Bill Black: Krugman and Obama’s Dangerous Austerity Myths

Yves here. I have to confess, it is frustrating to see Krugman say many of the right things but not be willing to go too far afield of orthodox thinking.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives

Austerity in response to the Great Recession has proven to be an economic weapon of mass destruction. On January 10, 2013, Paul Krugman (Nobel Laureate in Economics) and President Obama launched the same dangerous austerity myth in remarkably similar language.

January 10, 2013
Coins Against Crazies

Lately, revenue has fallen far short of spending, mainly because of the depressed state of the economy. If you don’t like this, there’s a simple remedy: demand that Congress raise taxes or cut back on spending. And if you’re frustrated by Congress’s failure to act, well, democracy means that you can’t always get what you want.

Remarks by the President in Nomination of Secretary of the Treasury

And thanks in large part to [Treasury Secretary Geithner’s] steady hand, our economy has been growing again for the past three years, our businesses have created nearly 6 million new jobs.

And we’ve begun to reduce our deficit through a balanced mix of spending cuts and reforms to a tax code….

I know that many, perhaps most Americans, would read these quotations and think: “of course, they’re repeating obvious truisms.” Both quotations are, however, dangerous myths. My colleagues at UMKC who specialize in macroeconomics have been discrediting these myths for many years, and Krugman has come to the same viewpoint. Randy Wray has just published a book on the subject: L. Randall Wray. Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (2013). Every time someone reads it a Pete Peterson acolyte loses his wings.

Krugman knows what he wrote is a dangerous myth. I assume he fell victim to limits on the word count of his column and did not have time to reiterate the point he has made many times as to why trying to balance the budget in our situation would likely cause a recession.

I have explained many times the reason why austerity in response to the Great Recession is a lose-lose-lose-lose-lose-lose proposition. The losses that austerity causes include reversing growth, causing a recession and increasing unemployment, poverty, inequality, misery (by cutting spending programs for those in need at the time they most need them) and budget deficits.

In a recession, demand is inadequate to produce full employment. The Great Recession caused severe unemployment and a massive loss of income and wealth – above $12 trillion in the household sector. This reduces demand by trillions of dollars – well below the level of demand required for full employment. A Great Recession will cause a dramatic rise in the federal budget deficit because revenues will fall sharply and the demand for government services in the form of unemployment compensation, Medicaid, and food stamps (SNAP) increase.

Austerity consists of some mixture of (net) tax increases and (net) government spending cuts. (Net) tax increases reduce already inadequate private sector demand. (Net) spending cuts directly reduce public sector demand and indirectly reduce private sector demand. The vast majority of government spending does not go to paying compensation to government employees, but to private contractors and vendors. All these recipients then spend, adding to demand for consumption and investment. Increased government spending leads private sector employers to increase hiring and helps produce a recovery from the Great Recession. Austerity has the opposite effect. It is pro-cyclical – it makes the recession more severe and long-lasting by simultaneously reducing already inadequate private and public sector demand. As the recession becomes more severe, underemployment increases – decreasing government revenues and increasing the need for government spending for programs like unemployment compensation, Medicaid, and food stamps (SNAP). This can lead to increased federal deficits. One of the unintended consequences of austerity programs designed to decrease the deficit is that they can increase the deficit – and inflict catastrophic economic, social, and psychological harm.

This explanation demonstrates why Krugman is propagating a myth when he writes that austerity is a “simple remedy” to a budget deficit driven overwhelmingly by the Great Recession. It is far more likely that inflicting austerity will constitute the economic analog to bleeding a patient – malpractice born of ignorance of how systems actually work. Both forms of malpractice make the patient (economy and deficit) sicker.

Obama spread the same dangerous myth about austerity. Obama’s initial policy was influenced primarily by his principal economic advisers, Larry Summers and Christina Romer. They favored stimulus and understood it needed to be much larger than the amount that the White House felt could be passed. Over time, however, Treasury Secretary Geithner became far more dominant as the strength of his personal relationship with President Obama grew. Geithner was a Republican who had become an Independent as a fig leaf. He shared the views of so many elite bankers who he had served as President of the Federal Reserve Bank of New York. Geithner wanted austerity, including severe cuts to social programs and the safety net.

From Zach Goldfarb’s excellent profile of Treasury Secretary Timothy Geithner’s success inside the Obama administration:

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [then chairwoman of the Council of Economic Advisers Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.”

