Krugman - Debt Reduction = Increased Spending

[Munger]

Re: Krugman - Debt Reduction = Increased Spending

It is not necessary that savers must sacrifice their savings in order for debtors to pay their debts.

Please pick which one you disagree with:

(1) one person's debt is another person's asset;
(2) decreasing a debt must decrease an asset.

[Munger]

Re: Krugman - Debt Reduction = Increased Spending

Another. He's probably wasting his breath; the Austerians will believe what _feels_ right.

“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.

It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.

And that kind of moralizing is the reason we’re mired in a seemingly endless slump.

The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.

This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.

The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.

Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.

So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.

But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.

And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.

And those who should know better lack all conviction.

John Boehner, the House minority leader, was widely mocked last year when he declared that “It’s time for government to tighten their belts” — in the face of depressed private spending, the government should spend more, not less. But since then President Obama has repeatedly used the same metaphor, promising to match private belt-tightening with public belt-tightening. Does he lack the courage to challenge popular misconceptions, or is this just intellectual laziness? Either way, if the president won’t defend the logic of his own policies, who will?

Meanwhile, the administration’s mortgage modification program — the program that inspired the Santelli rant — has, in the end, accomplished almost nothing. At least part of the reason is that officials were so worried that they might be accused of helping the undeserving that they ended up helping almost nobody.

So the moralizers are winning. More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe.

The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.

But they don’t know that. And because they don’t, the slump will go on.

http://www.nytimes.com/2010/11/01/op...gman.html?_r=1

[Chomsky]

Re: Krugman - Debt Reduction = Increased Spending

Please pick which one you disagree with:

(1) one person's debt is another person's asset;
(2) decreasing a debt must decrease an asset.

But decreasing the debt via repayment, while decreasing the asset, also adds to the asset holder's cash position (plus interest). Right?

[Spartacus]

Re: Krugman - Debt Reduction = Increased Spending

But decreasing the debt via repayment, while decreasing the asset, also adds to the asset holder's cash position (plus interest). Right?

depends on the environment.

In the normal course, the usual suspect creditors can turn around and re-lend the money, thus multiplying their assets at the fractional reserve multiplier.

BUT in other circumstances, the creditor may be required to put incoming money away ("bad debt provisions", "loan loss provisions" for example), and that reduces the creditor's assets by the amount they have to take out of circulation divided by the fractional reserve.

If the bank could lend a dollar they would have $9 in assets (according to the reserve requirement - assume Keen's wrong for now). Having to hold the dollar means a dollar means that dollar is sequestered and the bank's losing out on the $9 in loans.

[Munger]

Re: Krugman - Debt Reduction = Increased Spending

But decreasing the debt via repayment, while decreasing the asset, also adds to the asset holder's cash position (plus interest). Right?

True, when viewed as an open system -- a problem with my question, granted.

On the macro level it is a closed system -- you can picture it as two people, Saver and Debtor. Debtor can never repay saver unless saver is willing to decrease the asset side of his balance sheet.

[Chomsky]

Re: Krugman - Debt Reduction = Increased Spending

True, when viewed as an open system -- a problem with my question, granted.

On the macro level it is a closed system -- you can picture it as two people, Saver and Debtor. Debtor can never repay saver unless saver is willing to decrease the asset side of his balance sheet.

But the money supply is (generally) always growing, to account for productivity and growth - this is c1ue's point about Krugman overlooking growth, I believe. New money can be earned by the borrower through labor and used to repay the debt.

[ASH]

Re: Krugman - Debt Reduction = Increased Spending

Munger -- Do you understand Krugman's objection to the claim that "you can't solve debt problems with more debt"? I honestly don't understand what endgame Krugman envisions for the public debt in this scenario. The statement that you can't solve a debt problem with more debt isn't "moralizing" so much as an observation that deficit spending by the government to provide the private sector with income to pay off private debts results in net transferal of debt from private to public accounts, but does not extinguish the total stock of debt. One exchanges a private debt problem for a public debt problem, but one does not solve the general problem of too much debt building up and requiring too much cash flow to service. Do you have any insight into why Krugman doesn't think this is a problem? The only thing I can think of is that Krugman believes that once unburdened of their debt, the private sector will grow fast enough to allow the government to pay off through taxation of the expanded economic activity the debt it assumed to bail out the private sector, but that does not appear to be empirically true.

