Paul Krugman’s Economic Theory: Five Basics

From Paul Krugman:

So, in order:

1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.

About Scot McKnight

Scot McKnight is a recognized authority on the New Testament, early Christianity, and the historical Jesus. McKnight, author of more than forty books, is the Professor of New Testament at Northern Seminary in Lombard, IL.

  • Steve Billingsley

    I don’t really see anything here that I disagree with in theory – except a couple of things from a comment perspective.

    1. Where has austerity actually been tried outside of countries that were fiscal basket cases and eaten up by corruption to begin with? (If you say the UK or reference the sequester – you lose. A decrease in the rate of increase of spending isn’t austerity – it is merely less stimulus). Repeat after me – there is no austerity in the US.
    2. The issue with stimulus spending in the US (and I can’t really speak to other countries as well) isn’t that a lot of money was spent. It is how it was spent. Far too much stimulus spending only went to politically connected constituents/cronies and to prop up balance sheets of institutions and profit margins of corporations. There is a ton of capital available that is private sector capital – but it is just sitting on the sidelines (for lots of reasons – risk aversion, greed, the inability to decipher the mixed signals that Washington is sending and more)

    The issue with this kind of theory is that it is just that – theory. It doesn’t end up bearing much resemblance with reality. We have increased spending significantly since 2008 – but we also raised taxes this year (the top marginal rates and the expiration of the payroll tax cut) – in classic Keynesian formulations you raise taxes and cut spending during boom cycles and cut taxes and raise spending in bust cycles. Nowhere do you raise taxes and increase spending at the same time. Again – mixed signals which result in what we have – slow, muddled growth without any recovery of wages among anyone other than the wealthy and politically connected.

  • http://www.Yeshua21.com Wayne

    [5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.]

    But, historically, that day never comes. The good times are never good enough… There is always pressure to spend more and “good reason” not to put a damper on the (always) “fragile” econcomy.

  • http://wheatonblog.wordpress.com/ Peter Green

    There’s a lot wrong with this, but I’ll point out the most obvious and most fundamental. It’s in his first point, from which his other points flow.

    If you “slash spending” and I “slash spending,” that money doesn’t cease to circulate in the economy, as Krugman disingenuously implies. Most people save that money in banks, or invest it in stocks, etc. Thus, it *reenters* the economy to become *income* for someone (e.g., an entrepreneur, employees or a start-up company, owners and employees of companies that provide goods and services to start-up companies and other recipients of investment, etc.).

    So no, “slashing spending” does not necessarily decrease income. And no, the government should not spend money when it is already in debt. “The government” doesn’t have “money.” Tax-payers do. For the government to spend money it doesn’t have in order to stimulate the economy based on a flawed economic worldview is deeply problematic. Furthermore, it goes against everything the Bible says about debt. The fact that Krugman’s economic worldview produces moral decisions directly opposite of what the Bible says should cause serious questions, to state it mildly.

  • http://www.jonrising.blogspot.com Jon Rising

    Scot,

    When are you planning on posting a summary of Thomas Sowell’s economic theory?

  • Klasie Kraalogies

    This is the “paradox of thrift”. I’m in two minds about it – it makes sense, but there is also some valid criticism. When the money is not being spent, where is “sitting”? If under the mattress (or in gold bars in the backyard – yes, I’m looking at you, gold bugs), then sure, the paradox is entirely true, since the overall, accessible money supply is being reduced. However, if it is in the bank, or in investments, then no – because while the paradox takes only consumer spending into account, it doesn’t consider business investment, or the fact that a large cash supply might enable banks to lend money at low rates, thus encouraging business investment, which will restart the business cycle. Of course, this also assumes that the banks are not in a position of creating a liquidity trap – that is, holding large cash reserves rather than increasing lending.

    Increasing government spending might do the same, but this leads to less money (providing there is no “quantitative easing”, which is inflation inducing) being available for business. Thus government spending, which is not necessarily productive spending (too often we have subsidies and pork barrel spending), might well be less efficient in breaking the down-cycle. IF government however has invested in a rainy -day fund (such as Norway, or Alberta), THEN government spending would help, because it is not deficit spending.

    Basically, when considering recessions and depressions, one must look not just at spending per se, but at the overall money supply and liquidity.

