Deficits Matter—But Not in the Way Paul Krugman Thinks They Do

Kate Aronoff January 13, 2017

For Krugman, the problem is that Republicans are driving up deficits, period. For others, it’s that no one seems to be driving them up in the right way—foreclosing on the possibility of egalitarian reforms before it even arises. (Marc Smith/ Flickr)

Paul Krug­man is wor­ried. Repub­li­cans, it seems — after decades of hem­ming and haw­ing — have stopped pre­tend­ing to care about deficits and are prepar­ing to go all-in on a spend­ing-heavy agen­da. As a for­mer Sen­ate Repub­li­can said recent­ly, con­cerns about bal­loon­ing bud­gets have sort of dis­ap­peared from the radar.” A few years ago, this would have been wel­come news to Krug­man, who made argu­ments in sup­port of deficit spend­ing until very recent­ly. But no more.

Run­ning big deficits is no longer harm­less, let alone desir­able,” he warns. His log­ic here is two-fold. As the coun­try was recov­er­ing from the reces­sion, grow­ing the deficit was a nec­es­sary mea­sure to let the econ­o­my pick itself back up, per tra­di­tion­al Key­ne­sian doc­trine. Today, though, full employ­ment has been more or less restored,” Krug­man writes, as evi­denced by slight­ly high­er wages and the fact that more work­ers are quit­ting their jobs in a show of new-found bar­gain­ing pow­er. Deficits — as the title of his recent op-ed reads — mat­ter again.”

Amidst such pros­per­i­ty, Krug­man argues, gov­ern­ment bor­row­ing once again com­petes with the pri­vate sec­tor for a lim­it­ed amount of mon­ey. This means that deficit spend­ing no longer pro­vides much if any eco­nom­ic boost, because it dri­ves up inter­est rates and crowds out’ pri­vate investment.”

To some econ­o­mists, that’s non­sense. Deficits absolute­ly mat­ter, always and every­where,” says Pavli­na Tch­erne­va, but not in the way that peo­ple think.” Tch­erne­va is direc­tor of Bard College’s eco­nom­ics pro­gram and a lead­ing schol­ar of some­thing known as Mod­ern Mon­e­tary The­o­ry (MMT).

As Krug­man con­cedes, it would be impos­si­ble for the Unit­ed States to find itself in a Greek-style debt cri­sis. Unlike the Euro, dis­trib­uted by the Euro­pean Cen­tral Bank, the U.S. dol­lar is a sov­er­eign cur­ren­cy, deci­sions about which are made inde­pen­dent­ly — like the one to spend $14 tril­lion bail­ing out the finan­cial sec­tor in 2009. By sug­gest­ing that spend­ing could some­how crowd out” pri­vate sec­tor invest­ment, Tch­erne­va tells In These Times, Krug­man falls into a trap of treat­ing mon­ey as a fixed quan­ti­ty, over which the pub­lic and pri­vate sec­tor compete.

The Trea­sury and Fed always coor­di­nate to meet gov­ern­ment pay­ments. We don’t depend on pri­vate mar­kets,” she explains. To Tch­erne­va and oth­er Mod­ern Mon­e­tary The­o­rists, deficits don’t mat­ter because the gov­ern­ment will run out of mon­ey to pay its bills, but because of the return they do or do not pro­vide on the state’s invest­ment — and to whom.

Some deficits cre­ate jobs and some do not. Some deficits cre­ate a lot of inequal­i­ty and oth­ers do not. The way we want to think about it is in terms of what we are get­ting for the mon­ey,” she says.

Tak­ing on Democ­rats in the mid-1990s, Repub­li­cans start­ed to artic­u­late a sim­ple and com­pelling log­ic. Amer­i­cans … are angry and in doubt about the future,” con­ser­v­a­tive poll­ster Frank Luntz wrote at the height of the GOP-engi­neered gov­ern­ment shut­down in 1995. The main cul­prit? Wash­ing­ton’s inabil­i­ty to bal­ance its own books.”

The irony is that the GOP loves deficit spend­ing, just on spe­cif­ic pro­grams. Deficit-fund­ed wars and tax cuts for the rich have ani­mat­ed Repub­li­can admin­is­tra­tions from Ronald Rea­gan to George W. Bush. Yet when it comes to oth­er so-called big-tick­et items, Repub­li­cans warn Democ­rats (and, more impor­tant­ly, the pub­lic) that such spend­ing will dri­ve the coun­try into finan­cial ruin or worse: bring vig­i­lante Chi­nese bond­hold­ers to our doorsteps.

For Tch­erne­va, the GOP’s new­found turn away from deficit hawk­ish­ness makes sense. It also hints at what was dri­ving con­ser­v­a­tives’ deficit fren­zy all along: a quest for pow­er. Sound­ing alarm bells about bud­gets has proven a sound tac­tic to chal­lenge Demo­c­ra­t­ic pres­i­dents. Now that Repub­li­cans con­trol the White House, they can let them go silent.

