Yeah, Krugman is a tad toward the left, but has he got a point?

For three years and more, policy debate in Washington has been dominated by warnings about the dangers of budget deficits. A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy. But even though the deficit scolds have been wrong about everything so far — where are the soaring interest rates we were promised? — protests that we are having the wrong conversation have consistently fallen on deaf ears.

But after peaking in 2009 at $1.4 trillion, the deficit began coming down. The Congressional Budget Office expects the deficit for fiscal 2013 (which began in October and is almost half over) to be $845 billion. That may still sound like a big number, but given the state of the economy it really isn’t.

Bear in mind that the budget doesn’t have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy.
Right now, a sustainable deficit would be around $460 billion. The actual deficit is bigger than that. But according to new estimates by the budget office, half of our current deficit reflects the effects of a still-depressed economy. The “cyclically adjusted” deficit — what the deficit would be if we were near full employment — is only about $423 billion, which puts it in the sustainable range; next year the budget office expects that number to fall to just $172 billion. And that’s why budget office projections show the nation’s debt position more or less stable over the next decade.

So we do not, repeat do not, face any kind of deficit crisis either now or for years to come.

  1. still looking for an alternate country to move to says:

    Krugman would be right if you ignore history. If you think of the economy like a sine wave cycling up and down this theory would require the spending to be running near the center so we have as many years (or dollars) above the average have below. In reality the spending average is up near the top of the wave so we only have a hand-full of years where we are making any progress.

    Also keep in mind, when the budget (remember when we used to have budgets?) projects a surplus, people like Krugman come out saying we should spend even more on social engineering and failed government projects.

    • Phydeau says:

      Actually, from what I’ve heard, people like Krugman say that when you have a surplus, that is the time to pay down the deficit. People trying to buy votes are the ones who want to spend, spend, spend the surplus… regardless of political party.

      As a matter of fact the last president to have a surplus (left to him by Democrat Bill Clinton) was George W. Bush, and he certainly didn’t pay down the deficit… it increased a lot while he was in office. And that’s not even counting his bogus wars.

      And it was Dick Cheney who said “Deficits don’t matter”.

      And Krugman is a tad toward reality, which has a well-known liberal bias. :)

      • Egon Ruuda says:

        So according to Krugman: “Never” he likes the spend, then spend some more policies of the post industrial UK. It failed HARD. Here is a relevant grapph:
        see how many times the US has actually deacreased its debt in either terms of dollars or %of GDP since 1960. There is no doubt that there has never been any serious attempts to repay any debt after the war-bonds was cashed.
        Krugman’s sollutions of spending with the help of the FED will cause inflation on an massive magnitude and take the debt down as well as all savings of the US populace with it.

    • Grandpa says:

      They will only be a problem if WE let them be a problem, and if WE don’t pass legislation to bring the jobs back. Tax breaks for outsourcers must stop.

  2. LibertyLover says:

    I’m not a Keynesian. However, I am familiar enough with the theory to realize the problem isn’t necessarily with Keynesian Economics. The problem is that our politicians don’t know when to stop. Assuming KE is a valid theory, Washington is supposed to stop when things are good. Our politicians don’t know how to do that. They spend like there is no tomorrow regardless of the current fiscal status.

    So, like any good father, you need to takes the keys away from your teenager when they misbehave. Starve the Beast. They’ve shown they don’t have the willpower to stop when they are supposed to.

    AFA why the interest rates haven’t gone up . . . have you tried to get a credit line from a bank these days? They are holding onto the money with the tightest fists seen since the GD. Once they start letting it out in circulation, you’ll see them.

    And all of this assumes that running a deficit is good anyway. Deficits do nothing more than inflate the currency — a hidden tax that you have no control over.

    • Sea Lawyer says:

      Buchanan’s “Democracy in Deficit: The Political Legacy of Lord Keynes” outlines quite succinctly why we should expect to always see budget deficits going forward. Voters want things now, and deficit spending allow for somebody else in the future to pay for them.

  3. MikeN says:

    The higher interest rates aren’t there because the Fed is flooding the market with funny money. Prices are steadily going higher to adjust.

    • CrankyGeeksFan says:

      To me, the Euro currency “crisis” is a major reason interest rates are low. The “crisis” created a flight-to-quality and investors bought U.S. Treasury notes and bonds. If the Eurozone improved, there would be an upward pressure on U.S. interest rates.

