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

Kate Aronoff

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.”

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Kate Aronoff is a staff writer at The New Republic and author of Overheated: How Capitalism Broke the Planet — And How We Fight Back. She is co-author of A Planet To Win: Why We Need a Green New Deal and co-editor of We Own the Future: Democratic Socialism—American Style. Follow her on Twitter @katearonoff.

Democratic Rep. Summer Lee, who at the time was a candidate for the state House, at a demonstration in Pittsburgh for Antwon Rose, who was killed by police, in 2018. Lee recently defeated her 2024 primary challenger.
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