Not to mention taking $500 billion out of the medicare budget to give to the insurance companies and then declaring victory on healthcare. And the early statement about needing to first fix the financial sector before the real sector can recover.

And, of course, it would be nice if Professor Krugman would reverse his errant and highly counterproductive contention that the federal deficit presents a long term economic or financial problem per se.

This Republican Economy

By Paul Krugman

June 3 (NYT) — What should be done about the economy? Republicans claim to have the answer: slash spending and cut taxes. What they hope voters won’t notice is that that’s precisely the policy we’ve been following the past couple of years. Never mind the Democrat in the White House; for all practical purposes, this is already the economic policy of Republican dreams.

So the Republican electoral strategy is, in effect, a gigantic con game: it depends on convincing voters that the bad economy is the result of big-spending policies that President Obama hasn’t followed (in large part because the G.O.P. wouldn’t let him), and that our woes can be cured by pursuing more of the same policies that have already failed.

For some reason, however, neither the press nor Mr. Obama’s political team has done a very good job of exposing the con.

What do I mean by saying that this is already a Republican economy? Look first at total government spending — federal, state and local. Adjusted for population growth and inflation, such spending has recently been falling at a rate not seen since the demobilization that followed the Korean War.

How is that possible? Isn’t Mr. Obama a big spender? Actually, no; there was a brief burst of spending in late 2009 and early 2010 as the stimulus kicked in, but that boost is long behind us. Since then it has been all downhill. Cash-strapped state and local governments have laid off teachers, firefighters and police officers; meanwhile, unemployment benefits have been trailing off even though unemployment remains extremely high.

Over all, the picture for America in 2012 bears a stunning resemblance to the great mistake of 1937, when F.D.R. prematurely slashed spending, sending the U.S. economy — which had actually been recovering fairly fast until that point — into the second leg of the Great Depression. In F.D.R.’s case, however, this was an unforced error, since he had a solidly Democratic Congress. In President Obama’s case, much though not all of the responsibility for the policy wrong turn lies with a completely obstructionist Republican majority in the House.

That same obstructionist House majority effectively blackmailed the president into continuing all the Bush tax cuts for the wealthy, so that federal taxes as a share of G.D.P. are near historic lows — much lower, in particular, than at any point during Ronald Reagan’s presidency.

As I said, for all practical purposes this is already a Republican economy.

As an aside, I think it’s worth pointing out that although the economy’s performance has been disappointing, to say the least, none of the disasters Republicans predicted have come to pass. Remember all those assertions that budget deficits would lead to soaring interest rates? Well, U.S. borrowing costs have just hit a record low. And remember those dire warnings about inflation and the “debasement” of the dollar? Well, inflation remains low, and the dollar has been stronger than it was in the Bush years.

Put it this way: Republicans have been warning that we were about to turn into Greece because President Obama was doing too much to boost the economy; Keynesian economists like myself warned that we were, on the contrary, at risk of turning into Japan because he was doing too little. And Japanification it is, except with a level of misery the Japanese never had to endure.

So why don’t voters know any of this?

Part of the answer is that far too much economic reporting is still of the he-said, she-said variety, with dueling quotes from hired guns on either side. But it’s also true that the Obama team has consistently failed to highlight Republican obstruction, perhaps out of a fear of seeming weak. Instead, the president’s advisers keep turning to happy talk, seizing on a few months’ good economic news as proof that their policies are working — and then ending up looking foolish when the numbers turn down again. Remarkably, they’ve made this mistake three times in a row: in 2010, 2011 and now once again.

At this point, however, Mr. Obama and his political team don’t seem to have much choice. They can point with pride to some big economic achievements, above all the successful rescue of the auto industry, which is responsible for a large part of whatever job growth we are managing to get. But they’re not going to be able to sell a narrative of overall economic success. Their best bet, surely, is to do a Harry Truman, to run against the “do-nothing” Republican Congress that has, in reality, blocked proposals — for tax cuts as well as more spending — that would have made 2012 a much better year than it’s turning out to be.

