Saturday, June 9, 2012

Who cares what Reagan was?

Paul Krugman, from Reagan Was a Keynesian

As many economists have pointed out, America is currently suffering from a classic case of debt deflation: all across the economy people are trying to pay down debt by slashing spending, but, in so doing, they are causing a depression that makes their debt problems even worse.


This is exactly the situation in which government spending should temporarily rise to offset the slump in private spending and give the private sector time to repair its finances.


In this situation, the government should admit it made policy mistakes that led to the creation of all this debt, that "people are trying to pay down" today.

In this situation, the government should "repair" those finances itself. The Federal Reserve should take the responsibility, and pay down private debt. This way, people wouldn't have to be "slashing spending" and "causing a depression".

There is no link between decisions to increase government spending and decisions to reduce personal indebtedness. Having the government spend more does nothing for people's debt. We need direct policy action to reduce the problem: Reduce private sector debt. Do it now.


Woj said...

Right on the mark. My preferred response is something along the lines of Steve Keen's modern-day debt jubilee. The Fed lending directly to individuals is also a good option. If only these ideas weren't falling mostly on deaf ears.

The Arthurian said...

Letting the cat out of the bag, tomorrow I link to a post by Rex Nutting

I never thought I'd read a post like his.

Woj said...

Wow...there is hope. I wish he didn't downplay the actual Cassandras who have been out there though.

Not sure if you've seen this paper yet (or if I mentioned it previously), but its on the Fisher dynamics in Household Debt: One major point of interest is that the rise in private debt has been less about new borrowing and more about the rise in interest costs. I think it supports your cost-push inflation theory.

Jazzbumpa said...

It also illustrates the importance of interest rates.

I disagree that the post is right on the mark though. Yes the govt should admit policy mistakes, but that aint ever gonna happen.

Nor is jubilee and/or financial repair by the Fed or any other agency.

The other thing that should happen but won't is what Krugman is calling for.

Govt spending boosts the economy which creates jobs, which helps people reduce debt because they have a paycheck. Which is part of why this: "There is no link between decisions to increase government spending and decisions to reduce personal indebtedness." is most emphatically not true.

The other part is the accounting identity connecting public debt, private debt and the trade balance.


Woj said...

@Jazzbummpa - You don't believe the govt will admit policy mistakes, yet do expect the income from govt spending to be spread out over the population?

Govt spending, if perfectly crafted, could produce vast new jobs and ensure the funds were directed to those invididuals/groups with the highest propensity to spend (probably not the wealthy). Unfortunately govt's are constrained by political calculations and lack of information.

Much of the household debt rests with the bottom 60-70%, yet much of the gains from govt spending goes to the top 20-30%. Govt spending is no panacea either.

The Arthurian said...

Woj, I was gonna try reading that Fisher Dynamics paper again this weekend and then get back to you.

That didn't work.

I think JW Mason is brilliant. I never got all the way through that pdf. But I want to give it another shot.

The Arthurian said...

JzB: "Govt spending boosts the economy which creates jobs, which helps people reduce debt because they have a paycheck."

But that did not work for the 30 years after 1980, nor for the 30 years before that.

We need direct action.

Woj said...

@The Arthurian - No rush, I'm sure you've got plenty of other items on your plate. I heaven't read too much of his other work but have some on my reading list when time frees up.