Ask Me Help Desk - Krugman on deficits

Economist Paul Krugman of the NY Slimes appears to be a casandra on deficits or not depending on which party is in power .

Here is his op-ed today where he says not only that the deficit is not a problem... but we have to go deeper in the red.
http://www.nytimes.com/2009/08/28/op...gman.html?_r=1

don’t fret about this year’s deficit; we actually need to run up federal debt right now
So as of today he thinks that advanced countries (including the US) have survived these kinds of debt-to-GDP ratios in the past... What me worry ?
How big is $9 trillion? - Paul Krugman Blog - NYTimes.com

Got that ?
Here was Krugman in an interview on the Australian Broadcasting Corp.circa 2004.

TONY JONES: Paul Krugman, history proved your predictions right over the Asian financial crisis.

You're now warning essentially that the engine of the world economy, the United States itself, is heading for a South American style financial crisis.

What's the evidence for that?

PROFESSOR PAUL KRUGMAN, PRINCETON ECONOMIST: Well, basically we have a world-class budget deficit not just as in absolute terms of course - it's the biggest budget deficit in the history of the world - but it's a budget deficit that as a share of GDP is right up there.

It's comparable to the worst we've ever seen in this country.
Lateline - 11/03/2004: Krugman calls on Bush to reign in the red

So which is it Dr Krugman ? Do deficits matter or not ? Right now frankly you are sounding like you have signed on to former VP Cheney's frequently panned response about deficits.

Krugman's no economist. He's a party hack that happens to know a few economic principles and uses them to his party's advantage.

There is some truth to the idea that looking at deficits alone or looking at national debt alone is like looking at the liabilities section of the balance sheet, while ignoring assets, equity, profit & loss and cash flow statements. Looking at debt and deficits is looking at a very small part of a very large picture. In that sense, Krugman is correct in his current (2009) article.

HOWEVER, the fact is that if we look at the overall picture --- assets, liabilities, equity, cash flow, P&L, --- the picture is MORE BLEAK right now, not less bleak than it was in 2004.

From a P&L point of view, the nation is making less in revenues than at any time in the past 20 years (in adjusted dollars), and the prospect of increasing that revenue stream is poor due to unemployment being at 30-year highs. Expenses are INCREASING due to Obama's Stimulus Bill and all the bailouts, not to mention what will happen if Obamacare passes. Taxes are going up, inflation is going up, etc. and that translates to both increased spending and increased unemployment (more expenses, less revenues). Thus the deficit grows.

In terms of equity... well, right now we have none. Our debt is so high at $9 trillion that it completely offsets our assets, leaving us in a deficit equity position. We are overleveraged. The AAA+ rating on US Government securities (bonds, notes, debt instruments) are being watched very closely due to the level of our debt relative to our equity, and if that debt level gets much higher, you can almost guarantee a downgrade in rating from the rating agencies. THAT will completely screw up the entire world's economic status, because most countries rely on either the value of the dollar (which is based on the USA's sovreign debt rating--- the "full faith and trust" of the US government) or US Bonds and Notes (which is also based on our sovreign debt rating) to buoy their own economic systems. If that debt rating is downgraded, all of those other economies get downgraded too.

Under Bush, we had a budget deficit of $480 billion. That was a very large number all right, but it was sustainable in the short run... we could handle it until the finances of the country were brought back under control. There was no threat of a sovreign debt rating downgrade. We were HIGHLY leveraged, but we were not OVERLEVERAGED. We were not in a deficit equity position. And the debt we had in place BOUGHT us something that could be put on the asset side of the balance sheet, whether that was military, agricultural, real estate, whatever. We used our debt to purchase something that was an asset. The liability was offset by an asset.

What do we have from Obama's 800% increase in liabilities? Can anybody show me an asset of any value that we now own that offsets the liability he created? We haven't grown our military. The companies that we "purchased" with bailout funds are BANKRUPT... that's why they needed to be bailed out in the first place. We haven't created more jobs with that debt... in fact there are MORE people unemployed than before. The few assets we have picked up are "toxic" and can't be properly valued... which in effect means that for the purposes of debt valuation, they are worth ZERO.

The bottom line is this... when Bush was President and everyone complained about the debt, I told them to look at the BIG PICTURE and they would be able to see that the debt isn't all that bad. Now that people are claiming that Obama's debt os good, I again say they should look at the big picture. Because when you do, you'll find that the situation is MUCH WORSE than you might have thought.

Apply the same reasonable standards to both Bush and Obama, and you'll come out with a very clear picture of the good and the bad. And Obama ain't the good.

Elliot

Quote:

Originally Posted by ETWolverine

Krugman's no economist. He's a party hack

In terms of equity... well, right now we have none. Our debt is so high at $9 trillion that it completely offsets our assets, leaving us in a deficit equity position.

Hello El:

And YOU ain't no BANKER.

