankiw’s display of ignorance and absurdities continues to compound geometrically.

We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

The only reason we would ever be ‘forced’ to make those cuts would be real resource constraints- actual shortages of land, housing, food, drugs, labor, clothing, energy, etc. etc. And yes, that could indeed happen. Those are the real issues facing us. But Mankiw is so lost in his errant understanding of actual monetary operations he doesn’t even begin to get to where he should have started.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

He fails to recognize that federal taxes function to regulate aggregate demand, and not to raise revenue per se, again showing a complete lack of understanding of current monetary arrangements.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

Ok, finally, apart from the revenue error, he’s got the rest of it sort of right, except he left out the part about that tax being highly regressive.

As I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

Due entirely to ignorance of actual monetary operations.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.

N. Gregory Mankiw is a professor of economics at Harvard.

And no small part of the real problem we face as a nation!

Feel free to repost and distribute

Share

Plosser on ‘removing accomodation’

Posted on by

Plosser Speach

Some comments below:

Let me begin by noting that the economy has gained significant strength and momentum since late last summer and seems to be on a much firmer foundation going forward. Consumer spending continues to expand at a reasonably robust pace, and business investment, particularly on equipment and software, continues to support overall growth. Labor market conditions are improving. Firms are adding to their payrolls, which will result in continued modest declines in the unemployment rate. The residential and commercial real estate sectors remain weak but appear to have stabilized. Nevertheless, I do not believe that weakness in these sectors will prevent a broader economic recovery. Indeed, the nonresidential real estate sector is likely to improve as the overall economy gains ground.

If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy.

No it won’t. As the Fed’s own Kohn and Carpenter have stated, there is no ‘monetary channel’ from reserves to anything else.

Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future.

Not true.

But what matters is that pretty much the entire FOMC believes it to be true and will act accordingly.
Market participants also believe it to be true and shift portfolios accordingly.

To avoid this outcome, the Fed must confront at least two challenges. The first is selecting the appropriate time to begin unwinding the accommodation. The second is how to use the available tools to move monetary policy toward a more neutral stance over time.

Looks to me like the current situation- 2 years of very modest gdp growth, high unemployment that is forecast to fall only slowly, and very little signs of private credit expanding- is telling us policy is already relatively neutral, given the circumstances.

First, monetary policy should operate using the federal funds rate as its policy instrument. Because the Fed can now pay interest on reserves, monetary policy could use the interest rate on reserves (IOR) as its instrument, establishing a floor for rates and allow reserves to be supplied in an elastic manner.3 However, targeting the federal funds rate is more familiar to both the markets and policymakers than is an administered rate paid on reserves. To make the funds rate the primary policy instrument, the target federal funds rate would be set above the rate paid on reserves and below the discount or primary credit rate that banks pay when they borrow from the Fed.

This means the that at the margin the NY Fed has to keep the banks net borrowed to keep the fed funds rate above the floor, and net long to keep it below the ceiling.

Good luck and who cares if the rate paid on reserves equals the fund funds rate?

This operating framework is sometimes referred to as a corridor or channel system and is used by a number of other central banks around the world.4 I have argued elsewhere that our goal should be to operate with a corridor system instead of a floor system,

Yes, this greatly simplifies life for the NY Fed trading desk, especially if you allow fed funds to trade at the floor rate. The should have done it a long time ago, like most other CB’s in the world. And while they are at it, they should also drop reserve requirements, like Canada did a while back, and get rid of that anachronism. (I recall being at a monetary conference in Canada, where a senior monetary crank- sorry, I mean senior mainstream economist- was on a rant about how dropping reserve requirements to 0 was going to be hyper inflationary.)

in part because it constrains the size of the balance sheet while the floor system does not.

Like the salesman who went on after he made the sale and discredited himself. This last part again reveals is anachronistic, gold standard understanding of monetary operations.

The second element of the environment follows from the first. To ensure that the funds rate constitutes a viable policy instrument and thus is above the interest rate on reserves, the volume of reserves in the banking system must shrink to the point where the demand for reserves is consistent with the targeted funds rate. This will require a significant reduction in the size of the Fed’s balance sheet, with reserve balances falling by $1.4 trillion to $1.5 trillion to about $50 billion.

Yes, pretty much the problem I described above.
So why would the fed funds rate not be ‘a viable policy instrument’ if it equaled the rate of interest the Fed payed on reserves?

My proposed strategy involves raising rates and shrinking the balance sheet concurrently and tying the pace of asset sales to the pace and size of interest rate increases.8

The important thing here is not the wisdom of the policy, but that these statements are in fact what the FOMC is likely to be doing.

The first element of the plan to exit and normalize policy would be to move away from the zero bound and stop the reinvesting program and allow securities to run off as they mature. Thus, we would raise the interest paid on reserves from 25 basis points to 50 basis points and seek to achieve a funds rate of 50 basis points rather than the current range of 0 to 25 basis points.