[thriftyandboringinohio]

Re: Krugman - Debt Reduction = Increased Spending

We're already there, no?
+socialized food production: Massive subsidies for agriculture
+socialized housing: mortgage interest tax deductions, govt backs +90% of all mortgages?
+socialized transportation: amtrak, GM, Chrysler, etc

Today, the two largest exporting countries in the world are China and Germany; a communist nation and a socialist nation. If an ever-more deregulated capitalist economy is best, we must be doing it badly, because we've fallen from first place to third place.

[Munger]

Re: Krugman - Debt Reduction = Increased Spending

But the money supply is (generally) always growing, to account for productivity and growth - this is c1ue's point about Krugman overlooking growth, I believe. New money can be earned by the borrower through labor and used to repay the debt.

True. But Krugman took this into account.

Let's say Fed creates $10 to pay Debtor to make Widget. Fed has Widget and Debtor has $10. Debtor can pay off $10 of his debt, and Saver has $10 in cash in place of $10 in loans. But the money supply was increased, which is the inflation remedy mentioned by Krugman. Why not simply print $100 for Debtor to wipe away his debts?

What if Saver wants to buy the Widget to capture the growth? Well, then Saver is willing to spend his money -- which Krugman pointed out is the problem, because it's not happening.

[Starving Steve]

Re: Krugman - Debt Reduction = Increased Spending

But the money supply is (generally) always growing, to account for productivity and growth - this is c1ue's point about Krugman overlooking growth, I believe. New money can be earned by the borrower through labor and used to repay the debt.

The debtor (the State of California as an example) smartens-up. It drills for oil off of Los Angeles. It builds 10 new atomic power plants. It builds water-filtration and pumping-plants. It hikes sales taxes. It chops govn't (for examples, the Cal. Air Resources Control Board or the Tahoe Regional Planning Agency).

Then guess what is going to happen: Water prices DROP. Energy prices DROP. Tax revenues INCREASE. Govn't costs DROP. Land prices DROP. And then, plain old people would have more money to spend on what used to be called, "the good-life in the Golden State".

Gov. Pat Brown knew how to grow the California economy. He was a real liberal. Gov. Jerry Brown, the son of former Gov. Pat Brown, are you reading this post? Are you folks at UC Berkeley getting the message about what real liberalism is all about?

[wayiwalk]

Re: Krugman - Debt Reduction = Increased Spending

Interesting question SSteve. Apparently the discussion on Charlie Rose last night was all about what real liberalism is about, vs what liberalism is in practice by our politicians today.

[tsetsefly]

Re: Krugman - Debt Reduction = Increased Spending

Both ideas are currently popular chestnuts in certain circles.

The notion of "uncertainty" is delightfully ill-defined and of little provable consequence. The claim holds that business people large and small are paralyzed by some fear that a law may be enacted or repealed against their preference, and so they won't hire people, expand markets and thrive, even though they otherwise could. Baloney. They deal with hurricanes, earthquakes, and fierce international competition in the daily course of their business, but we are asked to believe that somehow the mere existence of a democratic congress brings them to a standstill due to apprehension about what congress MIGHT do.

Second, you assert that if a corrective policy was not completely effective quickly it was therefore wrong or wholly ineffective. Some problems are big and tough, and some corrections are partial or take a long time to work.

Policy affects way more than once in 10-20 years natural disasters do(unless of course its a once in a lifetime disaster in which some companies don't survive). Some companies cant react to the competition and go out of business how does this correlate with being up in the air about future policy?

