Krugman, Bellan and Greenspan

A couple of decades ago, one of the more prominent economic commentators in the Canadian media was a University of Manitoba prof by the name of Ruben Bellan.  Professor Bellan, who passed away in 2005, was by all accounts the nicest of men, but I have to admit that his economic views would regularly drive me crazy.  In essence his main argument, which he repeated tirelessly, was that government debts and deficits don't matter, because in effect we owe each other the money. (IOU = UOMe, but as I = Me, QED!).

This has always struck me as fallacious on a number of grounds.  Borrowing is an intergenerational transfer -- we are passing on a financial burden to our children and grandchildren without ever giving them a choice in the matter.  There are times when this is appropriate, as Keynes demonstrated to almost everyone's satisfaction, but it's not an acceptable way to proceed year in and year out.  Borrowing is also a transfer from the general population (who will eventually have to pay taxes in order to repay the debts) to the wealthy, who will also have to help repay the debt but get to earn interest in the meantime, as they're the ones who buy the bonds.

I'm starting to wonder if Paul Krugman, in his regular and repetitive rants in the op-ed pages of the NYT, is turning into a latter-day Ruben Bellan -- a man who never saw a deficit he didn't like.  Krugman sincerely believes that US economic policy can and should be even more stimulative than it already is.  He argues that the fact that financial markets are not punishing the US for its profligacy is evidence that the bond vigilantes have no serious concerns over the deteriorating fiscal situation.

Interestingly, though, this wasn't the way he looked at things when he contemplated the Bush tax cuts a few years ago.  Here's a quote from a piece he wrote in 2003:

Last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits...my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.

And as that temptation becomes obvious, interest rates will soar. It won't happen right away... But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

Evidently not a good prediction, as Krugman himself was honest enough to recognise in a confessional column in 2010:

I wrongly believed that markets would look at [the Bush tax cuts, war efforts and Medicare drug expansion, and]... lose faith in American governance, driving up interest rates on our debt. Instead, bond investors discounted the politics, and acted as if they believed that America would eventually pull itself together and start behaving responsibly. The jury's still out on that, but clearly my short-run prediction proved wrong.

If anything, Krugman's views have evolved further since then.  His more recent columns show no inclination at all even to start speculating about when and how fiscal and monetary stimulus might need to be removed.  Moreover, his assertion that the bond vigilantes are not exacting a price seems to take little notice of the fact that a large proportion of new US debt is being hoovered up by the Fed.  The vigilantes are hardly getting a look-in.

All in all, I think I was mistaken to see Krugman as a man who never saw a deficit he didn't like.  It all depends whose deficit it is -- Republican = bad; Democrat = good -- the exact mirror image, in fact of the positions taken by Alan Greenspan.

Looking back over these few paragraphs, I feel a bit queasy, because in general I think Krugman is right.  Fiscal stimulus and monetary ease were essential back in 2008 and it's probably a bit soon to be reversing course.  But by staking out his position in such shrill terms, by failing to spell out how and when he thinks it may be appropriate to start phasing out the stimulus, Krugman is playing into the hands of the neanderthals on the other side of the argument, who find it all too easy to portray his positions as politically motivated and irresponsible.

If you want to read further, the Krugman quotes above are from this interesting piece on the PBS website. The reader comments at the end are also interesting, but keep in mind this is PBS, Krugman's natural constituency.  He wouldn't get such an easy ride over at Fox News.