This indicates the fed funds rate and the interest paid on reserves would be roughly equal, which makes sense operationally.

We would also announce that between each FOMC meeting, in addition to allowing assets to run off as they mature or are prepaid, we would sell an additional specified amount of assets. These “continuous sales,” plus the natural run-off, imply that the balance sheet, and thus reserves, would gradually shrink between each FOMC meeting on an ongoing basis.

Again, good to know what they plan on doing. And it seems this time around the all seem pretty much to be on the same page. At least so far.

Now the remaining question is whether the employment outlook will improve sufficiently and core inflation measures stabilize sufficiently in the FOMC’s comfort zone for them to begin ‘removing accommodation’ as they call it.

I’d suggest that could be by Q4 if not for the global bias towards ‘fiscal responsibility’ along with the inflation fighting going on in China which threatens to keep output gaps wide and employment low.

And at least so far price pressures are mainly from crude oil, which the Fed (rightly) considers a ‘relative value story’ and from food prices, which are closely related to fuel prices through various bio fuels and fertilizer inputs. Wages and unit labor costs remain subdued and with productivity relatively high there are, so far, no signs of ‘pass through’ from food and fuel prices to core measures.

The second element of the plan would be to announce that at each subsequent meeting the FOMC will, as usual, evaluate incoming data to determine if the interest rate on reserves and the funds rate should rise or not. Monetary policy should be conditional on the state of the economy and the outlook. If the funds rate and interest on excess reserves do not change, the balance sheet would continue to shrink slowly due to run-off and the continuous sales. On the other hand, if the FOMC decides to raise rates by 25 basis points, it would automatically trigger additional asset sales of a specified amount during the intermeeting period. This approach makes the pace of asset sales conditional on the state of the economy, just as the Fed’s interest rate decisions are. If it were necessary to raise the interest rate target more, say, by 50 basis points, because the economy was improving faster and inflation expectations were rising, then the pace of conditional sales would also be doubled during the intermeeting period.10

Share

Haley Barbour’s ‘innanity’

Posted on by

Barbour slams Obama on taxes, economy

By Jillian Harding

March 26 (CNN) — Mississippi Republican Gov. Haley Barbour on Saturday criticized President Obama’s economic policies and urged fiscal discipline in Washington.

Speaking in Des Moines, Iowa, to a crowd of conservative activists, the potential 2012 GOP presidential contender said, “When the government sucks all the money out of the economy, how is the private sector supposed to create jobs?”

Spending $1.5t more than taxing ADDS that much income and $financial assets to the economy

Barbour slammed the Obama administration’s tax policies for placing an extra burden on taxpayers and inhibiting job growth.

“The president from the beginning has been calling for the largest tax increase in American history,” Barbour said, adding “the policies of this administration in every case have made it harder to create jobs.”

What tax increases? Just talking about them?

Barbour also struck out at taxes placed on the oil industry, saying they would be passed on to consumers.

“Who’s he think is going to pay that? Exxon?” Barbour said, “That’s going to be paid by the people who are pumping gas and diesel fuel into their cars & trucks.”

Citing the need to jumpstart the economy, Barbour told the crowd that reducing spending would be key.

“I urge you to remember the most important thing, cutting spending is the means to an end, the end is to continue to grow our economy,” he said.

What sense does that make???

He’s a menace.

Share

Dean Baker: Krugman Is Wrong: The United States Could Not End Up Like Greece

Posted on by

Krugman Is Wrong: The United States Could Not End Up Like Greece

By Dean Baker

March 25 — It does not happen often, but it does happen; I have to disagree with Paul Krugman this morning. In an otherwise excellent column criticizing the drive to austerity in the United States and elsewhere, Krugman comments:

“But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.”

Actually this is not right for the simple reason that the United States has its own currency. This is important because even in the worst case scenario, where the deficit in United States spirals out of control, the crisis would not take the form of the crisis in Greece.

Yes, precisely!

Greece is like the state of Ohio. If Ohio has to borrow, it has no choice but to persuade investors to buy its debt. Unless Greece leaves the euro (an option that it probably should be considering, at least to improve its bargaining position), it must pay the rate of interest demanded by private investors or meet the conditions imposed by the European Union/IMF as part of a bailout.

However, because the United States has its own currency it would always have the option to buy its own debt. The Federal Reserve Board could in principle buy an unlimited amount of debt simply by printing more money. This could lead to a serious problem with inflation, but it would not put us in the Greek situation of having to go hat in hand before the bond vigilantes.

This is also true under current institutional arrangements.

However, with regards to inflation, for all practical purposes the fed purchasing us treasury securities vs selling them to the public is inconsequential.

This distinction is important for two reasons. First, the public should be aware that the Fed makes many of the most important political decisions affecting the economy. For example, if the Fed refused to buy the government’s debt even though interest rates had soared, this would be a very important political decision on the Fed’s part to deliberately leave the country at the mercy of the bond market vigilantes. This could be argued as good economic policy, but it is important that the public realize that such a decision would be deliberate policy, not an unalterable economic fact.

