How it Works—Five points from Krugman

It’s not always like this, where I advocate increased government spending. Nor do I agree with everything Paul Krugman in spite of the fact I will never achieve or even approach his credentials. He has held his position since the start of this recession. He as been critiqued, contradicted, and misquoted. As the dust clears, he is proven correct. Unfortunately there are still a few quibblers.

This morning Mr. Krugman posted five points in his Blog titled The Ignoramus Strategy as reply to some of the quibbles. The five points below from his blog today are the foundation of the argument. They are not always true, but they fit this situation and time…he makes that point too. If you’re new to the issue or want to shore up your discussion points, these few short paragraphs are the summary of how the economy works differently than our families’ budget, what should be done, and why. Paul Krugman, enjoy:

“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.”


2 thoughts on “How it Works—Five points from Krugman

  1. Ken Simpson

    Good points by Professor Krugman. Yes, the Federal Government’s budget and spending are not the same as a household’s or a business’s spending or budget. The Federal Government’s deficit is a direct injection (to the penny) of dollars into the private sector. These dollars allow the private sector to spend and save (or pay down debt). Furthermore unlike the private sector (households and businesses) which is a currency user, the Federal Government is a currency issuer though its budget deficit and Central Bank operations. The Federal Government can never run out of dollars and can always pay its debts as long as its debts are in dollars. Congress in an act of madness can make the decision not to pay Federal debts (spending and borrowing) it has authorized but this would be a purely political decision. Furthermore the Federal Government, as a currency creator, does not have to balance its budget over the business cycle. As long as there is unemployment (the private sector refuses to hire all those willing to work) then the Federal government should run a deficit in order to bring the economy to full employment and thereby full production of wealth. Anything less is theft from current and future generations. Unemployment is the thermometer on the wall and the Federal deficit is the thermostat on the wall. Lastly, if when the economy reaches full employment and the combination of private sector and government spending thereby begins to create an amount of unwanted inflation the government can cut its spending or raise taxes or a combination of both.

    1. Steve Post author

      Ken, great points, and you allude to the area within #5 where we may disagree with Krugman depending on how those bills are to be paid with “the federal government can never run out of dollars and can pay Federal debts as long as its debts are in dollars” It will be interesting to see what the directions will be from the mainstream when/if we really get out of this recession. Nicely put!


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