Geithner is not an economist and what he “knows” about economics is mostly dangerous myths. That is one of the reasons why Geithner was such a major contributor to never detecting or countering the epidemic of accounting control fraud that drove the financial crisis, hyper-inflated the housing bubble, and produced the Great Recession. It took some significant arrogance or sexism to tell one of the nation’s most famous macro-economists that she was 180 degrees wrong about macro-economics.

The “$13 billion jobs program” is a sick joke as a response to the Great Recession. Our central economic problem is jobs. The central jobs problem is not a lack of training – it’s a lack of demand. If consumers don’t buy, employers don’t hire. The inadequacy in demand is measured in the trillions of dollars. A trillion is a thousand billion. A $13 billion program is one-one-hundredth of the appropriate size to begin to deal with the Great Recession. Why not adopt a federal jobs guarantee program that ends the waste and injury of people willing and able to work being kept idle? Why is it politically possible to pay people not to work but not to give productive jobs to those who want to work and are able to do so?

President Obama’s comments show that he does not understand these issues. First, he credits job gains to Geithner’s “steady hand.”

And thanks in large part to [Treasury Secretary Geithner’s] steady hand, our economy has been growing again for the past three years, our businesses have created nearly 6 million new jobs.

The opposite is true. Had Geithner had his way and inflicted austerity on us we, like the Eurozone, would have been thrown back into recession and unemployment and misery would be rampant. Three Eurozone nations, Spain, Italy, and Greece, have Great Depression levels of unemployment, particularly among their young. Had Geithner gotten his way and inflicted self-destructive austerity Mitt Romney would now be President and the Republicans would control the Senate. If Geithner had not helped block the push by Romer and Summers within the administration for greater stimulus the U.S. recovery would be far more robust and millions more Americans would be employed. (In fairness, the Republicans and conservative (“Blue Dog”) Democrats who killed the revenue sharing portion of the stimulus bill and insisted that much of the stimulus had to be in the form of the extension of tax cuts for the wealthy, which have a far smaller stimulus effect than alternatives, also cost millions of Americans their jobs.)

Geithner led the administration’s push to end the single-most effective stimulus program – not collecting the full payroll tax.

The payroll tax is an extremely regressive tax, so the partial tax “holiday” was particularly effective in getting cash into the wallets of those who most needed the money and were most likely to spend it on their pressing needs. (A Federal Reserve study was recently released showing the “multiplier” (stimulus) effect of the “holiday” was even greater than anticipated.) Collecting the full tax, which resumed in January 2013, is an act of austerity.

Independent analysts say that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as one million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.

Geithner led the charge to raise the tax and kill the million jobs.

“This has to be a temporary tax cut,” said Timothy F. Geithner, the Treasury secretary, testifying before the Senate Budget Committee this year and voicing the view of many in the White House and on Capitol Hill. “I don’t see any reason to consider supporting its extension.”

The White House has not pushed for an extension.”

Where we saw a million reasons to continue the tax cut, Geithner was unable to see “any reason.”

The federal budget deficit is falling. It fell in absolute dollars in FY 2012. As a percentage of GDP, it has fallen every year since 2009. The deficit fell from 10% of GDP in 2009 to approximately 7% in FY 2012. That is a 40 percent reduction in the deficit as a percentage of GDP during the Great Recession and early years of the recovery.

Paul Krugman authored at least two columns dated January 10, 2013 (at least on their web versions). The column, entitled “The Mostly Solved Deficit Problem” both refutes and propagates the myth I have been discussing.

Here is the key sentence that embodies the incoherence. The context is that he is reporting the projections of the Center on Budget and Policy Priorities (a group of pro-austerity deficit hawks).

As long as the economy recovers, which is an assumption built into all these projections, the debt ratio will more or less stabilize soon.

But that is precisely what CBPP cannot “assume” because CBPP purports to analyze austerity policies. Inflicting those policies is precisely what would reverse the recovery and send us back into recession and increase the deficit. The policy that is “solving the deficit problem” is not inflicting austerity on the Nation. If we continue that policy and regain full employment we will continue to reduce the deficit “problem.” Krugman, however, treats a CBPP myth as if it were fact:

CBPP goes on to advocate another $1.4 trillion in revenue and/or spending cuts, which would bring the debt ratio at the end of the decade back down to around its current level.

CBPP’s austerity plan would do the opposite. It is a weapon of mass economic destruction.