For that, in the end, is the best argument against Republicans’ claims that they can fix the economy. The fact is that we have already seen the Republican economic future — and it doesn’t work.

48 Responses

  1. But it’s also true that the Obama team has consistently failed to highlight Republican obstruction, perhaps out of a fear of seeming weak.

    That’s definitely part of it. But another part of the problem is that the Obama administration cannot get their economic narrative and policy stance straight. They came up with a jobs plan last year which was a mixed bag, though definitely better than nothing. But they continue to undermine any positive rhetoric by introducing it all within the misguided framing of a Peterson-style responsibility agenda that mis-conceptualizes sovereign governments as analogous to firms and households.

    The public sector needs to invest in infrastructure, education and human development, and environmental health to ensure the long-term prosperity of the country.

    The federal government deficit is the non-government surplus.

    The federal government faces no solvency constraint.

    Future generations will always consume what they manage produce, and will be limited only by the limitations on their real resources. Our duty to future generation consists in using our existing real resources to invest in the long-term productive capacity of our country, and to preserve the health of our environment so that our chldren don’t have to waste their resources in cleaning it up and repairing it.

    1. @Dan Kervick, Obama is a very intelligent person, but not very experienced in economics. By nature he is a moderate Republican, in spite of right-wing foaming at the mouth about socialism. A socialist does not restore the bankers and preserve private health insurers, … etc. He also seems by nature fairly timid … he is more the ‘facilitator-in-chief’ (can’t we all reason together … to the GOP!).

      It’s pretty clear this is what we have and I doubt it will change in a second term. On the other hand, we could pick a Wall Street vulture for President.

      1. @SteveK9, Yeah, it’s hard to say. I do think that if he were starting over, knowing what he knows now, he might not have allowed himself to get drawn into the same strategy. But we’ll never know.

      2. @SteveK9,

        Obama is first and foremost a narcissist, who will say and do anything to get reelected. He’s really a lot like Bill Clinton, minus the overactive libido and the charm.

      3. @ESM,

        Of course. But it’s a matter of degree, and I think Obama is the most narcissistic president or presidential candidate that I’ve seen in my lifetime. He might not have been born that way, but the near-universal flattering coverage he gets in the media has boosted his ego to the stratosphere. This guy won (and accepted) the Nobel Peace Prize in his first year in office, and now he sits at his desk and decides which alleged terrorists (some of which are US citizens) to kill, along with any number of innocent civilians who are unlucky enough to get in the way. The only way you can reconcile that is to believe that you are something more than a human being.

        I think it’s much harder for Republican candidates to be as narcissistic since they’re exposed to negative media coverage from the moment they’re seen as running for higher office. Sarah Palin is a case in point. I think she is narcissistic too, but it’s hard to keep it up, when everywhere she turns people are making fun of her for her ignorance and her white trash background.

  2. Krugman believes that pursuing large budget deficits during boom times can lead to inflation.

    If the only cost of eliminating poverty is inflation, I say eliminate poverty and let the inflation hawks eat cake – cake that may cost a little bit more because 50 million Americans aren’t living in poverty.

  3. Krugman is the only voice of reason that gets broad national and international coverage.

    Without Krugman conservatives would go pretty much unchecked.

    1. @dan, And that is why I resist criticizing him. It would be nice, as Warren says, if he changed his mind about the deficit but he is one of the few we have to push for jobs against the neo liberal assault.

      1. @WARREN MOSLER, That seems to sum up the perennial battle between Dems/GOP & libs/cons.

        Smart, naive egos vs narrow, savvy sociopaths.

        Seems our political process has become too unrepresentative to escape this result. We won’t sustain any recovery until we have a reliable way of involving large numbers of pragmatic people in policy exploration.

        Any election that starts out as an us-vs-them fight, instead of a thorough policy discussion, has already failed.

        We need to start electing people who belong to no political party whatsoever, only to the electorate of the USA.

