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US Spend-or-Cut Debate Rages on at World Knowledge Forum in Seoul
Spend or cut? It is a debate that goes to the heart of the post-2008 economic crisis - and yesterday simmering tensions over the two opposing strategies, between a Nobel prize-winning economist and a best-selling economic historian, boiled over again on a stage in South Korea.
Professor Krugman reckons the benefits of an extra trillion dollars far outweigh future repayment obligations. (Photograph: Mike Clarke/AFP/Getty Images) Princeton University professor Paul Krugman, who is urging the Obama administration to start a second round of fiscal stimulus, clashed - not for the first time - with Harvard professor Niall Ferguson, who reckons the US debt situation is worse than that facing Greece and could eventually threaten its national security.
In Krugman's view, the benefits of an extra trillion dollars in US stimulus spending, most likely under the guise of quantitative easing, far outweigh future repayment obligations.
Indeed, Krugman argues, President Obama's first round of $814bn stimulus spending made next to no difference in either expanding government, a key Republican charge in the upcoming midterm elections, or significantly adding to long-term US debt, because most of the so-called spending was actually tax cuts.
"We actually never did significant fiscal expansion," Krugman told the World Knowledge Forum in Seoul . "What does a trillion dollars of borrowing do to the long-run fiscal position? The stimulus spending makes almost no difference."
Not so, countered Ferguson at the same venue, warning that such a course could trigger a "debt spiral of rising interest rates, widening deficits, crumbling credibility and yet more rising rates."
Ferguson's views on crumbling US economic credibility are not new but he's lately included an alarmist addendum: over the next decade, he says, US debt repayments will begin to exceed defence spending. Since half of US treasury debt is now held by foreign governments, and a full fifth, or $847bn, is held by China, the US will be forced to make deep defence spending cuts and, de facto, place US strategic security in foreign hands.
"Military retreat from the mountains of the Hindu Kush, or the plains of Mesopotamia," Ferguson warned last month, "has long been a harbinger of imperial fall."
He argues that you need look no further than Beijing itself: "For more than a year since our debate began, the Chinese have been consistently agreeing with me, saying that they regard the course of US fiscal and monetary policy as dangerous.
"So it's not just me you are arguing with, Paul," he told Krugman, "it's the Chinese government."
For now, the argument appears to favour Krugman's position that initial stimulus spending was inadequate given the size of the US economy's troubles. In his opinion, Ferguson "hasn't bothered to understand the basics" of economics and his assumptions are based on a "flawed" reading of Keynes.
Krugman and Ferguson are not alone in locking horns on the issue. Black Swan author Nassim Nicholas Taleb, who tends toward Ferguson's positions (both argue that the US debt situation is worse than Greece's) recently warned US budget deficits are spiralling out of control.
"They are addicted to debt," he warned. "The administration, unlike European administrations, is not aware of the risks of mounting deficits."
Still, new stimulus spending appears almost certain and the bond markets, where economists would expect to see a loss of confidence, do not appear unduly concerned. Not that this will soothe Ferguson: "The markets are fine until they're not fine," he warns darkly.
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33 Comments so far
Show AllWhy not tell us rather than having us go somewhere else?
gop or dem?
neither.
I don't think there is much doubt about the multiplier effect and which kinds of stimulus are most effective. There is a long term question of how to pay for the stimulus. If it is not possible to grow our way out we will have to finance the stimulus with less spending--try cutting defense and higher taxes--try progressive taxation. My only question for Krugman is to better address the later question-- how to pay for it. As for Ferguson, perhaps he should look at the long term costs of high unemployment and underemployment because I don't think fiscal austerity will solve any of those issues and leaving them unanswered is a formula for social failure and unrest.
Ferguson has a cushy secure job. Why should he be concerned with those who do not?
Let us first cut spending on the military bases and keeping troops all over the world before we get to other spending matters. Other countries are more peaceful by now, have governments who generally respect their own citizens compared to the US, and can take care of themselves. I've heard a lot of consent even from conservatives on that. With a few exceptions on which nations to occupy, they too agree that we've occupied far too many nations and overburdened our spending costs since WWII ended. Anyone who would have worked in the DOD would see by now why working projects there are endless compared to almost any other sector with the exception of the financial sector.
To counteract the neocon strategy of shrinking government to flush it down the toilet, I think a better strategy is to expand government to force reduced defense spending. The purpose of the Pentagon being the enforcement arm to protect the worldwide investments of the WEALTHY PREDATORY CAPITALIST WELFARE KINGS MANY OF WHICH DON'T PAY USG taxes but get the benefit of the taxes that others paid.Admiral Mullen has already admitted that the Pentagon spending is a threat to national security because the Pentagon/spy agencies are funded with the Treasury bond proceeds for deficit spending.NO REPRESENTATION WITHOUT TAXATION.