The deficit fell because we improved our recovery through the “automatic stabilizers.” These stabilizers do not need new legislation to create them, so they act “automatically” to respond to a recession (or inflation). In a recession, the stabilizers work in a counter-cyclical (stimulus) fashion to make recessions less severe and long-lasting. The stimulus program expanded this stimulus. As economic growth increases due to the increased demand, unemployment falls and revenues rise while expenditures for the unemployed fall. The result is that the federal budget deficit falls. Had we followed Geithner’s advice and inflicted austerity we would be back in recession and facing growing deficits.
Obama’s next statement about Geithner and Lew compounds the harmful myth of austerity.

And we’ve begun to reduce our deficit through a balanced mix of spending cuts and reforms to a tax code….

No, the U.S. was reducing at a moderate clip its deficit as a percentage of GDP due to economic growth. Stimulus increased that growth and acted to reduce future budget deficits. The overall reduction in the deficit (from 10% to 7% of GDP) is very large and the cumulative reduction in the size of the deficit that Obama achieved relative to the increased deficits that Geithner’s and Jacob Lew’s preferred austerity myths would have inflicted are in the trillions of dollars. To the extent that Obama has made (net) “spending cuts” and tax increases in response to the Great Recession he has slowed our recovery and likely increased our deficit (to list only two of the six harms characteristically inflicted by austerity).

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  1. Democraatus

    The depression that follows the artificial boom, driven by relentless credit bubble blowing, is in essence the economy’s cure and signals the return to the real balance of market forces. That this cure comes with pain, does not alter this clear logic.

    No meddling by state and central bank with money and credit, no boom and subsequent pain by bust (disregarding the role of banks for the sake of argument).

    There are all kinds of reasons why plain and outright austerity can be rejected as a policy in a looming Depression. However, continuing to spend money with one hand not taken in with the other hand is no solution either.

    In essence, it is all about the politics of steering the pain of the bust to the people and assets of choice, and the preferred time path (delay of the bust). If the medicine (austerity or: simply stop spending more than you take in) is rejected, one should clearly describe the consequences thereof and why, in spite thereof, avoidance of taking the medicine now is preferred. That leads to fruitful debate and sensible choices, perhaps leading to changes limiting the possibility of a future government/central bank induced and cherished boom.

    However, treating austerity as a problem is denying the medicine for the disease. Let’s focus on the application of the medicine instead of denying the inevitable application thereof from the start.

    Spending money you do not have is never a solution to previous overspending. A 12yr child can understand this. Apparently, this is unlearnt again when you study economics or become a politician.

    1. Ben Johannson

      You could have distilled your entire comment down to: “Pain brings pleasure.”

      The S&M fetish of austerians is everywhere in their thinking.

      1. Democraatus

        On the contrary. It is all about reality. There will be pain. Denying reality is possible, but not the consequences.

        So if you step beyond the disingenuous comment for a moment that I or Austrians enjoy pain, you could focus on the logic instead. Denying the damage caused by a government/central bank induced credit boom is about the same as thinking that 1 trillion dollar coins bring prosperity.

        1. Nathanael

          Get a clue. All money is credit (see the comment a few below), and a credit boom is a perfectly normal thing. Credit should be growing indefinitely at a steady rate in a healthy economy, because credit == trust.

          You want to avoid *bubbles* — stuff which is inherently untrustworthy (“tulips will be more valuable every day!”) but that’s another matter.

        2. Calgacus

          Democraatus: MMTers, genuine Keynesians, real Institutionalists, understand the Austrian viewpoint very, very well. But all the problems you point to have already been absorbed, considered, aufgehoben, into the theory. It is in their blood. Look at the sequence of Doktorvaters (teachers) Karl Menger (founder of Austrians)—> Bohm-Bawerk (essentially a student of Menger)-> Schumpeter->Minsky->UMKC’s LR Wray. Yes, austerity can be a medicine for problems. Bankruptcy can cure bad balance sheets. But on the scale of an economy, it is nuts – it is amputating your nose to cure a cold. The prime recommendation of MMT, the JG is a non-inflationary permanent cure for the primary problem of busts and depressions – the life threatening symptom – unemployment. There are other recommendations, but first, keep the patient alive.

