jack

Government Debt

Krugman takes the reasonable-sounding but very surprising position that government debt is Not All That Scary Really. He says that the US government incurred MASSIVE debt in WWII, and that was never paid back -- but now is a tiny portion of the national debt.

Runaway debt is a problem, as is debt that is simply wasted (eg. spent on useless projects, subsidies to people who don't reinvest it, etc). But if the money is sensibly invested in the economy or infrastructure somehow, even via dubious projects such as a word war, it can be a good thing.

And he thinks in the current situation, the government should not be scared of more debt unless they're actually likely to default (which is hopefully still unlikely). This will need to be paid back by taxing more in the future, but hopefully that will be accomplished without raising taxes, but because the economy is much bigger.

I want to believe this because (a) it sounds reasonable and (b) it aligns with my ideology, but I know it's antithetical to out default assumption that it's fiscally irresponsible to borrow too much. But that that's different when we're looking at an economy as a whole (when net foreign debt is surprisingly small), when "paying it back" doesn't mean "giving it away to strangers" but "returning sensible dividends to pension schemes, investment accounts, etc, etc"

Gold standard

Krugman didn't really mention this, but it helped me think about it.

As I understand it, the advantage of the gold standard is if you think the government is prone to imploding, and may take the currency with it, having money backed by something that easily transfers internationally or privately is useful.

However, the disadvantage is that the effects of the government and central bank adjusting the money supply and interest rate have generally been better than letting them be determined randomly by the number of gold mines discovered, and a gold standard gives up on that.

It is sort of a scary question. Do we know enough about the economy that our attempts to adjust it are better than just fixing it to gold so we can't make matters worse? But despite some false starts, it seems like in general we DO do better, and there are a number of proto-depressions in the last 80 years that probably WOULD have happened if the government and central bank hadn't reacted with changes to the money supply.

I haven't read much economics, but I was interested to read "End this depression now". Published a couple of years ago, but sadly still equally relevant.

Krugman is a columnist, blogger, and author (and nobel prize winner) about economics, and left-wing by American standards.

The book sounded convincing to me, but I don't know enough to vouch for the validity, or the correctness of my summary. I hope someone can offer a more authoritative opinion, especially including people prone to agree and prone to disagree.

The current depression in UK/US and similar countries

As I understand it, the short version is, Krugman says not every depression is based on the same underlying causes as the great depression, but this one is. He wasn't originally convinced, but he saw how this depression happened, and it was just like Keynes described in the great depression.. And that the solution, like in the great depression, is simple even if not necessarily easy: for the government to spend a lot of money.

Government creating money

In the old days, government increased the money supply by literally printing money. Since WWII, the same effect has been achieved by changing the amount of money that the central bank will lend to large banks and the regulations on how much money they're allowed to lend out, and by adjusting the interest rate.

Some people are terrified of high inflation because too much causes hyperinflation, which causes Hitler. This is a serious risk (I think hyperinflation happened in Argentina, but they recovered surprisingly well), but only if the economy is otherwise collapsing and the government chooses to GO ON printing money. In fact, the policies of the last 80 years have been surprisingly successful at keeping inflation at a small but steady rate, and we are in no serious risk of hyperinflation -- in fact we probably need HIGHER inflation, but governments are too scared to push for it.

Usually the government and central bank balance unemployment and inflation by adjusting the money supply and interest rate. This is usually but not always the biggest factor in the economy.

However, we recently had the problem that the central bank lowered the interest rate to near zero, and the government increased the amount of loans available to the large banks, but it still wasn't enough. The money theoretically available to the banks wasn't used, because they were too scared of a repeat of the housing crash, and it didn't get loaned or invested, it just got sat on. This is called a "liquidity trap".

Krugman says that the answer is to go further: if banks won't put money into the economy, the government should do it directly. This will increase government debt, but assuming the economy grows, the effect will still be negligible.

Some people think that the solution is the opposite: that we've run out of money, or that people aren't trained for the jobs we need, and the answer is massive austerity measures. Krugman says this is wrong. Unemployment hit EVERYWHERE, in a manner consistent with "people not creating jobs" not "people having the wrong skills".

Who gets the money

This is the bit that arguably is ideological. In terms of economics, it doesn't matter who gets the money as long as they spend it or invest it, not just sit on it.

So Krugman (and I would agree) says an obvious place to start would be putting back the social safety net the government did cut back on. That would (a) be humane (b) restore a status quo (c) be good the economy for all the usual reasons I think a social safety net is good (d) work, because anyone drawing any sort of benefits (work-related or not) is almost certainly going to need them, and hence spend them, creating economic activity, not sit on them.

Giving the money to large institutions which will sit on them, or use them to reduce the cuts on executive pay or dividends, the proceeds of which are likely to be saved not invested, won't help, because the money will not be used.

However, the UK government has (apparently) been giving subsidies to random companies in the form of guaranteeing loans to them for specific infrastructure projects. I think the "subsidise random companies" model has good aspects on a small scale (because it helps small businesses grow) but is a bad idea as the basis for an economy (because it encourages companies to compete on "how much can we bribe politicians to subsidise us" rather than "how much can we actually do useful stuff). However, even if it's stupidly implemented, it's equally good from an "injecting into the economy" standpoint.

However, we need a lot more of it. From what I can tell, if Krugman is right, we need to reverse the austerity and invest even more money, and many people are still arguing for further cuts.