True! And, again, for all practical purposes the decision is inconsequential with regards to inflation.

The other reason why the specifics are important is because it provides a clearer framing of the nature of the potential problem created by the debt. The deficit hawks want us to believe that we could lose the confidence of private investors at any moment, therefore we cannot delay making the big cuts to Social Security and Medicare they are demanding. However if we have a clear view of the mechanisms involved, it is easy to see that there is zero truth to the deficit hawks’ story.

Agreed!

Suppose that the bond market vigilantes went wild tomorrow and demanded a 10 percent interest rate on 10-year Treasury bonds, even as there was no change in the fundamentals of the U.S. economy. In this situation, the Fed could simply step in and buy whatever bonds were needed to finance the budget deficit.

Correct.

And this would result in additional member bank reserve balances at the Fed, with the Fed voting on what interest is paid on those balances.

Does anyone believe that this would lead to inflation in the current economic situation? If so, then we should probably have the Fed step in and buy huge amounts of debt even if the bond market vigilantes don’t go on the warpath because the economy would benefit enormously from a somewhat higher rate of inflation. This would reduce the real interest rate that firms and individuals pay to borrow and also alleviate the debt burden faced by tens of millions of homeowners following the collapse of the housing bubble.

However not to forget that the Fed purchases also reduce interest income earned by the economy, as evidenced by the Fed’s ‘profits’ it turns over to the treasury.

The other part of the story is that the dollar would likely fall in this scenario. The deficit hawks warn us of a plunging dollar as part of their nightmare scenario. In fact, if we ever want to get more balanced trade and stop the borrowing from China that the deficit hawks complain about, then we need the dollar to fall. This is the mechanism for adjusting trade imbalances in a system of floating exchange rates. The United States borrows from China because of our trade deficit, not our budget deficit.

True, but with qualifications.

China didn’t start out with any dollars. They get their dollars by selling things to us. When they sell things to us and get paid they get a credit balance in what’s called their reserve account at the Fed.

What we then call borrowing from China- China buying US treasury securities- is nothing more than China shifting its dollar balances from its Fed reserve account to its Fed securities account.

And paying back China is nothing more than shifting balances from their securities account at the Fed to their reserve account at the Fed.

Which account China keeps its balances in is of no further economic consequence,

And poses no funding risk or debt burden to our grandchildren.

Nor does it follow that the US is in any way dependent on China for funding.

Nor is balanced per se trade desirable, as imports are real economic benefits and exports real economic costs.

This also puts the deficit hawks’ nightmare story in a clearer perspective. Ostensibly, the Obama administration has been pleading with China’s government to raise the value of its currency by 15 to 20 percent against the dollar. Can anyone believe that China would suddenly let the yuan rise by 40 percent, 50 percent, or even 60 percent against the dollar? Will the euro rise to be equal to 2 or even 3 dollars per euro?

And, with imports as real economic benefits and exports as real economic costs, in my humble opinion, the Obama administration is negotiating counter to our best interests.

Also, inflation is a continuous change in the value of the currency, and not a ‘one time’ shift which is generally what happens when currencies adjust.

This story is absurd on its face. The U.S. market for imports from these countries would vanish and our exports would suddenly be hyper-competitive in their home markets. As long as we maintain a reasonably healthy industrial base (yes, we still have one), our trading partners have more to fear from a free fall of the dollar than we do. In short, this another case of an empty water pistol pointed at our head.

The deficit hawks want to scare us with Greece in order to push their agenda of cutting Social Security, Medicare and other programs that benefit the poor and middle class. This is part of their larger agenda for upward redistribution of income.

We should be careful to not give their story one iota of credibility more than it deserves. By implying that the United States could ever be Greece, Krugman commits this sin.

Agreed!

Addendum: In response to the Krugman post, which I am not sure is intended as a response to me, I have no quarrel with the idea that large deficits could lead to a serious problem with inflation at a point where the economy is closer to full employment. My point is that the problem with the U.S. would be inflation, not high interest rates, unless the Fed were to decide to allow interest rates to rise as an alternative to higher inflation.

Agreed!

Nor would today’s size deficits necessarily mean inflation should we somehow get to full employment.

It all depends on the ‘demand leakages’ at the time.

This point is important because the deficit hawk story of the bond market vigilantes is irrelevant in either case. In the first case, where we have inflation because we are running large deficits when the economy is already at full employment, the problem is an economy that is running at above full employment levels of output. The bond market vigilantes are obviously irrelevant in this picture.

In the second case, where the Fed allows the bond market vigilantes to jack up interest rates even though the economy is below full employment, the problem is the Fed, not the bond market vigilantes.

We have to keep our eyes on the ball. The deficit hawks pushing the bond market vigilante story are making things up, as Sarah Pallin would say, their arguments do not deserve to be treated seriously.

Agreed.

They should be unceremoniously refutiated!

Share