    2. My point is that no one gets the coverage Krugman receives.

      If the policies do start to turn around and the stimulus actually does work he may get a second Pulitzer.

      No matter what or why Krugman as advocated fiscal stimulus from the very beginning.

      1. @dan,

        Krugman has been a partisan hack for so long that he has no credibility anymore with at least 50% of the electorate and even a greater percentage of politicians.

        It would be a waste of time to try to educate him, even if there was a chance his GDP-sized ego could allow his mind to be changed.

      2. @ESM,

        ESM: You are good at tossing insults around: like accusing Krugman of “dishonesty” (no reasons given). You also claim he needs “educating” (again – no reasons given).

        You have provided very good evidence that Krugman is right, and his critics are wrong. Keep up the good work – and the insults.

      3. @ESM,


        As for the educating part, everybody here believes he needs educating on MMT. The many idiotic things he has written in regards to the banking system and MMT have been documented on this site numerous times. I think you know that, so I won’t address that point.

        I am happy to address the dishonesty part too, but I was waiting for somebody to challenge me. I will start with just a few points from his column:

        1) Krugman is being dishonest when he writes that government spending is falling; it’s still growing, and in any case, he is comparing against a baseline of a >$800B stimulus package; note that Krugman never gives citations or links in his columns – it’s not because he doesn’t know how to do it.

        2) Through fiscal year 2011, Obama was dealing with significant Democratic majorities in both the House and the Senate; so far Republicans have only been able to block spending for fiscal year 2012.

        3) Federal (and certainly state) taxes are higher, not lower, than they were during Reagan’s presidency, or even Bush 41’s presidency after he broke the “read my lips” pledge; Krugman would probably defend his statement based on a % of GDP metric, but we all know that during a recession the progessive tax system takes in a lower % of GDP; for example, General Electric is paying no taxes right now because of loss carryforwards. Is GE’s zero tax rate because of Republican tax cuts?

        4) I have a reference to a Spring 2003 Krugman column somewhere (I have posted it here before) where Krugman’s arguments are precisely opposite to his arguments today, despite the fact that economic conditions were similar (too slow recovery from a recession), except for two things: deficits were much smaller, and a Republican was president.

      4. @ESM,

        Here’s Krugman’s column from March 11, 2003 where he writes about the looming fiscal train wreck because of growing deficits. He even decided to lock in his mortgage because the growing deficits would send interest rates skyrocketing.

        “You have provided very good evidence that Krugman is right, and his critics are wrong.”

        By the way, can you point me to this very good evidence that I provided? My memory must be failing me, since I only remember providing evidence that Krugman is a dishonest hack.

  4. “Put it this way: Republicans have been warning that we were about to turn into Greece because President Obama was doing too much to boost the economy; Keynesian economists like myself warned that we were, on the contrary, at risk of turning into Japan because he was doing too little. And Japanification it is, except with a level of misery the Japanese never had to endure.”

    Where have I heard that before?

    1. @Ed Rombach,

      The same where Mr. Krugman heard it for the first time – Warren Mosler’s article.

      Mr. Kugman, be a man for once and give the necessary credit!

  5. This is Krugman on the BBC:
    He tackles the household analogy and is refreshingly blunt.

    Call me an optimist, but I think Krugman mostly gets it and is both working the politics and working his internal conflicts. I’m not sure he’ll ever get past the latter. There is a big career intertwined with those conflicts. I am torn on whether he is doing long term damage with some of his questionable positions. Again, as an optimist, I think his contribution is a net benefit to the conversation.

    1. @Michael Boudreau, Yes, MMT is getting absorbed little by little. A couple of years ago you couldn’t even get people to accept that there is no solvency constraint. Now I read people almost every day who say “a government that issues debt in its own currency can’t go bust.” And when they say it, the tone is usually to suggest that everyone knows that and has always known it.

  6. I think that we should not take the words at a face value. Not everyone is as dumb as some German economists who think that they can force everyone into Austerity Union by a show of scary brinkmanship.