      Another major reason for low interest rates is the Federal Reserve’s Qualitative Easing (QE1, 2, 3, …) which will keep interest rates low for years. These easings are 50% of the reason the stock market has rallied over the last year according to one analyst.

      This has lowered the dollar against foreign currencies which has lead to higher oil prices and probably food prices.

  4. CPBrown says:

    Right now we are paying over $200 billion a year for interest payments. That is, we get *nothing* for $200 billion every year.

    The idea that adding *any* more to a $16 trillion dollar existing debt is just fine and dandy is the ultimate in denialism.

  5. dusanmal says:

    And again one must learn from the mathematical models, obvious in other disciplines: Keynesian economics is mathematical equivalent of recuperation from a stall in the theory of flight. Economic Bubble=climbing in the plane faster than it can physically support; Resulting economic collapse=stall, collapse of lift and falling aircraft; Keynesian solution to spend in deficit=theory of flight concept of intentionally losing altitude in order to gain momentum and recover lift/flight. However, in PRACTICE of flight comes the crucial item that both THEORY of flight and Keynesian economic THEORY can ignore on paper without consequence: WHERE IS THE GROUND?! In the practice of flight if pilot attempts to recover from a stall at lower altitude than needed to gain lift – plain crashes, everyone dies. Same applies to Keynesian economy and the equivalent of low distance to the ground is how close is GDP to debt. From historical records, GDP=Debt IS the ground level. You apply Keynesian economy in that case and you won’t have enough time to gain lift but you’ll slam into total catastrophe.
    I have personally experienced this TWICE in my lifetime. Result is inevitable. “Benevolent” tyrant who run my country of origin attempted exactly the same prescription. With the result repeating itself since Roman times. Total economic crash and decades of prosperity lost in an almost instant.
    Keynesian economic solution can be applied only by society that is not already drowning in debt and it can never be general principle of working economic system. Temporary rescue of well working system only.
    Worth notice: only Japanese of 1990′s have been able to apply Keynesian economy since Roman times with enough control not to crash but “crash land”… 20 years later, they still crawl (economically speaking). That is the best possible scenario and have worked only once in history…

    • bobbo, Financial Advisor to the Stars says:

      —or, its working RIGHT NOW in GOUSA.

      Your analogy is a good one. Kudos. WHERE IS THE GROUND? In economics—the ground moves as does the airplane. Amusing?

      check the Japan example. I thought their current stagnation/stall was because they also instituted AUSTERITY MEASURES (IE–they pulled up on the stick when entering the stall) just like the Europeans did at the last Banking Crises? The USA at the same conditions added more power and is actually out of the stall?

      Yes, my friends===Keynes is RIGHT—we just never follow it. Like a monkey grabbing banana’s==we can’t let go of the goodies we like either.

    • ± says:

      People don’t understand that rules which may apply to all other currencies, don’t apply at all here because of the dollar’s (now undeserved) world reserve currency status.

      Just as England’s pound lost this status to the dollar after WWII, the dollar surely will get it’s long overdue deserved downfall. China and Russia will duke it out (metaphorically) to confer this status to their currency.

      • bobbo, neutering gun nuts with their own lack of ammunition says:

        China–possible in a few Decades.

        Russia–is third world barter economy.

        Remember the Rush 15 years ago re “Petro Dollars.”

        USA===Huge! Good to compare and contrast with UK of 100 years ago, 50 years ago, now. Spain 300 years ago, 200 years ago, etc….. Japan 100 years ago……..YOU KNOW—like Nobel Prize winners in economics do.

        Lots to learn.

    • Bryan Price says:

      “one must learn from the mathematical models”

      Since when does economics truly have anything to do with math?

      If an economic schools don’t have an understanding of the human psyche, and an excellent handle on when the people making up economic decisions don’t make them to their own favor (which may be impossible to truly predict), you’re just as well flipping a coin. Anything else is just in the same category as astrology. Yeah, they might get some things right occasionally, but what is the track record, is it at least better than flipping a coin? But nobody wants to track who is actually predicting the economy right every time.

  6. spsffan says:

    Well, again, yes. The problem with Keynesian economics is not so much that it doesn’t work as advertized. It isn’t perfect, but it more or less does what it says it does.

