Krugman has a good column today about the unbelievably cheap money available to our government to use to invest in the future (win the future?) if we could just get these deficit fetishists to STFU:
…[I]nvestors are, in a sense, offering governments free money for the next 10 years; in fact, they’re willing to pay governments a modest fee for keeping their wealth safe.
Now, those with a vested interest in the fiscal crisis story have made various attempts to explain away the failure of that crisis to materialize. One favorite is the claim that the Federal Reserve is keeping interest rates artificially low by buying government bonds. But that theory was put to the test last summer when the Fed temporarily suspended bond purchases. Many people — including Bill Gross of the giant bond fund Pimco — predicted a rate spike. Nothing happened.
Oh, and pay no attention to the warnings that any day now we’ll turn into Greece, Greece I tell you. Countries like Greece, and for that matter Spain, are suffering from their ill-advised decision to give up their own currencies for the euro, which has left them vulnerable in a way that America just isn’t.
So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt.
And governments should be granting their wish, not obsessing over short-term deficits.
Obligatory caveat: yes, we have a long-run budget problem, and we should be taking steps to address that problem, mainly by reining in health care costs. But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.
You don’t even have to make a Keynesian argument about jobs to see that. All you have to do is note that when money is cheap, that’s a good time to invest. And both education and infrastructure are investments in America’s future; we’ll eventually pay a large and completely gratuitous price for the way they’re being savaged.
That said, you should be a Keynesian, too. The experience of the past few years — above all, the spectacular failure of austerity policies in Europe — has been a dramatic demonstration of Keynes’s basic point: slashing spending in a depressed economy depresses that economy further.
So it’s time to stop paying attention to the alleged wise men who hijacked our policy discussion and made the deficit the center of conversation. They’ve been wrong about everything — and these days even the financial markets are telling us that we should be focused on jobs and growth.
Unfortunately, all these alleged wise men are working overtime in Washington, behind the scenes, to persuade the US congress that they need to slash even more and lower tax rates — and our elite media seem to think they are the Sully Sullenbergers of the economy.
Meanwhile, if you were hoping for growth, keep hoping. Today’s GDP numbers reveal that we are as flat as a pancake:
IF RECENT data left any doubt, America’s Bureau of Economic Analysis (BEA) dispatched it this morning: the American economy slowed sharply in the second quarter, adding to the weakest recovery of the post-war period. The BEA’s advanced estimate of economic growth found that real GDP rose at just a 1.5% annual pace in the second three months of the year, down from 2.0% in the first quarter and a surprisingly strong fourth quarter performance of 4.1%—the fastest three-month spurt of the recovery. The advance estimate is subject to two revisions in coming months.
Growth slowed across most major categories. Personal consumption grew at a more laggardly pace in the second quarter relative to the first, net exports shifted back to a drag on the economy as import growth outpaced exports. And the government remained an economic albatross; the federal government has reduced its contribution to output for all of the past year, and state and local governments have been a drag for 11 consecutive quarters.
Andrew Sullivan surveyed the reporting and made special note of this one:
Josh Barro sees the report as a reason to vote for Romney:
President Obama doesn’t have a plan for economic growth other than fiscal stimulus, and he can’t get any more of that from Congress. The president won’t engage on monetary policy or housing policy, and he has turned up the volume on his hare-brained industrial policy ideas that would only make the economy worse. That’s why, despite all hismanifesthorribleness, I might still vote for Mitt Romney. Our best hope with Romney, even if it is a thin hope, is that he has a secret plan to fix the economy. It’s no secret that Obama doesn’t have one.
That has to be one of the dumbest paragraphs I’ve read this election season. The reason demand remains flat is pretty obvious: deleveraging from the amount of public and private sector debt accumulated before the recession and during it takes time. And trusting some bizarre “secret” plan to rescue the economy is just nuts. Romney’s official plan is to be even more draconian than David Cameron in Britain, where premature austerity has now led to a serious double-dip. The actual plan – because Romney is nothing if not a cynic – will likely be more Keynesian stimulus through Pentagon spending and a new war, alongside more debt-fueling tax cuts. In other words, in my view, Romney will be more deficit-friendly than Obama in the near-future, while blocking any Grand Bargain on future spending because of theological intransigence on tax cuts.
I agree with him that Barro’s logic is daft. Hoping for a “secret plan” is right up there with believing in Santa Claus, particularly since the Republicans have a very limited playbook. But I doubt seriously that Romney’s not going to come through with a draconian austerity plan. (After all, he and Cameron are already in a dick measuring contest over the Olympics. Is Mitt going to let that fop be more of a slash and burn conservative than him? I doubt it.)
But Sullivan might be right about the wars. They like to do that on a non-Keynesian basis, so I see no reason to think it’s part of his economic plan, however. (And God help me, let’s hope there’s no Grand Bargain either way.)
Krugman weighed in on the GDP numbers on his blog this morning:
Here’s a chart. It shows changes since the second quarter of 2009, which was both the bottom of the recession and the earliest point at which you can plausibly say that Obama had any influence on actual policy. I show nonresidential fixed investment — basically business investment — and government purchases of goods and services:
Business investment has actually gone up a lot; maybe you think it should have gone up even more, but it’s not the heart of the problem. On the other hand, we’ve had a lot of cutbacks in government — mainly at the state and local level, but federal aid could have avoided that.
This isn’t an act of God. There have been specific policies enacted at all levels of government that made it happen. And in a rational world they could be reversed. We don’t seem to be in a rational world, unfortunately.