  • Scott F

    Where does the money go if it is not being spent. How about $145 billion that Apple is currently sitting on?

    “Overall, corporate-cash stockpiles at U.S. non-financial companies rated by Moody’s grew to $1.45 trillion in 2012, up 10% from 2011, according to the report.”

    (http://247wallst.com/2013/03/19/corporate-cash-piles-up/#ixzz2SANMUdz2)

  • Joe Canner

    It seems to me that the problem pre-2008 was not that people were spending instead of saving, it was that they were going into debt to spend. This kind of “stimulus” only works if there are assets to back up the debt (i.e., stable home prices, stable or improving income, etc.)

    Accordingly, the problem now (compared to pre-2008) is not that people aren’t saving instead of spending (although there may be a few who are making some feeble attempts to protect themselves against the next downturn), but rather that people aren’t borrowing as much: bad credit, declining property values, wiser money management, etc. Lenders and borrowers are both understandably spooked into inaction.

    I’m not sure if more government spending is the answer, but it seem fairly clear that less spending is not the answer, and absent any other bright ideas, we are in for a long slow recovery until people have saved what they need to save and restored their credit-worthiness to the point that they can start spending once again.

  • Eric

    the goverment doesn’t “own” or have any money of it’s own. assuming the goverment is playing by real world rules, the only thing it owns it what it taxes or takes from the people. so for the theory to work, the goverment has to take money in order to give money or have a stimulus. i don’t think anyone can aruge that the goverment spending my money on bogus research or “shovel ready jobs” is a better way to spend my money than for me keep more of my money (through tax decreases) and buying a tv or gas or food. what we really need to look at is why some are stuffing their mattresses with cash. it isn’t becasue they want to “hurt” the economy but because they are afraid they will need that moeny in the future as they continue to see thier take home pay go down and cost of everything go way, way up. it is easy math, if the goverment was more concerned with getting people higher take home pay, and working tirelessly to decrease the cost of stuff like gas and food, we would see more people spend that extra money on stuff, and that would create the damand for jobs and new merch to keep up with demand which means there are more people working, and paying taxes. the math works every time. it is better to get a low percet of taxes from a 1,000 people working rather than a high percet of taxes from 10 people becasue the other 990 are unemployed or under-employed. if you truly believe the goverment can spend your moeny (or Apple’s or whoevers) better than you can and stimluate the economy better than you can then you are a step away from socialism. why not then just give all our money to the goverment and trust it to give us what we need?

  • http://wheatonblog.wordpress.com/ Peter Green

    Eric is right, the only money the government has, is that which it takes in taxes. For the government to spend money when it is in debt (which it is), is to spend money that it plans to recover in *future* taxes. In other words, government spending now means more government taxation later. Your grandkids will pay later for your “stimulus” now. That doesn’t make good government policy. That makes greedy grandparents.

    So yes, if you want to tax your grandkids so that you can buy that house you can’t afford because of government “stimulus”, by all means, subscribe to Krugman’s economic policy.

  • http://azspot.net naum

    Eric is right, the only money the government has, is that which it takes in taxes. For the government to spend money when it is in debt (which it is), is to spend money that it plans to recover in *future* taxes. In other words, government spending now means more government taxation later. Your grandkids will pay later for your “stimulus” now. That doesn’t make good government policy. That makes greedy grandparents.

    No. In past periods of U.S. economic history debt was indeed swallowed up by an expanding economy and its burgeoning aggregate demand — debt ratios were higher in the Revolutionary period and in wake of WWII. We never “paid down” this debt, it simply got swallowed up in a growing economy.

    All of these are valid points. Historically, empirical evidence shows that austerity is the wrong remedy for depressed economies. Austerity measures should be reserved for good economic times — running a national budget is not akin to running a household budget and to think so is to commit a grievous error. Sure, debt should not spiral out of control, but there is truth in spending your way out of an economic crisis. Some argue that we have done that, to a degree, but Keynesian devotees like Krugman would point out that that stimulus was misdirected into banking interests / other elites / etc. instead of where it would have the greatest velocity and multiplier effect.

    Again, examine the nation’s empirical economic history and this truth indeed borne out.