          Criticizing “spending money you don’t have”: Sounds good, but is stark raving mad. If nobody created money ex nihilo, then where did all the money come from? Was it created by God millennia ago? What Lerner ridiculed as “The Immaculate Conception of Money”? Creating money ex nihilo doesn’t mean anything inflationary or deflationary, good or bad. What matters is what the money creator sells his money for (spends, buys) or sells stuff for (taxes, sales).

      2. from Mexico

        I agree. Austrian economists are for the most part a sadistic bunch, and they craft an entire pseudosciene in order to justify the infliction of pain on innocent people, while at the same time exculpating free-riders.

        For instance, Democraatus tells us “continuing to spend money with one hand not taken in with the other hand is no solution either.” This statement is predicated on two assumptions:

        1) The neoclassical ‘barter’ or ‘loanable funds’ theory of money, which holds that products are paid for with products. Steve Keen describes the fallacy here (and by the way, as Keen mentions, Krugman and Democraatus are both on the same page when it comes to embracing this fiction):

        Neoclassical “Loanable Funds” Fiction

        Patient lends to impatient
        • Patient’s spending power goes down
        • Impatient’s spending power goes up
        • No change in aggregate demand

        2) That 100% of newly created money goes into non-productive, speculative investment and 0% goes into productive investment, therefore new money creation never results in increased production and aggregate demand.

        Another piece of pseudoscience is the following passage from Democraatus’ comment:

        In essence, it is all about the politics of steering the pain… If the medicine (austerity or: simply stop spending more than you take in) is rejected, one should clearly describe the consequences thereof and why, in spite thereof, avoidance of taking the medicine now is preferred. That leads to fruitful debate and sensible choices…

        Actually, I’m quite a fan of punishment and of strong reciprocity, and strongly believe that the perps who caused the GFC should not go unpunished. However, where is there even a scintilla of evidence that austerity will punish the perps? If one intentionally set out to design a policy to punish the innocents and let the perps off the hook, I don’t think one could come up with a more effective policy prescription than austerity to achieve that end. The outcome of austerianism in practice is very differnt than austerianism in theory. But austerians are in love with theory, to the point that theory trumps reality. The state has repeatedly been demonstrated to be the most effective entity to punish perps, and with policies designed to specifically single out and punish corporate and wealthy free-riders.

        1. PeterP


          “Spending money you don’t have”? This is what people have been doing for the last 5000 at the very least. History shows clearly: the economy is fueled by trade of commodities for credit. 99% of the time if you buy something, like a beer in a lodge in Babylonia, you buy it for a *promise* to repay (say with barley) at harvest time. At the moment of purchase there is no barley. This is the historical record, not some “logical” fantasy that supposedly must have been true (which really just shows people’s logic is very fallible).

          To recap: credit creation creates debt and money, and money is created out of thin air all the time. Every time a firm gets a line of credit, the deposit is created out of thin air against the IOU of the firm, a pledge to repay, which likewise has been created out of thin air. Debt repayment conversely destroys money as both IOUs are cancelled.

        2. hyperpolarizer

          There’s something I don’t get here. I am a great fan of this site, and am also a fan of Krugman, though I have my disagreements with him.

          But the post seems to go out of its way and out of context, to tar him with the brush of being an Austerian. He is not. He is not (in context) recommending balanced budget at all cost; he has repeatedly said we should borrow and spend now, because borrowing is essentially free.

          Folks here have it in for Dr. K.; beats me why. I say let a thousand flowers bloom.

          As I say, I don’t buy him entire, by a long shot. In particular he cuts Obama far too much slack for good intentions. He is not willing to say (even if he does realize) that the reason the platinum coil will not be minted is that Obama wants another crisis, so he will have another shot at cutting the great social insurance programs of the New Deal and Great Society. That blindness is my beef with Dr. K.; but accuse him of Austerianism? never.

    2. YankeeFrank

      “Spending money you do not have is never a solution to previous overspending. A 12yr child can understand this. Apparently, this is unlearnt again when you study economics or become a politician.”


      The idea you find so obvious is simply not true. The government that is sovereign in its currency (as is the US government) is never in the position of not having enough money. Period. There are many things a 12 year old child can understand that are wrong. And many other things that a 12 year old understands in a simplistic way. A government is not a household, or a business. The idea that we must punish people, especially innocent people, to balance some numbers on a balance sheet is morally and intellectually abhorrent.

