Deficits mat­ter again

Hawaii Tribune Herald - - COMMENTARY - Paul Krug­man Paul Krug­man is a syn­di­cated colum­nist who writes for the New York Times News Ser­vice.

Not long ago prom­i­nent Repub­li­cans such as Paul Ryan, the speaker of the House, liked to warn in apoc­a­lyp­tic terms about the dan­gers of bud­get deficits, declar­ing a Greek-style cri­sis was just around the corner. But now, sud­denly, those very same politi­cians are per­fectly happy with the prospect of deficits swollen by tax cuts; the bud­get res­o­lu­tion they’re con­sid­er­ing would, ac­cord­ing to their own es­ti­mates, add $9 tril­lion in debt dur­ing the next decade. Hey, no prob­lem.

This sud­den turn­around comes as a huge shock to ab­so­lutely no­body — at least no­body with any sense. All that pos­tur­ing about the deficit was ob­vi­ous flim­flam, with the pur­pose of hob­bling a Demo­cratic pres­i­dent, and it was com­pletely pre­dictable that the pre­tense of be­ing fis­cally re­spon­si­ble would be dropped as soon as the GOP re­gained the White House.

What wasn’t quite so pre­dictable, how­ever, was that Repub­li­cans would stop pre­tend­ing to care about deficits at al­most pre­cisely the mo­ment deficits were start­ing to mat­ter again.

Those apoc­a­lyp­tic warn­ings are still fool­ish: Amer­ica, which bor­rows in its own cur­rency and there­fore can’t run out of cash, isn’t at all like Greece. But run­ning big deficits is no longer harm­less, let alone de­sir­able.

The way it was: Eight years ago, with the econ­omy in free fall, I wrote that we had en­tered an era of “de­pres­sion economics,” in which the usual rules of eco­nomic pol­icy no longer ap­plied, in which virtue was vice and pru­dence was folly. In par­tic­u­lar, deficit spend­ing was es­sen­tial to sup­port the econ­omy, and at­tempts to bal­ance the bud­get would be de­struc­tive.

This di­ag­no­sis — shared by most pro­fes­sional econ­o­mists — didn’t come out of thin air; it was based on well-es­tab­lished macroe­co­nomic prin­ci­ples. Fur­ther­more, the pre­dic­tions that came out of those prin­ci­ples held up very well. In the de­pressed econ­omy that pre­vailed for years af­ter the fi­nan­cial cri­sis, gov­ern­ment bor­row­ing didn’t drive up in­ter­est rates, money cre­ation by the Fed didn’t cause in­fla­tion and na­tions that tried to slash bud­get deficits ex­pe­ri­enced se­vere re­ces­sions.

But these pre­dic­tions were al­ways con­di­tional, ap­ply­ing only to an econ­omy far from full em­ploy­ment. That was the kind of econ­omy Pres­i­dent Barack Obama in­her­ited; but the Trump-Putin ad­min­is­tra­tion will, in­stead, come into power at a time when full em­ploy­ment has been more or less re­stored.

How do we know we’re close to full em­ploy­ment? The low of­fi­cial un­em­ploy­ment rate is just one indi­ca­tor. What I find more com­pelling are two facts: Wages are fi­nally ris­ing rea­son­ably fast, show­ing that work­ers have bar­gain­ing power again, and the rate at which work­ers are quit­ting their jobs, an in­di­ca­tion of how con­fi­dent they are of find­ing new jobs, is back to pre-cri­sis lev­els.

What changes once we’re close to full em­ploy­ment? Ba­si­cally, gov­ern­ment bor­row­ing once again com­petes with the pri­vate sec­tor for a lim­ited amount of money. This means deficit spend­ing no longer pro­vides much if any eco­nomic boost be­cause it drives up in­ter­est rates and “crowds out” pri­vate in­vest­ment.

Now, gov­ern­ment bor­row­ing can still be jus­ti­fied if it serves an im­por­tant pur­pose: In­ter­est rates re­main very low, and bor­row­ing at those low rates to in­vest in much-needed in­fra­struc­ture is still a very good idea be­cause it would raise productivity and it would pro­vide a bit of in­sur­ance against fu­ture down­turns.

But while can­di­date Trump talked about in­creas­ing pub­lic in­vest­ment, there’s no sign at all con­gres­sional Repub­li­cans are go­ing to make such in­vest­ment a pri­or­ity.

No, they’re go­ing to blow up the deficit mainly by cut­ting taxes on the wealthy. And that won’t do any­thing sig­nif­i­cant to boost the econ­omy or cre­ate jobs. In fact, by crowd­ing out in­vest­ment it will some­what re­duce long-term eco­nomic growth. Mean­while, it will make the rich richer, even as cuts in so­cial spend­ing make the poor poorer and un­der­mine se­cu­rity for the mid­dle class.

But that, of course, is the in­ten­tion.

Again, none of this im­plies an eco­nomic catas­tro­phe. If such a catas­tro­phe does come, it will be thanks to other poli­cies, such as a roll­back of fi­nan­cial reg­u­la­tion, or from out­side events such as a cri­sis in China or Europe. And be­cause stuff does hap­pen, and a lot de­pends on how the U.S. gov­ern­ment re­sponds when it does, we should be con­cerned that the in­com­ing ad­min­is­tra­tion only seems to take eco­nomic ad­vice from peo­ple who have been con­sis­tently wrong about, well, ev­ery­thing.

But back to deficits: the cru­cial point is not that Repub­li­cans were hyp­o­crit­i­cal. It is, in­stead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when big­ger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.

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