  • http://wheatonblog.wordpress.com/ Peter Green

    To say that it got “swallowed up” is a nice euphemism. It allows us to blissfully ignore *how* it was swallowed up–i.e., through *taxes*. Granted, tax revenue increased as the economy expanded, but the debt wasn’t just magically “swallowed up”.

  • Daniel S

    As a 20-something young man, I’m of the opinion that the policy response to the 2008 financial crisis has amounted to something of an unintentional war on the young. The main goals seem to be to return asset values (primarily housing and stocks) to their previous levels, at least in nominal terms, and bring unemployment back to normal. And the first goal has seen much more success than the second. Now, having housing prices shored up is great if you own a house–and can sell it before the bubble bursts again–but for those of us who, traditionally, would be looking to buy our first houses sometime in the next half decade or so, lower housing prices would have provided a silver lining to the economic crisis. Because otherwise, it’s pretty grim for my generation. The youth unemployment rate is higher than society at large (I have a job but I realize many don’t) while we’re at a stage of life where gaining experience and a bit of money in the bank is very important. And we’ll be paying the bills for this for our whole working lives–those of us who manage to get established in the workforce at all, that is.

  • Steve W.

    One of the problems with Krugman’s analysis (and there’s certainly more than one) is that he treats all government spending on equal terms. For him it doesn’t matter whether the State spends more on infrastructure or on studies on the mating rituals of Louisiana swamp toads, as long as the spending goes up, the economy will rise with it. This is obviously wrong.

    Certain programs like improving roads, expanding fiber optic networks for internet access, repairing dated city heating systems not only provide jobs and employment, but also provide tangible benefits to the business community that lead to more business investment. Toad studies, or poetry festival subsidies, or even the expansion of the food stamp program at their best offer temporary jobs that will not help the economy in the long term, and at their worst simply serve as redistributionary mechanisms that end up mitigating the economic impact because of the huge amount of bureaucracy involved (there is a reason why downtown Washington D.C. has been booming over the past 5 years).

    The reality is that a smaller stimulus in 2008 that was more directly targeted to the infrastructure projects would have improved the economic environment far more than the bloated 870 billion stimulus package that was passed. It doesn’t matter how much you spend, if it’s not on the right things it won’t make a bit of difference.

  • metanoia

    Economics is similar to nutrition. You eat more than you burn, you gain weight. You spend more than you take in, you go bankrupt. Good times or bad times, we permit our government to do us a disservice when allow it to spend $1.40 for each dollar it collects in taxes.

  • Kyle J

    @Wayne #2

    That day came in the 1990′s. Taxes were raised and spending was cut during a period of economic expansion and the budget was balanced.

  • Kyle J

    @Jon #4

    Why don’t you find a good piece summing up Sowell’s overarching views/prescriptions and post them here? People can judge their value side by side.

    Agree or disagree with Krugman, his predictions have been pretty solid over the last decade-plus.

  • metanoia

    Kyle @15. “Agree or disagree with Krugman, his predictions have been pretty solid over the last decade-plus.” If that were true, there wouldn’t be so much disagreement. :-) A side by side comparison of Sowell and Krugman would be an exercise in stark contrast. But the simplest economic policy that I think everyone can agree on is that if you spend more than you take in you’re eventually going to get in trouble. Right now we’re in survival mode, but our children and grandchildren are in for a devastating era of taxation.

  • Kyle J

    @metanoia

    Key word is “eventually.” As Krugman pointed out, spending does have to balance with revenues in the long term. So you cut spending and raise taxes in a balanced way over a long term period, as the president has proposed.

    Regarding predictions, do you remember the predictions from the right that the Bush Sr. and Clinton tax increases would lead to economic ruin (and the Bush Jr. tax cuts would usher in economic prosperity)? Or the constant predictions that inflation is about to spike at any moment if we don’t drastically cut spending? Those failed predictions have, sadly, not changed many minds on that side of the debate.

  • http://azspot.net naum

    To say that it got “swallowed up” is a nice euphemism. It allows us to blissfully ignore *how* it was swallowed up–i.e., through *taxes*. Granted, tax revenue increased as the economy expanded, but the debt wasn’t just magically “swallowed up”.

