James Hamiliton the Krugmanian argument for deficits.
Krugman's response.
(HT: Cafe Hayek)
Showing posts with label Deficits. Show all posts
Showing posts with label Deficits. Show all posts
Deficit Discussion/Clarification
Okay, so I read all of Rob's links concerning Krugman framing his liquidity trap/fiscal stimulus story. And Rob is right, he does frame the argument quite well. It seems I was speaking more out of my own incoherence than Krugman's failure to convey his ideas clearly.
So I propose we drop Murphy as I don't think he adds anything to the discussion (I regret the post) and ignore tax policy (at least for the time being) so we can focus on Krugman's deficit argument.
As I understand it, Krugman's premise is we are in a liquidity trap (interest rates = 0) so monetary policy is a gun without ammunition and fiscal policy needs to step in to make up for what the Fed and private sector can't/won't do. This can be done through tax cuts or increased spending. This is viewed as a short-term issue so it is assumed the deficit can be paid off in the long-run without signifcant inflationary costs. Also, tax cuts will be saved instead of used for investment or saving, and thus government must step in to do the spending. Ala, deficit spending is the best remedy for our current woes.
Rob, is this correct? I don't want to go any further unless I have basics of the story down.
So I propose we drop Murphy as I don't think he adds anything to the discussion (I regret the post) and ignore tax policy (at least for the time being) so we can focus on Krugman's deficit argument.
As I understand it, Krugman's premise is we are in a liquidity trap (interest rates = 0) so monetary policy is a gun without ammunition and fiscal policy needs to step in to make up for what the Fed and private sector can't/won't do. This can be done through tax cuts or increased spending. This is viewed as a short-term issue so it is assumed the deficit can be paid off in the long-run without signifcant inflationary costs. Also, tax cuts will be saved instead of used for investment or saving, and thus government must step in to do the spending. Ala, deficit spending is the best remedy for our current woes.
Rob, is this correct? I don't want to go any further unless I have basics of the story down.
Cowen on Deficits
Tyler Cowen offers some thoughts on the theory of running fiscal deficits. I like this paragraph in particular:
A high deficit often is an unfavorable symptom of bad politics, even if you think the high deficit is economically OK on its own terms. It's a sign that you have dysfunctional institutions and decision-making procedures, as indeed they do in Belgium and Italy. I believe that the not-always-swift American voter in fact understands high deficits -- correctly -- in this light. They don't hold theories about "crowding out," rather they sense something in the house must be rotten. And so they rail against deficits, as do some of their elected representatives. It's a more justified reaction than the pure economics alone can illuminate.
When water regularly overflows from your toilet, you want the toilet fixed, whether or not the water is doing harm.
A high deficit often is an unfavorable symptom of bad politics, even if you think the high deficit is economically OK on its own terms. It's a sign that you have dysfunctional institutions and decision-making procedures, as indeed they do in Belgium and Italy. I believe that the not-always-swift American voter in fact understands high deficits -- correctly -- in this light. They don't hold theories about "crowding out," rather they sense something in the house must be rotten. And so they rail against deficits, as do some of their elected representatives. It's a more justified reaction than the pure economics alone can illuminate.
When water regularly overflows from your toilet, you want the toilet fixed, whether or not the water is doing harm.
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