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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.
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.