    The problem is that we only use the easy part, spending like drunken sailors on shore leave without ever going to sea for months at a time in between.

  7. Boner says:

    …sustainable deficit…“?! What the f**k?!!!

    Any other business or government with a budget deficit isn’t in business/power for very long. It’s a fact proven time after time. But it’s a fact that doesn’t seems to apply to the United States. And the reasons the U.S. is immune is due to some very underhanded reasons. Most notably, the U.S. controls the very money standard used throughout most of the world. But here’s the kicker: the U.S. is also able to authorize the printing of more money based on nothing but thin air conjecture. And the “authority” which does this isn’t even really part of the government!

    In other words, if I were broke and able to get my buddy to keep supplying me with an endless supply of IOU’s that everyone else kept accepting then I too could sustain a budget deficit. It would be even better if no one knew what the real value of my buddies IOU’s were too. All I had to do was show anyone interested my neighbors room full of gold (that I happen to be renting out) – or even just tell them about it.

    I don’t know who this Krugman guy is, but he sounds like just another liberal politician LAWYER who thinks he’s some kind of economics expert.

    “Sustainable deficit”, HA! How about telling me there’s a sustainable DEATH! Cause there is, you know. Very sustainable.

    • CrankyGeeksFan says:

      In the late 1960s, the Federal budget was in surplus. That doesn’t happen again until the late 1990s – and for three straight years. So that’s only for 4 of the last 45 years or so that the budget was balanced, and here we are.

      Don’t panic then that the budget is in deficit, instead worry about Wall Street corruption, etc.

      • Egon Ruuda says:

        Even if the government claimed it was making a surplus it does not make it true.
        It has with a few minor downturns gone up steadily.

        As the lower graph shows you the government owed huge amounts in war bonds during and a few years after the war. Once that was stabilized, it was UP UP UP! Even in the percentage of GDP.

        • CrankyGeeksFan says:

          The annual federal budget was in surplus in the years that I mentioned above; however, the public debt outstanding obviously existed. These two things are different.

          My point is: Look at the late 1990s, unemployment was at a decades low, the dollar had strengthened a lot in a few years and the stock market was growing. It still would have taken until about now, 2013, to bring the public debt outstanding to $0. We can’t go into a panic mode because there’s a public debt greater than $0.

          “There’s nothing to fear but fear itself.”

          I use figures from the Bureau of the Public Debt in the U.S. Department of the Treasury.

          • Reason says:

            You too sound like one of them thar “experts”.

            Read the story again and see if you can tell the difference between things like the national dept and budgets – which Congress is responsible for but hasn’t acted on for the last few YEARS. Our national debt is growing faster than ever and it’s NEVER been paid off practically since the country was founded. And thanks to Obama and his expert handling of things it’s growing at a rate faster than all previous administrations COMBINED!

            Here’s a little video that may help you understand these FACTS:


            And now, there’s another lie we’re somehow supposed to just accept: debt is the new money. Not gold. Not silver. Not even fictitious widgets! DEBT!!!

            So considering those two things, now re-read a key part of the story again:

            A few lonely economists have tried from the beginning to point out that this fixation is all wrong, that deficit spending is actually appropriate in a depressed economy.

            Can we see it again? Or has the point been made? “Deficit Spending” is just a fancy way to say, “let’s put it on the credit card since we don’t have to pay it for a while.” (Let our kids pay for it.)

  8. Phydeau says:

    That Krugman guy is only a Nobel Prize winning economist. I’m sure you know WAY more than him.

    • Egon Ruuda says:

      I do not know where you have been but there has been several Nobel laurates in economics before and after that do not share his views on almost anything. So they are all wrong too?

    • Somebody says:

      Yes, and Obama has the Nobel Peace Prize.

    • Reason says:

      Your right! I probably DO know more than he does.

      However, when it comes to math he may know just a little bit more. Like how to crunch numbers using fuzzy math which make the lies seem a little more truthful.

      You might also say that Obama knows more about the law too! He also won a Nobel Prize. But I don’t think I’d believe much of what he has to say either.

  9. Egon Ruuda says:

    Krugman is a fucking nutbag. Interest rates can not be zero forever. And at this point even it it was 0.01% we could not finance the interest payments even if we do not cut spending DRASTICALLY and not like the drop in the ocean sequester. Piling on more debt will only make things worse. (if that is even possible)

    • CrankyGeeksFan says:

      The debt’s interest rates are set on the IOUs – Treasury Bills, Notes and Bonds – at the time of issuance, and for years in advance. A sharp cut in annual federal budget spending won’t effect those payments.