Krugman needs to be thrown out with the Fed. And yes we need to bring most of the troops home as maxpayne suggests. Think locally.
Admiral Mullen admitted in August that the Federal deficit, national debt, spending is a threat to national security and it is the Federal deficit, the proceeds of the Treasury bond sales that funds the Pentagon/spy agencies. This means that Pentagon/spy agency spending, to protect us from national security risks, IS THE NATIONAL SECURITY RISK. The American taxpayers are funding a national security risk, the Pentagon, to protect the WELFARE KINGS from security risks.If this sounds insane it's because it is insane.
The way to fix the economy is breathtakingly simple:
1) close the U.S.'s 1000+ military bases in 180 countries, or at least most of them.
This will remove about $500 billion/year from our annual expenses. It will also have the added benefit of making us safer, as the main reason terrorists hate the US is NOT for "our freedoms," but because of our military presence in their countries.
2) Cut our offense, er, I mean "defense" budget by 50%. This will remove another $500 billion/year from our annual expenses.
3) Eliminate the Bush tax cuts on the wealthiest 1%. This will add around $200 billion/year in tax revenue.
4) Implement an immediate tax increase from 15% to 20% on all capital gains. This will add another $300-$400 billion/year in tax revenue.
5) Cut income taxes on the other 99% of Americans by 20%. This will reduce tax revenue by $300 billion or so, more than offset by the above 4 measures, but will immediately inject $300 billion into the economy, as those 99% of Americans take the $ and go spend it.
As an added bonus, to make Social Security solvent for the next 600 years:
6) Remove the income cap from its current $80,000/year (or whatever it is), so that ALL income by ALL people is subject to SS.
Boom. That simple. And, thus, will never be implemented in a billion years by our elite corporate oligarchy.
"When fascism comes to America, it will be wrapped in the flag, carrying a cross."
Demonstorm
Bravo! Your suggestions are excellent as well as being quite sensible.
The reason they won't even consideration is that it is a solution, a sensible solution, and the only sense the USG has is nonsense.
Your first two suggestions have ramifications you did not consider. Even if accomplishing them did save a trillion dollars a year, most people in the military would be out of work, as would most people working for the armaments industries. That would reduce tax revenues to the government, which would seem to offset some of the savings.
However, suggestions 3 through 6 are certainly worthwhile and would have a positive effect on the budget deficit.
Rehire them in CCC/WPA gov't organizations (call it the REAL Dept. of the Interior) to work on much-needed infrastructure projects(eg. PUPLICLY OWNED utilities, powerplants, rail systems, damns, bridges, locks, canals, NAWAPA[ a 21st century TVA], etc...). This would create millions of new jobs. Also, go for glass-steagall bankruptcy reorganization to EXPOSE wallstreet's phony claims to real assets that need bailing out, that supposedly ties the taxpayers to a PHONY indebtedness to them, thus freeing up credit to be applied to labor & infrastructure projects. And THIS time let's keep a huge maintainence staff to maintain the new & upgraded infrastructure. With this workforce, the private business community will find their "paying customers". We've been wrong to wait on the business community to get the ball rolling. Only the gov't can do that.
Hey Sheepherder, it goes beyond that.
Housing them here will be outrageously expensive, and will drive up the military budget accordingly. On top of that, it would produce a housing shortage that would drive up the cost of rentals and home ownership when the state of the economy can't support it.
On the Bush tax cuts, which i am on record here as saying should be eliminated in favor of an Eisenhower era structure, I believe the correct number was 200 Billion over 10 years, not per year.
I support going Demonstorm one better on #4 in that every stock transaction should be taxed to stop the computer players who are trading on fractions of a cent, and occasionally fat fingering a transaction here or there and sending the market into a panic. Nothing but good can come from either actions. Here again I am on record as saying we should tax capital gains even more regardless of whether they are made by the banker with our savings, or by ourselves risking our own resources. There isn't much else that can be done with the money except spend it (still helps the economy) or burn it, and nobody you know is doing the latter, unless you know a wall street tycoon, CEO or a Fed worker.
For #5, I say: way to go.
And for #6, I ask that we do a little research before we all go posting numbers. It helps our arguments to be factual. The current limit on SS payments is $106.8K/year, and the fact that there is an upper limit is proof positive of a class war.
How about Social Security for ALL? anything less is to start an "age-war". Why should young people be forced to pay into a system they will probably never see benefit from, to an older generation that messed the world up so much for them?
If the system was a safety net for EVERYONE it would get more support.