But that is only part of the answer. The truth is jobs will not pop in a declining economy and the current policy of trying to revive dead companies and implement similar policies that helped create the mess wont happen.

It took a long time to work? I would say it's more than coincidence that once FDR's programs started coming off the books or where repealed by the supreme court things started to get better.
The Obama administration is following similar steps that the japanese took, how has that gone for them?

[flintlock]

Re: Krugman - Debt Reduction = Increased Spending

Yes. The private sector was doing a wonderful job putting those millions of unemployed people to work. The private sector is doing a wonderful job putting the idle human resources to work right now.

How much potential capital is being wasted as the unemployed sit idle when they would gladly be building a power plant or repairing a road?

Your rant is a complete fallacy. There is no "crowding out" when the unemployment rate is over 25%.

For once I agree. ( well more than once, I exaggerate ) This is the perfect time for a jobs program to develop our infrastructure and at least get some productivity out of people who otherwise will still have to be provided for. Too bad we squandered billions in the past propping up people when jobs were plentiful.

These are not ordinary times. Extraordinary measures are called for. Germany pulled itself out of the depression and built the world's first super highways. We could start by improving our roads and move on to getting some decent Broadband speeds!

[flintlock]

Re: Krugman - Debt Reduction = Increased Spending

As I have stated many times the tea party started from the "libertarian/republican ron paul movement" then got infiltrated(not totally) by the neocons and moralist. The way to separate a "real" tea party minded candidate is by looking at their views on foreign policy. IF they want to continue the current policy of fighting wars overseas and policing the war then they are neocons. The other way is to see if they rely on social issues way too much (againt abortion and gay marriage, this should be at the bottom of what to do list for any politician that people are concerned with gays getting married is beyond me).

The overwhelming majority of republicans dont even want to touch military spending, thus they are not serious about spending cuts. Any talk about spending cuts will have to include cutting military spending...

Exactly. No military cuts, then fuggiddabout it.

I need to crunch some numbers, but I suspect the government could employ millions on REAL, useful jobs with money already in the budget. But something has to give. Personally, I think reigning in the Empire is a good place to start.

[Munger]

Re: Krugman - Debt Reduction = Increased Spending

Munger -- Do you understand Krugman's objection to the claim that "you can't solve debt problems with more debt"? I honestly don't understand what endgame Krugman envisions for the public debt in this scenario. The statement that you can't solve a debt problem with more debt isn't "moralizing" so much as an observation that deficit spending by the government to provide the private sector with income to pay off private debts results in net transferal of debt from private to public accounts, but does not extinguish the total stock of debt. One exchanges a private debt problem for a public debt problem, but one does not solve the general problem of too much debt building up and requiring too much cash flow to service. Do you have any insight into why Krugman doesn't think this is a problem? The only thing I can think of is that Krugman believes that once unburdened of their debt, the private sector will grow fast enough to allow the government to pay off through taxation of the expanded economic activity the debt it assumed to bail out the private sector, but that does not appear to be empirically true.

I don't want to speak for Krugman, but my understanding of his views is that a depressed economy has "magneto troubles," as Keynes once put it. That is, it is stuck in an energy well and cannot muster the escape energy on its own. If the government can "jump start" the economy via stimulus, it will run again on its own if it gains enough momentum.

So, I think the idea is to give the economy enough of a jolt through stimulus that it will start growing on its own, and at the point the budget can be examined and trimmed and the debt can be paid off in due course. Krugman claims that debt as a percentage of GDP was much higher in the aftermath of WWII, among other times, and that we had no trouble paying it off because the economy was running full steam from the massive jobs program that the war provided. Krugman does not think the ease with which the debts were paid off had anything to do with Europe being blown apart, as he says that if you believe in free trade, having trade partners able to produce goods makes both parties better off.

Krugman also advocates debt forgiveness and/or a period of moderately high inflation to work the debt overhang off.