      A free lunch is eaten everyday, by millions of people across the nation. The biggest and grossest free lunch is eaten by the Wall Street criminals who steal by charging interest on money they create out of thin air. The moral and decent free lunch is eaten by all those who eat the food that is produced essentially for free by large corporate farms that receive tens of billions of dollars in corporate welfare yearly. We have so much food in the world that almost half of it is lost to poor farming practices and picky producers/customers every year. Of the 4 billion pounds of food produced worldwide yearly, only around 2 billion actually are eaten. Massive quantities of produce that is perfectly healthy is thrown away in the west because it isn’t uniform in size, before people even get a chance to bid for it or volunteer to take it home.

      Since roughly half the food produced in the world goes uneaten and wasted, it seems there are many free lunches. We live in a world of limitless bounty. Its not like the old days where there was famine due to a real lack of food. The idea that we must impose any kind of austerity is pure evil in a world of such bounty.

      There are millions of houses in the US that are unoccupied and have been for years because of the wall street created bubble and collapse. Sounds like there are free houses to be had as well.

      We live in an era where there is more than enough for everyone, but capitalist monopolies demand artificial scarcity for their profits, and so the misery continues so a relative few can amass more than they can even imagine spending. When the collapse comes, and it will come, hopefully the truth will become plain and we can do away with artificial scarcity once and for all. Capitalism is fine for the things we don’t need to live. But for everything important, like food, shelter, healthcare and education, we must have a government of and for the people that protects and provides. Its that simple.

      Its hard to be so wrong about something and change your mind, but “democraatus”, its worth the effort.

      1. Aquifer

        “Capitalism is fine for the things we don’t need to live. But for everything important, like food, shelter, healthcare and education, we must have a government of and for the people that protects and provides. Its that simple.”

        Thank you! I have been making that argument for some time by suggesting that – 1) for the things we need, let production/distribution be under public control, such that the ruling paradigm is moral, not market, forces, 2) for the things we “want” but don’t really need (e.g. Iphones. let the private sector get its rocks off, as long as it doesn’t crap up the environment or interfere with 1). If the private sector manages to turn a “want” into a “need”, then understand, at that point it will have to be turned over to the public sector ..

        1. different clue

          Soviet Agriculture 2.0 for food, then? I would prefer to see agriculture in the hands of millions of scientific-organic/Amish/etc. sole-proprietor owner-operator farm families, myself.

          1. different clue

            So seize the oligopolized land at gunpoint and forcibly re-homestead it all over again to millions of small operator families. Meanwhile, why not buy what food one can from what small operators still exist?

            The food problems we have now stem from that oligopolization of so much agriculture. Sovietizing it will only intensify those problems.

        2. Aquifer

          dc –

          “So seize the oligopolized land at gunpoint and forcibly re-homestead it all over again to millions of small operator families.”

          LOL – and this would not involve, at least initially, “nationalizing” good chunks of ag land e.g. putting it under public control? Why not treat food as a “utility”? We already subsidize it – why not subsidize the “right” stuff using the “right” methods?

    3. TK421

      ” continuing to spend money with one hand not taken in with the other hand is no solution either”

      All money is spent before it is taken in. Money does not grow on trees; it is created by a government, then dispersed into the economy at large.

      1. Aquifer

        I look at it rather the other way around – economics, money, and all, being creations of the human imagination, are whatever we decide they will be, so let us start with the premise that the purpose of an economy is to promote the welfare of those who live within it. Then figure out a) what would such an economy look like b) what sort of mechanisms, including media of exchange, would best facilitate the workings of that economy …

        That is, no “a priori” assumptions about how or why it would work – all assumptions to be examined and not simply uncritically accepted, no matter whose name is attached, historical analysis would be useful in terms of a possible comparison of whatever system we came up with – has “this” been done before, what happened, why did it fail/succeed, is the outcome of that past example dispositive of the fate of such an idea or contingent upon conditions that do not adhere now, is there anything inherent in our proposal which militates failure, etc. How can we tweak it to work out the bugs – what bugs can we accept before we begin, and who will be “bugged” by it …

        History MAY help us figure out what to, or not to, do, but ISTM should not be considered prescriptive of what we are allowed to do, and certainly not what we should do …

        1. be'emet

          help help! an economy has a “purpose?” other than that of the persons/institutions that shove it in directions thought to favor them…

          our economy is driven by the unintended consequences (god’s rule) of the accidents of our civilization’s history. Well meaning associations – mmt & the rest – can attempt to shift the shove in some more favored direction. More unintended consequences to follow. Worth a try, even a fight. More unintended consequences.