Bravo! Excellent suggestions
krugman understands keynes work
ferguson obviously never read it and didn't understand it if he didn't
its hard work to understand the truth, few are willing to put in the work
but that doesn't stop some of those who are too lazy to put in the work from becoming "professor emeritus" "supply side" economists
krugman understands keynes work
ferguson obviously never read it and didn't understand it if he didn't
its hard work to understand the truth, few are willing to put in the work
helmore, like most of media equates ferguson with krugman and keynes "its just a matter of opinion"
its all relative
there is a truth, krugman and keynes tell it, ferguson has no clue
Well thanks from two of the top economists. Since it's a voodoo show, can CD also post who'd win a debate between "Q" from Star Trek and Michael Landon's angel character, I think it might be more interesting, and probably more enlightening.
No offense to Witch Doctors, I know you work harder and get better results.
wow, wonder if anyone can understand what you are saying
but you are apparently trying to criticize somebody
when you bring nothing to the table yourself,
I think he is suggesting that if you put 26 economists in a room and ask them a question, you will get 26 different answers.
And of course, he, like you, knows this in his gut without ever having studied a lick of economics. Isn't it wonderful to know something so completely and deeply, that the facts and evidence against it are completely irrelevant?
Also, I think he was apologizing for insulting voodoo practitioners as he realizes their practice is much more grounded in reality and science than "Economics".
(why do you think the Big Pharma companies sent so many people in to investigate it? the practice of voodoo includes the western world's greatest knowledge base of medicinal use of plants)
and I heard all black people are good at basketball...
I agree with Krugman we need more stimulus spending but the question is how will that stimulus be allocated? If it means a wall street bail out, hell no. However, if it means a bailout for home owners facing foreclosure or the unemployed using their skills to buildup the infrastructure then go for it. Keep in mind that more loans entail more debt and higher cost of living in the future. Anything is better then doing nothing.
any money that goes into social programs that benefit the poor and middle class stimulate the economy, and in the end reduce the debt
any money that goes into the pockets of the rich shrink the economy and in the end increase the debt
The WEALTHY PREDATORY CAPITALIST WELFARE KINGS assets worldwide are protected by the Pentagon/spy agencies and the funding for their protection is the Federal deficit, national debt, which is what funds the Pentagons/spy agencies by increasing the debt.Many of these WELFARE KINGS don't even pay USG taxes but get the benefit of others tax monies. Furthermore, Admiral Mullen declared the Federal deficit, the proceeds from the Treasury bond sales, a threat to national security and the Pentagon being funded with the Federal deficit Treasury bond proceeds is a threat to national security. The American taxpayers are funding a risk to national security, the Pentagon, to prevent risks to national security, admitted by Admiral Mullen.The actual purpose of the Pentagon is to protect the WELFARE KINGS WORLDWIDE INVESTMENTS and to secure the resources of the world. Many of these WELFARE KINGS pay no USG TAXES while getting the benefits of others tax monies.
What a sham debate this must have been. Krugman makes mincemeat of Ferguson every other day in his blog. Ferguson is a clown, a pure right-wing ideologue who knows less about economics than my Irish grandmother. His huffing and puffing about empires and power relations is a grotesque and comical substitute for serious economic analysis.
Of course I'm sure the idiot press lapped it all up. Two formidable personalities who disagree, and who's to say who is right?
Very different reactions to this article compared to Dean Baker's on printing money - which is what quantitative easing is.
The only way the left can become popular is by being trusted on economics.
Michael Hudson writes:
'“Quantitative easing” is a euphemism for flooding economies with credit, that is, debt on the other side of the balance sheet. The Fed is pumping liquidity and reserves into the domestic financial system to reduce interest rates, ostensibly to enable banks to “earn their way” out of negative equity resulting from the bad loans made during the real estate bubble. But why would banks lend more under conditions where a third of U.S. homes already are in negative equity and the economy is shrinking as a result of debt deflation?'
Michael makes a good point that is glossed over by Krugman:
'In Krugman's view, the benefits of an extra trillion dollars in US stimulus spending, most likely under the guise of quantitative easing'
See Hudson: http://counterpunch.org/hudson10112010.html
I don't call printing money for bankers prudent stimulus spending.
Obama's spending bill improved infrastructure nationwide that would not have been fixed by any other means.
Why is Krugman not advocating for more of that?
"'In Krugman's view, the benefits of an extra trillion dollars in US stimulus spending, most likely under the guise of quantitative easing'"
This makes no sense at all. The kind of stimulus Krugman favors would involve government paying people to fix roads and bridges, and giving aid to the states so they can stop slashing benefits for the poor. That's fiscal policy, not monetary policy. It has nothing to do with quantitative easing, which is a monetary policy aimed at buying up debt so that the reserves held by banks increases.