I don't know where you dream up your numbers, but I'm calling you again. According to this website: The Big Picture the US has assets valued at more than $47 TRILLION. That's about a 5 to 1 debt ratio according to MY math..

But, what do I know?

excon

Not sure what that is based on total assets in the U.S. or U.S. owned assests .

Quote:

Originally Posted by excon

Hello El:

And you ain't no BANKER.

I dunno where you dream up your numbers, but I'm calling you again. According to this website: The Big Picture the US has assets valued at more than $47 TRILLION. That's about a 5 to 1 debt ratio according to MY math..

But, what do I know?

excon

Not very ,much.

MOST of those assets are offset by debt NOT SHOWN ON IN THE BUDGET... because it's not "government debt" in the sense that bonds or notes are. It is "off balance sheet" debt.

For instance, there's the unfunded "off balance sheet debt" of Social Security, Medicare and Medicaid that is not taken into consideration in the debt numbers... again, because they are extra-budgetary... outside the official budget process. The unfunded Social security debt alone is $12.8 trillion not shown in the "national debt" figures. Medicare and Medicaid total another $40 Trillion or so. According to USA Today the actual debt of the US government is $59.1 TRILLION.

That $59.1 trillion of real debt is a bit higher than the $47 Trillion in assets you cite. That's a deficit equity position. In business parlance, the USA is bankrupt... it has no equity, no net worth. The deficit net worth of the US government is $-12.1 TRILLION... MORE OF A DEFICIT THAN THE OFFICIAL NATIONAL DEBT of $9 TRILLION.

Again, you speak as if you know something about economics, but you don't. Haven't you learned yet not to challenge me on economics and finance? You get bitten by it every time.

Checkmate.

Elliot

ET

Just for the sake of argument : ;)

Are there not plenty of households that run a deficit a equity position?
[ I know that is one of the causes of the financial bind this country is in ]

For example:

A household making $50,000 a year living in a $ 200,000 [ principal left ] house driving a vehicle with, say, $10,000 left on the principal, and perhaps $20,000 in retirement and one 5 year old vehicle paid off, carrying $2000 balance on several credit cards?

Mind you I think Obama and congress have that and are now taking out a loan to buy everyone in the neighborhood a Cadillac, and caviar.

G&P

Quote:

Originally Posted by inthebox

ET

Just for the sake of argument : ;)

Are there not plenty of households that run a deficit a equity position?
[ I know that is one of the causes of the financial bind this country is in ]

For example:

A household making $50,000 a year living in a $ 200,000 [ principal left ] house driving a vehicle with, say, $10,000 left on the principal, and perhaps $20,000 in retirement and one 5 year old vehicle paid off, carrying $2000 balance on several credit cards?

Yep. There are plenty of such households. Most of them either get their $h!t straight or they file for Bankruptcy protection.

The US Government, on the other hand, just raises taxes, prints more money, and generally screws the regular citizen in order to keep operating under these conditions and make them even worse.

That's the difference between individuals or private businesses and the government. Private people and private businesses have to face the consequences of bad financial decisions. The government doesn't.

It is possible to be in a deficit position for a short period and survive. Businesses and individuals can do it for short periods. But NOT for decades, which is what we are looking at right now in the government.

Quote:

Mind you I think Obama and congress have that and are now taking out a loan to buy everyone in the neighborhood a Cadillac, and caviar.

G&P

Yep. They not only have overspent, they have done so FRIVOLOUSLY and with no gain to offset the loss.

Elliot

Quote:

Originally Posted by ETWolverine

That's the difference between individuals or private businesses and the government. Private people and private businesses have to face the consequences of bad financial decisions. The government doesn't.

Elliot

Which is why I don't understand the liberal mentality that the government should provide all these entitlements to the masses, yet don't acknowledge who is paying for all this. The taxpayor and future generations of taxpayors.

G&P

I have a lot invested in the stock market so the growing deficit scares me. I think a 7 percent national sales tax would be a major help to get the debt under control. Canada was facing a similar debt crisis, but balanced the budget with the Goods and Services tax in the 1990s along with spending cuts. I'm a fiscal conservative so don't accuse me of being a tax and spend liberal/socialist.

Quote:

Originally Posted by inthebox

ET

Just for the sake of argument : ;)

Are there not plenty of households that run a deficit a equity position?
[ I know that is one of the causes of the financial bind this country is in ]

For example:

A household making $50,000 a year living in a $ 200,000 [ pricipal left ] house driving a vehicle with, say, $10,000 left on the principal, and perhaps $20,000 in retirement and one 5 year old vehicle paid off, carrying $2000 balance on several credit cards?

Mind you I think Obama and congress have that and are now taking out a loan to buy everyone in the neighborhood a Cadillac, and caviar.