    Was the state of living for children and grandchildren better or worse in the wake of post New Deal / WWII Keynesianism? Did it not usher in an ubiquitous middle class hitherto unprecedented, a state of which is taken for granted? Until the present time, when policies of monetarism and austerity are holding sway…

    …and your “through *taxes*” obfuscates the truth about velocity of money and multiplier affect of aggregate demand that drove a robust economy and an economic expansion that made most Americans (other than legacy of Jim Crow and pockets of rural poverty) regard increasing affluence as a natural progressive order.

    Again, just examine the nation’s empirical economic history and without resorting to parlor tricks or blind partisanship, it hard not to see Krugman more spot on than his naysayers. Keynesianism may not be faultless, but it has a far superior track record than those theories its detractors have flaunted through the ages.

  • scotmcknight

    Kyle J, you got one of his summaries? I wonder if Sowell would do such a thing.

  • Kyle J

    @Scot

    Ironically, I’m pretty sure the last time I read anything by Sowell was whenever you last linked to him.

    But a quick Google search turns ups this piece on economic stimulus:

    http://townhall.com/columnists/thomassowell/2009/01/06/the_economic_stimulus/page/full/

    It ends with a dire warning about inflation. That was four years ago.

  • Phil Miller

    1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

    I have heard Keynesian economics described as trying to increase the depth of the shallow end of the swimming pool by taking a bucket of water from the deep end and pouring it in the shallow end. For some reason, these statements remind me of this. Of course, for most families, spending is linked to their income. But it seems to me that what Krugman is saying is trying to do (which all Keynesians end up doing) is separating economic growth from real value.

    I’m not a person who gets all upset about the gold standard or all that, but whenever I read Krugman, I get the same feeling I had when I made the mistake of letting a vacuum salesman in my house.

    Was the state of living for children and grandchildren better or worse in the wake of post New Deal / WWII Keynesianism? Did it not usher in an ubiquitous middle class hitherto unprecedented, a state of which is taken for granted? Until the present time, when policies of monetarism and austerity are holding sway…

    I don’t believe Keynesian economic policies had much to do with it. America was in a unique position post-WWII. We were able to produce stuff that the world wanted, and we had a huge work force that could do it. Now, one could argue that the wealth distribution in the country itself was more equal because of more progressive tax policies, but that up for debate as well.

  • Kyle J

    @Phil

    To me, the commentators claiming we’d be better off if the govenerment made no attempt to deal with short-term economic recessions, we dramatically scaled back the social safety net, and we tied the value of our currency to an arbitrary mineral we pull out of the ground come across more like vacuum salesmen. The Nobel Prize thing should carry at least a little weight, no?

  • JohnG

    For the last 4 years krugman has been consistently right and his critics have been wrong.

  • bob

    No one says “the economy is like a family”. That would be a strange metaphor, indeed! Some have compared the *government* to a family, suggesting that living within means has benefits, and living beyond means has detriments. Were I allowed to legally print money for my family to use, I would do it quite regularly. Were I allowed to print money next year to pay for this year’s debt, I would do that too.

  • Kyle J

    @bob

    The government doesn’t “print money” to pay off debt. It does to boost demand on a short-term basis.

    http://krugman.blogs.nytimes.com/2013/02/04/money-wealth-and-models/

    There’s no disagreement about whether the federal government should reduce debt in the long term (just about how to do it). The disagreement is about whether the government should make any attempt to smooth out the economic cycle at all.

  • Glenn

    I wonder how much of this is still influenced by an older way of thinking that has not kept up with current trends. I am uncomfortable with the notion that we can spend now with the presumption that our economy will later return to a place of such strength that we will then “swallow up” the debt we have racked up. I have heard more than one prominent business leader make note of the fact that U.S. based corporations no longer have any reason to be tied down by the U.S. nor do they need to have any specific loyalty to the U.S. in our current world.

  • Kyle J

    Krugman has more on the failed inflation predictions of conservative economic observers in his column today:

    http://www.nytimes.com/2013/05/03/opinion/krugman-not-enough-inflation.html?partner=rss&emc=rss&_r=0

  • T

    I’m not going to comment on the original post’s economic theory, because it’s beyond a comment section. But I will say something about the oft-repeated refrain that the government doesn’t have any money, it only has what it takes from taxpayers. First, as matter of property law, the federal government does have money and a great deal of property. Further, as a constitutional matter, it has always had such power and right, the fact that such is fueled, though not exclusively, through taxes, does not make its property rights any less valid. Secondly, yes, a large part of the government’s funds comes from others via taxes. And mine comes largely from my clients. All of our monies come from others as we do what we do. Regardless, this idea that that the government’s money is ill-gotten or stolen, especially among Christians, needs to stop.