        2. Aquifer

          hmmm – well I suppose you are correct – our economy doesn’t seem to have a purpose – other than making rich folks richer …. So maybe i should reword that and say seeing as how an economy does seem to have an effect, should we at least try to steer it in a direction that does serve the folks who participate in it …

          You are right that there are always unintended consequences, e.g one unintended consequence of being born is dying, but that doesn’t mean, ISTM, that we should make no effort – ain’t that “lazy fair”? SOMEBODY will always be steering it – why not those be us?

    4. Generalfeldmarschall Von Hindenburg

      @Rob- awesome observation. You sure you’re not Mark Ames? ;)
      @Demokraatus- So to be devils advocate, I’m granting your whole argument. Going forward from there, I have to then ask, where were you parsimonious types when Goldman, Lehman and all those other “water carriers” and strutting “entrepreneurs” were spending kajillions of dollars to play with through the sorcery of their “special relationship to the Fed”?

      Theres ultimately no point in engaging with purveyors of this neo feudalist cant. If confronted on a point like this, they unleash the Tea Party canard that it was a lot of shiftless blacks and white trashoids who were useful idiots in a scam run by Fannie Mae to buy votes for pinko lib Democrats.

      Talking to the Ayn Randroids and Rothbardians is trying to beat three card monte or some streetcorner shell game. Just remember its all a facade to conceal a slavish devotion to the service of patriarchal autocracy.

    5. Lune


      In one sense, you’re right. Fiscal stimulus is the suboptimal plan. The *real* solution would have been to writedown all those loans that are never going to be repayed. That this would have bankrupted most of our financial institutions is the only “pain” that this country would have had to suffer, and would have been balanced by the fact that consumers, lightened of their debt load, would have started to spend again. Since we didn’t allow that to happen, people now take all their earnings and pay back their debts rather than consume. That’s the real reason why the recession started as demand shriveled up.

      So if the govt hasn’t chosen the first option (allow debts to be written down, so consumers can spend again), then I’m glad the govt is at least choosing (however weakly) the second-best option of replacing private spending with public spending.

      But I have to ask 2 questions of your position:

      1) Do you believe in austerity for the banks? The $12billion the govt spent on jobs pales in significance to the trillions given to financial institutions (not to mention the interest income they continue to steal from us thanks to the Fed keeping interest rates so low to help out the banks). That is also a form of govt spending. Do you oppose that as well?

      2) How do you reconcile your theoretical beliefs with the actual reality that those countries who have implemented austerity the most severely (Greece and Spain) not only have imploding economies, massive social upheaval, but also higher Debt-to-GDP ratios than economies (like ours) that rejected austerity and (however weakly) went along the stimulus course? It does seem that the countries that rejected the medicine you prescribe have turned out healthier than the ones that swallowed your bitter pill.

      As Thomas Henry Huxley stated “The great tragedy of Science is the slaying of a beautiful hypothesis by an ugly fact”.

      1. Nathanael

        In Greece, we see the true goals of the elite — they just pushed for a fake “austerity” package which CUT THE TAX RATE FOR BILLIONAIRES from 45% to 42%.

        It’s all about making sure the poor get poorer and the rich get richer.

        This is an incredibly short-sighted goal — meanwhile, the garbage isn’t being collected. Enjoy your so-called “money” while the filth piles up at your mansion, 0.1%.

    6. harvey

      The only way that people learn is if their foolish actions are followed by pain but to them, not to others.

      But from where I sit, the people who have caused the pain are being rewarded hugely with other people’s money.

      And the little people who were along for the ride are the ones who are feeling massive pain by losing their jobs and houses.

      Isn’t this what is called moral hazard ?

  2. Paul Tioxon

    Your overall analysis rings true, but in attacking austerity by means of characterizing the payroll holiday cessation as re-instituting a regressive tax is an exercise in mystifying the politics of the public. This is the dedicated funding source for Social Security, which would normally be seen as another slippery slope on the way to dismantle Social Security altogether. Geithner as an advocate of allowing this tax to be collected again at the beginning of this year, can be construed as stimulus killing hence pro-austerity move, but only if you do not make the equally important analysis that it is social security having its revenue diverted by means of non-collecting. In that light, this is not any, much less a good or strong argument to make against Geithner.