Peo­ple are not los­ing sleep over the bud­get of the Unit­ed States,” Tch­erne­va says. What they are los­ing sleep over is their jobs and their income. This is the rea­son why the Repub­li­can Par­ty is right now not pay­ing much atten­tion to [deficit] arguments.”

Mean­while, lib­er­al econ­o­mists like Krug­man remain behold­en to bud­get woes. Lurk­ing beneath the sur­face of his most recent op-ed is some­thing called NAIRU, short for the non-accel­er­at­ing infla­tion rate of unem­ploy­ment. Those who believe in the NAIRU argue that tru­ly full employ­ment — where any­one who wants a full-time, liv­ing wage job can find it,” accord­ing to Tch­erne­va — can trig­ger a neg­a­tive feed­back cycle. When jobs aren’t hard to come by, the think­ing goes, work­ers enjoy more bar­gain­ing pow­er, free­ing them to push boss­es for bet­ter wages and quit if they don’t get them. In turn, boss­es are more vul­ner­a­ble to pres­sure and more like­ly to com­ply with their employ­ees’ demands. They then pass increased pro­duc­tion costs down to con­sumers, who — as employ­ees them­selves — will start to demand even high­er wages.

The clos­er you get to full employ­ment, accord­ing to NAIRU, the high­er a risk you run of infla­tion. It also means that the fix to exist­ing or impend­ing infla­tion is for cen­tral banks to engi­neer high­er lev­els of unem­ploy­ment by rais­ing inter­est rates, plac­ing down­ward pres­sure on employers.

Rohan Grey, founder and pres­i­dent of the Mod­ern Mon­ey Net­work, calls the NAIRU an intel­lec­tu­al edi­fice designed to rein­force and jus­ti­fy keep­ing labor weak and under­mine their abil­i­ty to bar­gain,” argu­ing that it puts the bur­den of macro­eco­nom­ic pol­i­cy man­age­ment on the most vul­ner­a­ble peo­ple in soci­ety.” For the last sev­er­al years, infla­tion has under­shot the Fed­er­al Reserve’s 2 per­cent tar­get, even as unem­ploy­ment has dropped.

The rosy employ­ment data Krug­man cites may be mis­lead­ing, too. In part, due to the chang­ing nature of work, many of the jobs cre­at­ed since the reces­sion are part time, a cat­e­go­ry that includes every­one from retail work­ers clock­ing in for 20 hours a week to Uber dri­vers shut­tling pas­sen­gers for a sin­gle week­ly shift. Hun­dreds of thou­sands of peo­ple have either giv­en up look­ing for work, or — hav­ing failed to find it — are now inel­i­gi­ble for unem­ploy­ment benefits.

The alter­na­tive — tru­ly full employ­ment — would require some­thing called a job guar­an­tee, the miss­ing piece in the safe­ty net,” Tch­erne­va says. While not a replace­ment for oth­er kinds of unem­ploy­ment ben­e­fits, a job guar­an­tee in the MMT vision would look to put those peo­ple out of work who want it into pub­lic sec­tor jobs, and cre­ate a nation­al wage floor that would force the pri­vate sec­tor to com­pete. Such a pro­gram could also deter what Tch­erne­va calls the con­ta­gion effects” of unem­ploy­ment, where­by those out of work stop the kind of dis­cre­tionary spend­ing on things like meals out and trips to the movie the­ater that dri­ve job cre­ation in oth­er sectors.

Of course, such a pro­pos­al falls out­side the main­stream of both the Demo­c­ra­t­ic and Repub­li­can par­ties. Gov­ern­ment,” Oba­ma said in 2010, can’t cre­ate jobs to replace the mil­lions that we lost in the reces­sion, but it can cre­ate the con­di­tions for small busi­ness­es to hire more peo­ple, through steps like tax breaks.” Think­ing about jobs as a pub­lic ser­vice like any oth­er, though, leads to a dif­fer­ent con­clu­sion. When you need edu­ca­tion, the gov­ern­ment builds schools, yet when it comes to jobs we rely on the mar­ket,” Grey says.

If politi­cians seem far from accept­ing the idea of a job guar­an­tee, their con­stituents may be clos­er. A Gallup poll in 2013 found that 72 per­cent of peo­ple would vote for a gov­ern­ment-fund­ed fed­er­al pro­gram to put peo­ple to work on urgent infra­struc­ture repairs.

For Krug­man, the prob­lem is that Repub­li­cans are dri­ving up deficits, peri­od. For Tch­erne­va and Grey, it’s that no one seems to be dri­ving them up in the right way — fore­clos­ing on the pos­si­bil­i­ty of egal­i­tar­i­an reforms before it even arises.

Democ­rats have moved away from their New Deal roots. Democ­rats can­not be pro­gres­sives and fis­cal con­ser­v­a­tives,” Tch­erne­va says. These are con­flict­ing goals. They have to give up fis­cal con­ser­vatism and stand behind pro­gres­sive policies.”

Kate Aronoff is a Brook­lyn-based jour­nal­ist cov­er­ing cli­mate and U.S. pol­i­tics, and a con­tribut­ing writer at The Inter­cept. Fol­low her on Twit­ter @katearonoff.
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