  • http://wheatonblog.wordpress.com/ Peter Green

    T @29, saying that the government’s money only comes through taxation, which is what I said, is not the same thing as saying that it is “stolen,” which is what I did *not* say. I acknowledge that the government has both a legal and a Biblical right to tax it’s citizens. However, that Biblical right has serious constraints on it (e.g., not taxing the poor to the benefit of the wealthy, which is what almost all government “stimulus” does, being a good steward of the money it has taken from its citizens–again a standard that government stimulus almost never meets).

    Kyle J @26, the debate isn’t so much about whether the government *should* smooth out the economic cycle (though that is an important issue), but about whether the government *can* smooth out the economic cycle. In other words, does government intervention exacerbate or mitigate the economic swings? As for the Nobel Prize, that carries about as much weight as Obama’s “Peace” Prize with me.

  • http://faithandfood.morizot.net/ Scott Morizot

    The points Krugman outlines above are simply Macroeconomics 101. There shouldn’t be any controversy over them. The fact that there is such a controversy (and that so many countries are behaving so stupidly) appears to be a result of ideology and pyschology with no connection to anything resembling reality.

    Krugman gets a lot of attention, but he’s hardly the only economist advocating standard macroeconomic theory since 2008. I’ve been reading there statements and predictions as well as though advocating the austerity lunacy. The predictions of those on the austerity side (cutting spending will be expansionary, inflation will run wild, etc.) as well as those on the side of standard theory (particularly with the insights gained from the Japanese liquidity trap that began in the 90s).

    Krugman, Bernanke, and others advocating standard economic theory have largely been correct in their statements and predictions. Those on the other side have been utterly, completely, and empirically wrong.

    Now, I come from a family of scientists, so empirical evidence means something to me. Unfortunately, it doesn’t appear to mean much of anything to those actually implementing policy.

    I’ve been impressed by how impervious ideologues are to facts, though. That’s been truly eye-opening for me.

  • Kyle J

    @Peter #30

    Do you honestly believe the economic crisis of 2008-2009 wouldn’t have been deeper if the government hadn’t stabilized the financial/auto sectors and kept state and local government from cutting employment even more than they did?

    Should the federal government have simply let the Great Depression run its course?

    Do you observe that the austerity measures imposed by most major European countries have helped their economies?

    It’s very hard to argue with a form of policy nihilism that offers basically no empirical evidence to supports its views.

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/01/the-nihilism-of-david-stockman/

  • BradK

    A more recent Sowell article that is somewhat related to the Krugman comments can be found here:

    http://jewishworldreview.com/cols/sowell032613.php3

    Sowell blogs regularly at Jewish World Review.

  • http://wheatonblog.wordpress.com/ Peter Green

    Kyle J and Scott M, “There are no brute facts.” All facts have to be interpreted. Your “empirical evidence” is not self-interpreting as you seem to think. There are reasonable people, including (gasp!) educated people who look at the exact same facts and come to different conclusions. Including different conclusions about WWII and the cause for the end of the Great Depression. And as far as our current economic crisis goes, going back to 2008 is hardly meaningful. It has to be set in the context of our economy and governmental policies that go back at least as far as Clinton, if not further. There is good reason to believe that the depression/recession we have been in was caused by governmental “intervention” in the housing market. Pointing to European countries as if they refute *my* position is ironic.

    Arguing each and every one of these points is beyond my ability, or time. The point, here, though, is that to claim that those who disagree with you are “ideologues” or are completely blind to any empirical data is both offensive and a modernist epistemological power-play to silence and shame those who disagree with your interpretation.

  • Kyle J

    @Peter Green

    Facts absolutely have to be interpreted. And at some point predictions have to be judged. When a particular ideological movement constantly goes to the same prediction well–tax increases will always cause economic ruin, an inflation spike is always just around the corner–and consistently turns out to be wrong, their interpretation of the facts becomes much less credible.

  • Kyle J

    @BradK

    Same conclusion from Sowell, just four years later: government intervention is sure to cause inflation. My guess is he’ll write the same column four years from now when the economy goes into recession, as it is certain to do periodically, and whoever is president (or fed chair) at the time attempts to intervene.