G&P

That's an interesting example but this kind of thinking is what created the GFC, and you can't run a nation the way you might run your personal finances. What's wrong with that equation is too little saving or investments

A nation should not become over committed because when it does the result is inflation

Quote:

Originally Posted by earl237

I have a lot invested in the stock market so the growing deficit scares me. I think a 7 percent national sales tax would be a major help to get the debt under control. Canada was facing a similar debt crisis, but balanced the budget with the Goods and Services tax in the 1990s along with spending cuts. I'm a fiscal conservative so don't accuse me of being a tax and spend liberal/socialist.

Personally, I'm in favor of a flat tax or a consumption tax. I think that a G&S tax ends up becoming a VAT tax that creates disparity in the economy and ends up penalizing success and rewarding failure. A flat tax or a consuption tax is a simple way of increasing tax revenue without penalizing people for their success. It's simple... what you USE is what you pay for. Rather than, as we have now, what you EARN is what you pay for. Our current tax system DECENTIVISES success.

In any case, the real key to balancing the budget is to lower spending and lower taxes. Lowering spending is obvious.. less spending means less needed to balance the budget. Lowering taxes is simple "Laffer Curve" stuff... lower taxes means more spending, which means more production/manufacture/providing more services, which means job creation, which means more spending, etc. all of which leads to greater tax revenues for the government.

I'm just telling you stuff you already know.

Elliot

Quote:

Originally Posted by ETWolverine

Personally, I'm in favor of a flat tax or a consumption tax.

Hello again, El:

We agree. We can bend the top a little for the rich, and bend the bottom a little for the poor. We could write the law on one page, and fire everybody at the IRS.

excon

Quote:

Originally Posted by excon

Hello again, El:

We agree. We can bend the top a little for the rich, and bend the bottom a little for the poor. We could write the law on one page, and fire everybody at the IRS.

excon

Yep. And your entire tax return could fit on a 9x5 index card, and would look like this.

-------------------------------------------------------------

How much did you make this year. _____________

Multiply by x%. _______________

This is your total tax.

Please mail in a check in this amount by April 15.

--------------------------------------------------------------
End of story.

Elliot

Quote:

Originally Posted by ETWolverine

Personally, I'm in favor of a flat tax or a consumption tax. I think that a G&S tax ends up becoming a VAT tax that creates disparity in the economy and ends up penalizing success and rewarding failure. A flat tax or a consuption tax is a simple way of increasing tax revenue without penalizing people for their success. It's simple... what you USE is what you pay for. Rather than, as we have now, what you EARN is what you pay for. Our current tax system DECENTIVISES success.

In any case, the real key to balancing the budget is to lower spending and lower taxes. Lowering spending is obvious..., less spending means less needed to balance the budget. Lowering taxes is simple "Laffer Curve" stuff... lower taxes means more spending, which means more production/manufacture/providing more services, which means job creation, which means more spending, etc. all of which leads to greater tax revenues for the government.

I'm just telling you stuff you already know.

Elliot

Elliot I think you may be wrong here. My nation implemented a Goods and Services Tax a few years ago and the outcome was very interesting. Since it was implemented personal taxation has been reduced. A number of annoyance taxes were abolished in the process including an inefficient sales tax system and a certain number of tax avoiders amazingly decided to go out of business. Your tax system may be more efficient than ours was but it certainly resulted in the collection of far more revenue than predicted as all the underground industry was forced to pay a tax at the point of consumption. I know there is still a cash economy, you see tradesmen giving a discount for cash, but it somehow is more efficient even though business doesn't like the paperwork it is still better that what went before because someone is paying the tax

Quote:

Originally Posted by earl237

I have a lot invested in the stock market so the growing deficit scares me. I think a 7 percent national sales tax would be a major help to get the debt under control. Canada was facing a similar debt crisis, but balanced the budget with the Goods and Services tax in the 1990s along with spending cuts. I'm a fiscal conservative so don't accuse me of being a tax and spend liberal/socialist.

But what would get taxed? Food, toilet paper, gas? If you added a 7% tax to these things, it would be regressive and effect lower income earners proportionately greater.

If the revenue increases, do you trust congress to be prudent with it?

G&P

Quote:

Originally Posted by inthebox

But what would get taxed? food, toilet paper, gas? If you added a 7% tax to these things, it would be regressive and effect lower income earners proportionately greater.

If the revenue increases, do you trust congress to be prudent with it?

G&P

You don't have to tax everything. In Australia raw food is exempt as is Interest, etc, but you have to have to look at the bigger picture. In our case the tax is 10%, not high enough to be intrusive but high enough to have an impact. Yes, lower income earners do feel it initially but government pensions can be adjusted for offsets because there is a broader revenue base to pay for it.

If you are worried about your congress spending the excess, just think what it would be like if they were actually spending from surplus not borrowings. Just think, the rich might actually be paying for a change; every time they build that big house or buy that expensive car or boat or even dine out