      • MikeN says:

        No, the interest payments are primarily on short term bonds, so the debt has to get rolled over annually.

        • CrankyGeeksFan says:

          Good. Take advantage of the low interest rates. Much borrowong is to pay maturing debt.That technique helped tame public debt growth in the Clinton Administration.

          The rate is still on the paper – Be it 30-day, 90- day, 2 years, 10 years, etc. – when it’s issued. When the debt instrument “matures” after 90 days, 2 years, etc., that’s when the principal is paid back. The interest is paid in the interim.

  10. Somebody says:

    “Krugman is a tad toward the left”

    But by day he’s a fascist.

  11. Somebody says:

    He’s a fascist because he is a corporate shill for the Federal Reserve Bank.

    The FED is a private corporation with a license to create money out of thin air. It would be illegal for you to hack into your local bank and tack a few zeros onto the end of your account balances but when the FED does it, it’s A-OK! It does take a PhD in economics to explain why this is neither fraud nor forgery but the FED has been granted this power so that they can stabilize prices and maintain high levels of employment.

    Now, this is justified if you can overlook the fact that technological progress tends to make industry more efficient and in a free market that increased efficiency coupled with competition causes prices to tend downward distributing the benefit to everyone who has money and especially those who don’t have a lot. The FED can and indeed does prevent that “Deflation” so that the benefit is not dispersed amidst the unwashed masses and thus wasted but rather transferred into the coffers of the more deserving Wall Street types. But we peons accept this because we benefit on the other end by not being subjected to rising food or gas prices. Clearly a square deal and a wise and prudent choice on the part of the government to delegate this power to the FED.

    Now, as for the maintaining high levels of employment, It turns out that the Federal Government has to be the one that applies the FED’s methods to keep the unemployment numbers down. They have to “modify the accounting” so to speak and they can do this because they can redefine what unemployment is on the fly. This allows the FED and the Federal Government to honestly say that they have reduced the unemployment numbers and so the FED has not been a failure on that score if you kind of squint and look sideways at the facts.

    Anyway Krugman does a much better job at explaining why this private profit and public loss system is so excellent but sadly, that does technically make him an advocate for fascism if only in a literal sense.

    I’m sure he’s really a great guy.

    And I’m sure the FED has some incentive to look out for your interests and not wring you out but, I can’t think of it right now.

  12. observer says:

    They can’t keep interest rates artificially low forever. Someday there will be hell to pay.

  13. Dallas says:

    Doesn’t matter. The sheeple have been trained to believe they are living in luxury and the 1% needs more money for more trickle down.

    There is no room for alternate viewpoints at this time.

    • deowll says:

      Under normal circumstances a nation in worse shape than Spain should have rampant inflation. The secret is we aren’t selling our bonds on the open Market because only a fool would buy the things when they pay less interest than the rate of inflation. The Fed. is buying them. If I recall correctly they now hold over 1.6 trillion in bonds and growing all of which were purchased during the reign of dear leader. How long that farce can last is anyone’s guess but our credit rating should be junk bond and the interest paid on any bonds we tried to issue should reflect that.

      Why aren’t rated that low? The ratings companies are afraid of the government and nobody with a working brain would touch fed gov bonds with plunger anyway.

  14. MikeN says:


    White House Press Secretary says deficit reduction is more a Republican thing than a Democratic thing.

  15. CrankyGeeksFan says:

    The “rut” the country is in – the Fed’s Quantitative Easings- which has led to record profits for the largest banks while those same banks remain very tight with lending must end. It’s also led to rises in commodity prices and the stock market and for the consumer, an inflation beyond wage increases.

    Decreasing military spending is the reason the economy barely grew in 4th quarter of last year, as I understand it.

  16. MikeN says:

    Message from Pres Obama, his budget proposal will not seek a balanced budget. So please don’t put up posts like Is the USA Bankrupt? like you did when Pres Bush was in office with $400 billion deficits.

  17. MikeN says:

    So if deficits are not a problem, why did the President need to raise taxes? His fiscal cliff deal actually spent more money than it raised in the tax increase.