    In my opinion Krugman intuitively understands how the system works (maybe not in detail) but he thinks that he must not spill the beans. This issue was already debated on a MMT-friendly blog in the context of Krugman’s attack in Steve Keen and the subsequent response from Scott Fulwiller.

    … Krugman asked [Lietaer], “Didn’t they warn you about not touching the monetary system? If you insist on talking about it, it will kill you academically. It takes a university economist completely out of the system of peer approvals that culminates for a few in the prize given by the central bank of Sweden in honor of Alfred Nobel.” …

    Mitt Romney is a relative of Marriner Eccles.

    When the Republicans win the elections they will be the ones to stimulate the economy by increasing spending on defence.
    The usual propagandists can easily change their position – exactly as it happened in the past:

    Mitt Romney’s strategy of being “tough” may work but is further militarisation exactly what the world needs in 21th century?

    1. @Adam (ak),

      With regard to boosting military spending, taking preemptive military action against Iran, intervening in Syria and expanding the predator drone war against terrorists, I see little difference between President Obama or Mitt Romney or the Bush administration for that matter. In fact, with the exception of Ron Paul the entire Republican field of presidential candidates in the recent primary contests were all rather bellicose.

  7. thats what we need, more spending on defense(not) and maybe the easter bunny and santa claus will come early this year, trickle down piss on the people economics needs to be dead and buried once and for all. (mitt is also a tremendous liar) he is beholden to the extreme right

  8. The VERY liberal agenda of the past 12 years has run this country into the ground and now Krug tries to blame it on Repubs..Sure…The US is as left as it has ever been RIGHT NOW and that is why we are in trouble.
    A giant central govt that tries to run everything has never worked in 5000 years and it won’t this time.

  9. From Paul Craig Roberts:

    …JPMorganChase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorganChase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.

    Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorganChase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.

    It is difficult to imagine a more reckless and unstable position for a bank to place itself in, but Goldman Sachs takes the cake. That bank’s $44 trillion in derivative bets is covered by only $19 billion in risk-based capital, resulting in bets 2,295 times larger than the capital that covers them.

    Bets on interest rates comprise 81% of all derivatives. These are the derivatives that support high US Treasury bond prices despite massive increases in US debt and its monetization.

    US banks’ derivative bets of $230 trillion, concentrated in five banks, are 15.3 times larger than the US GDP. A failed political system that allows unregulated banks to place uncovered bets 15 times larger than the US economy is a system that is headed for catastrophic failure. As the word spreads of the fantastic lack of judgment in the American political and financial systems, the catastrophe in waiting will become a reality.

    Everyone wants a solution, so I will provide one. The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. The financial gangsters who want to continue enjoying betting gains while the public underwrites their losses would scream and yell about the sanctity of contracts. However, a government that can murder its own citizens or throw them into dungeons without due process can abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the gambling derivatives would vastly improve national security.

    1. @John,

      Wow, that’s pretty much the stupidest commentary I’ve seen all year with respect to derivatives. The notional value of a derivative contract has very little to do with the risk. I have traded $1B derivative contracts which could make or lose no more than $10,000. Furthermore, >95% of these contracts are offsetting, since it is often easier and more tax efficient to put on an offsetting contract than terminate the original one. Finally, undermining the sanctity of contracts does far greater damage than murdering a few random people here and there out of 313MM.

      I had no idea Paul Craig Roberts was such an idiot. Thanks for posting the evidence.

  10. Well, no surprise there. He was Ass’t Sec. of Treasury under Reagan, for crying out loud. He still think they saved the economy thanks to supply side. Thanks for the good comment ESM, very informative. As Hudson, I believe, once said, if you have such a position in the government it is because you are fundamentally unqualified for it; being unqualified for it is a pre-condition for holding the position. Nevertheless, I respect PCR for his brave position against the hypocrisies, lies and brutality of the last two governments. He’s just stuck in a false economics paradigm.

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