How Big Is the Budget Hole?Something I’ve been meaning to write: get into a discussion of matters fiscal, especially with conservatives, and you’re bound to have somebody declaring that we have a ONE TRILLION DOLLAR deficit, which means that what Americans want from their government is far more than we can pay for, so we must slash the welfare state, etc.. Also, that the hole is so big that taxing the rich can’t possibly make any real difference (although somehow savaging the poor supposedly will).
So I think it’s worth pointing out just how misleading all this is.
Yes, we do have a trillion-dollar deficit. But a large part of that deficit is attributable to the depressed economy. Reasonable estimates say that we have an output gap of something like $900 billion a year — yes, some would dispute that, but it’s the estimate I find most convincing. This automatically raises the budget deficit by depressing revenue and leading to more spending on unemployment insurance and means-tested programs like Medicaid — the CBO doesn’t offer a simple ratio on this, but a survey of their estimates suggests that we’re probably looking at $300 billion or more in automatic stabilizers here. Then you need to add in non-automatic but nonetheless cyclically-determined things like extended unemployment benefits and the temporary payroll tax cut. The point is that economic recovery would shrink the budget deficit a lot — almost surely more than $400 billion.
Meanwhile, zero is not the crucial number for the deficit; a much better criterion is the budget balance that would, on a sustained basis, stabilize debt as a percentage of GDP. Now, debt is currently slightly over 70 percent of GDP; with 2 percent growth and 2 percent inflation, that means that a deficit of almost 3 percent of GDP, say $450 billion, is consistent with a stable debt ratio.
Put these things together, and the real hole in the budget is a lot smaller than a trillion dollars — in fact, there may not be a hole at all.
Now, this doesn’t mean all is well. For one thing, if and when the economy recovers we really should be trying to reduce the debt ratio, not just keep it stable. Also, an aging population and rising health care costs mean that under current policy we will have a substantial structural deficit a decade from now, even if we don’t have one currently. So I don’t want to suggest that there is no deficit issue. But it’s nothing like the ONE TRILLION DOLLARS that you keep hearing.
Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed Page and continues as professor of Economics and International Affairs at Princeton University.
Mr. Krugman received his B.A. from Yale University in 1974 and his Ph.D. from MIT in 1977. He has taught at Yale, MIT and Stanford. At MIT he became the Ford International Professor of Economics.
Mr. Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. His professional reputation rests largely on work in international trade and finance; he is one of the founders of the "new trade theory," a major rethinking of the theory of international trade. In recognition of that work, in 1991 the American Economic Association awarded him its John Bates Clark medal, a prize given every two years to "that economist under forty who is adjudged to have made a significant contribution to economic knowledge." Mr. Krugman's current academic research is focused on economic and currency crises.
At the same time, Mr. Krugman has written extensively for a broader public audience. Some of his recent articles on economic issues, originally published in Foreign Affairs, Harvard Business Review, Scientific American and other journals, are reprinted in Pop Internationalism and The Accidental Theorist.
On October 13, 2008, it was announced that Mr. Krugman would receive the Nobel Prize in Economics.
Want some more Krugman? Okay.
Rise of the RobotsCatherine Rampell and Nick Wingfield write about the growing evidence for “reshoring” of manufacturing to the United States. They cite several reasons: rising wages in Asia; lower energy costs here; higher transportation costs. In a followup piece, however, Rampell cites another factor: robots.
The most valuable part of each computer, a motherboard loaded with microprocessors and memory, is already largely made with robots, according to my colleague Quentin Hardy. People do things like fitting in batteries and snapping on screens.
As more robots are built, largely by other robots, “assembly can be done here as well as anywhere else,” said Rob Enderle, an analyst based in San Jose, Calif., who has been following the computer electronics industry for a quarter-century. “That will replace most of the workers, though you will need a few people to manage the robots.”Robots mean that labor costs don’t matter much, so you might as well locate in advanced countries with large markets and good infrastructure (which may soon not include us, but that’s another issue). On the other hand, it’s not good news for workers!
This is an old concern in economics; it’s “capital-biased technological change”, which tends to shift the distribution of income away from workers to the owners of capital.
Twenty years ago, when I was writing about globalization and inequality, capital bias didn’t look like a big issue; the major changes in income distribution had been among workers (when you include hedge fund managers and CEOs among the workers), rather than between labor and capital. So the academic literature focused almost exclusively on “skill bias”, supposedly explaining the rising college premium.
But the college premium hasn’t risen for a while. What has happened, on the other hand, is a notable shift in income away from labor:
If this is the wave of the future, it makes nonsense of just about all the conventional wisdom on reducing inequality. Better education won’t do much to reduce inequality if the big rewards simply go to those with the most assets. Creating an “opportunity society”, or whatever it is the likes of Paul Ryan etc. are selling this week, won’t do much if the most important asset you can have in life is, well, lots of assets inherited from your parents. And so on.
I think our eyes have been averted from the capital/labor dimension of inequality, for several reasons. It didn’t seem crucial back in the 1990s, and not enough people (me included!) have looked up to notice that things have changed. It has echoes of old-fashioned Marxism — which shouldn’t be a reason to ignore facts, but too often is. And it has really uncomfortable implications.
But I think we’d better start paying attention to those implications.
Bernanke’s Non-Stupidity PactSo, how big a deal was yesterday’s Fed announcement? Philosophically, it was pretty major; in terms of substantive policy implications, not so much.
What the Fed did was pledge not to raise rates until unemployment is considerably lower than it is now, or inflation is running significantly above the 2 percent target. One fairly important wrinkle I haven’t seem emphasized: the inflation criterion was couched in terms of the inflation projection, rather than past inflation. This would let the Fed hold rates low even in the face of a blip caused by, say, a sharp rise in commodity prices.
It’s fairly clear — although not explicitly stated — that the goal of this pronouncement is to boost the economy right now through expectations of higher inflation and stronger employment than one might otherwise have expected.
So philosophically, this represents a conversion to the Evans criterion for rates and the Woodford/Krugman doctrine about monetary policy in a liquidity trap.
Substantively, however, there isn’t that much going on here. Basically, Bernanke is promising that the Fed won’t do anything stupid — specifically, that it won’t pull an ECB, and raise rates even though the economy is still depressed and underlying inflation is still low. As it was, however, few people expected the Fed to pull an ECB in any case. That’s reflected in the market reaction: rates actually rose, and expected inflation, as measured by the spread between nominal and real rates, went up only slightly.
Sorry, but this move, while it speaks well of the Fed’s learning process, was not a game-changer.
I could put more of Paul's stuff here, but you can read him for yourself. He's written 20 books and you can read him in the New York Times where he's a contributor. I thoroughly recommend reading him. He's a breath of sanity in a Fox News driven world.
- End This Depression Now! (2012)
- Principles of Economics, 2nd ed. (2009)
- The Return of Depression Economics and the Crisis of 2008 (Dec. 2008)
- The Conscience of a Liberal (Oct. 2007)