    I believe that under extreme duress, some concessions have to made, such as diverting the social security tax back to the paychecks of people who will then spend that money providing economic stimulus. What I do not agree with, is that it was wrong to allow this to be collected again. Social Security did its 2 year rotation, its tour of duty in harm’s way for the greater good. Now its time to let that source of stimulus to stand down, and allow it to be collected for its statutory purpose as the dedicated funding of Social Security.

    I believe with the political momentum and beating the republicans have taken in the election, the time to demand stimulus that isn’t a political compromise, that isn’t derived by cutting a tax that is needed to fund a program, in order to get republican support for passage, is NOW. None of the actors in this have done well for people in general, but I refuse to allow a re-branding of the FICA deduction for social security as a vague regressive, payroll tax. Leave Social Security alone, let some other means of new spending be put to work, like a National Infrastructure Bank that is funded by the Fed and grants money instead of debt with the stipulation that at least 75% of the grant go to wages.

    1. My Wag

      Social security taxes go into the general fund and get spent along with all other taxes. Any excess SS revenue gets a Tbond and promise to pay later (there are rumblings that cuts will have to be made because this revenue will have to come out of general fund.
      Social security taxers have actually masked the size of the federal deficit for years (since greenspan commission).

      This was the best way to get extra cash into paychecks of people who will actually spend it (multiplier effect).

      1. Aquifer

        If SS taxes go into the general fund, then what is this “excess revenue” you speak of? isn’t it rather that SS taxes go into paying current SS benefits and whatever is left after those are paid is the “excess” that goes into the Trust fund? Isn’t that why there is $2+ trillion in the Trust fund? Isn’t that why SS won’t actually have to dip into it for some more years to pay out benefits? Isn’t it that why SS never contributed to the deficit because SS wasn’t allowed to be paid out of general funds, until this recent “holiday” when it was agreed that the difference between what SS would have taken in pre-cut taxes and post-cut taxes, would, for the first time, be “made up” out of general funds, thus MAKING SS, for the first time, a contributor to the deficit? How clever is that …

        TPTB are playing games – those “entitlements” have been paid for, which is what makes them “entitlements” in folks eyes whether of a “conservative” or “liberal” persuasion, not “freebies” or “charity” which is why TPTB want to disparage the idea of “entitlement” …. And if they fail that, they will say, “well maybe the money WAS there, but it ain’t now …” But folks have seen how banks got trillions they WEREN’T “entitled” to, in their hour of need, so guess what – if that money in the SS fund did, in fact, “disappear”, it can “reappear” lickety-split, and it damn well better – because we, and our progeny are “entitled” to it a hell of a lot more than those %#@!? banks …

        And that is an argument i will continue to make, and invite all those who give a damn about SS/Med to make along with me …

        1. juliania

          Yes, I will make it also, Aquifer. I love Bill Black, but this is a bridge too far. It all of a sudden assumes that our social programs are not on the chopping block when they most clearly are, and Obama is first to put them there. I do not dispute that stimulus was obtained in this manner, but it needs to happen and it can happen in other ways.

      2. Procopius

        The way I understand it, the Social Security tax revenue goes into the Trust Fund first. Current revenue plus interest on the t-bonds are used to pay current benefits. The interest over and above what is used to pay current benefits is used to buy more t-bonds, just as the revenue from the tax was used after 1983. I can’t remember where I saw it, but I understand that although benefits payments have been in excess of current revenue for the last couple of years, the combined current revenue plus interest is still more than current benefits, so the Trust Fund continues to grow. The money from the Trust Fund goes into the general fund only through the purchase of t-bonds.

        I agree that the money used to buy t-bonds was used to pay for the tax cuts, which is what makes some people think it’s a Ponzi Scheme, but it is a fraud only if TPTB refuse to redeem the t-bonds when the time comes. Which, of course, the Republicans are threatening to do right now.