  • bob

    @kyle #26

    i think you latched onto my naive example and not my larger point. peace.

  • Phil Miller

    Krugman gets a lot of attention, but he’s hardly the only economist advocating standard macroeconomic theory since 2008. I’ve been reading there statements and predictions as well as though advocating the austerity lunacy. The predictions of those on the austerity side (cutting spending will be expansionary, inflation will run wild, etc.) as well as those on the side of standard theory (particularly with the insights gained from the Japanese liquidity trap that began in the 90s).

    What other options besides austerity does a smaller country that has run up so much debt that it can barely afford to pay the interest on that debt have? Countries like Greece, Spain, Ireland, etc. cannot simply continue to borrow money. They can promise higher interest rates, but at some point, investors realize that they aren’t going to be getting their money back. The other option of simply injecting more money in the way of inflation isn’t really something that will work very well in the Eurozone as it stands now.

  • http://faithandfood.morizot.net/ Scott Morizot

    Mark Thoma excerpts and comments on two essays by Romer and Stiglitz in this post:

    http://economistsview.typepad.com/economistsview/2013/05/romer-and-stiglitz-on-the-state-of-macroeconomics.html

    Macroeconomics is different from many sciences in that there’s no way to establish a controlled experiment. Instead, economists develop models from actual crises and similar significant events and make predictions based on those models. However, as Stiglitz points out, it’s not like we don’t have abundant data from which to develop those models. We do. Moreover, predictions made from models macroeconomists use can be judged empirically. Their predictions are either right or they are wrong. In this current global debacle, those who stuck with Macroeconomics 101 (perhaps with tweaks like the liquidity trap model learned from the Japanese fiscal crisis) were almost always right or mostly right in every positive and negative prediction they made. The economists who did not (often reviving theories and models that had been proven wrong already in the past) were wrong. And not just a little wrong. Wildly, utterly, flagrantly, and outrageously wrong in almost every positive and negative prediction they’ve made. The fact that they retain any influence and credibility, and they do, brings the credibility of macroeconomics as science into question. Not because accurate models based on the data can’t be created, but because there is obviously no credible discipline of peer review in the field. Models and theories resoundingly proven wrong persist and are treated credibly. It’s ludicrous.

    Mr. Green, I think I agree with your self-assessment about your ability to argue these points. You’re certainly vocal, but in and of itself, that’s meaningless.

    Ireland is a good example, Mr. Miller. Before the crisis, they had a budget surplus. There is no story of “running up debt”. The global fiscal crisis wrecked their country. Of course, they lacked their own currency, so couldn’t do what Iceland did. Iceland is recovering much better than Ireland as a result. That’s really the fundamental problem with the Eurozone. Countries retain their own separate, political fiscal policy but do not have their own currency. So they are trapped without the options that countries with their own currency have. (Japan looks like it has finally learned its lesson and is taking the sort of actions now it probably should have taken much sooner.)

    We have our own currency. Our problem right now is a lack of demand driven by high unemployment. The Fed has done all it can, but its powers are limited during a liquidity trap. Instead of bolstering low private demand with increased government employment and spending — as we have done in even the most recent fiscal crises in the Bush years, we have negated any gains the private sector has managed to make through a precipitous drop in government employment (mostly in education and first responders). And we are inflicting tremendous pain on people as a result. The only reason this didn’t turn into another Great Depression is because the automatic spending for unemployment insurance and food assistance blunted some of the worst of it. But we aren’t out of the woods yet and the ideologues seem determined to do their best to push us into an actual depression. The jury is still out on whether or not they will succeed.

  • http://www.chiasticstructures.com Todd Moore

    “any explanation is better than none….” –Friedrich Nietzsche

  • Kyle J

    @bob #37

    What was your larger point? And how does it substantively differ from “Yes, the government must pay its bills in the long run.”

  • Todd Moore

    Before concluding that Nobel prize winning Paul Krugman must be correct, try reading blogs like John Mauldin or Mike “Mish” Shedlock. This link might be termed as a rant, but Mish at least makes his point succinctly:

    http://globaleconomicanalysis.blogspot.com/2013/05/intellectual-dishonesty-and-insanity-on.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29