    2. Aquifer

      PT – i agree and perhaps would go a bit farther – i don’t thing the payroll tax should have been cut at all – figure out what such a cut would have put in folks pockets and send that back to them – same result – Bush was mocked for his puny rebate checks to folks, but, if i recall correctly, they were about the same as this “extra pocket money” from payroll tax “holiday”. The “starve the beast” mechanism was set in motion as soon as this cut was put in place – and now we are indeed seeing the inevitable result – “payroll tax bad” … The only thing that kept SS/medicare the 3rd rail for so long is the public’s idea that that payroll tax was their own investment in their retirement – besmirch that in folks eyes – introduce the concept that because the tax is less, so should the benefits be, to keep from adding to the deficit, and you are carrying water for TPTB …

      I realize that folks are reluctant to accept that equation because the “payroll tax bad” meme is also promoted by the MMT, folks … So it is a bit tricky to argue for it in “progressive” circles, but i will, nonetheless …

      Whether you can technically fund SS without a payroll tax or not is beside the point, IMO – that SS/Med program is a political decision, it will ALWAYS be under attack by TPTB, and needs all the defense it can get – and the strongest defense will be from folks who believe they are, indeed, “entitled” to it, because they paid for it, damn it and they have the “stubs’ to prove it …

      This is what i keep trying to say – the fate of these programs will not lie in the “technical” mechanisms of paying for them, but in the hearts and minds of those who could benefit, read all of us – and it is in the hearts and minds where this battle between market fundamentalism and social contract will be fought. IMO this trashing of the payroll tax is a baaad idea, ironic though that may be, if you want to actually preserve that “social contract” …

      1. different clue

        I fully agree. The “payroll tax holiday” was sought and passed as part of the Catfood Conspiracy to destroy Social Security by stealth-defunding it through staged salami tactical cuts to its funding.

        That’s why Obama sought it. That’s why the Catfood Democrats like Pelosi voted for it. To destroy Social Security. Which of the Democrats are symps and feltravs, and which are innocent dupes?

      2. jrs

        Totally agreed. If the preservation of the safety net requires everyone grasp complex economic theory, forget it, you lose. It’s over before it’s begun. It’s not going to happen. Not just because people aren’t perfectly rational although yes, but also because the very economic system we live in precludes most people having time to do all this research. Most voters are barely informed by our poor media of issues, and issues are less complex than theory.

        But having some skin in the game will make people psychologically invested in something for sure. It’s all those experiments that show people place an irrational premium on an object just because they own it. People who pay into SS “own” it! So work with people’s psychologies or work with pure reason on arcane subjects most people probably don’t even want to study, I know which one I’m betting on.

        So I’m happy the tax went back up, no I don’t need whatever crapitalistic crap I could have bought with that money instead (as if the middle class realizing there might be no old age safety net, and that this is catastrophic, might not just get a clue, and start saving that money instead of spending it even if only buys a more premium catfood in old age – fancy feast rather than the store brand!).

        1. from Mexico

          I agree.

          The reality is that, when it comes to humans, myth is more powerful than reality.

          That’s a reality that a lot of very intelligent people just can’t get their heads around. For great politicians like FDR, however, it comes as second nature.

          1. different clue

            That’s because those “very intelligent” people aren’t really intelligent at all. What they are is brilliant intellectuals. Which isn’t the same as being intelligent.

      3. jrs

        Sometimes I think about the about the widely mocked
        apocryphal at this point, tea party sign “Get the government out of my Medicare”. And I want to carry a sign “Get the government out of my Social Security”. Not of course because I don’t realize SS is a government program. But because at this point all the elected (and non) government heads seem to want to do is destroy these programs! Get the government out of my Social Security!

        1. Aquifer

          jrs – it was watching those tea party types yelling at their reps at those town hall meetings a few years ago that brought home to me FDR’s genius re the payroll tax – liberals will support/defend SS/Med because of the social contract idea, but conservatives will support/defend it because they “paid for it, damn it!”

          And when you have a good program that both libs and cons will support, in no small measure because of the formula that undergirds it, why mess with it … for the sake of an economic theory … If it ain’t broke, don’t “fix” it, as me Daddy would say …

      4. Paul Tioxon

        This is the enigma, so called, of government, with the consent of the governed as a structural component of a democratically controlled republic. Corporations use democracy as a major feature in decision making on the highest level by the shareholders. A majority is necessary. You need most of the people to go along with whatever direction you are taking them, willingly or kicking and screaming. Then, once in place, the consent is executed by a hierarchically configured bureaucracy. If you don’t like it fight by building a voting bloc or sell out and move on.

        A sovereign state is different in that it is not supposed to be liquidated for a better offer, but is supposed to stand in place, over time, from one generation to the next. Temporary emergencies may require a contradictory move against the idea of acquiring consent, in the face of invasion and destruction of the people and the state. Lincoln grappled with this, by imposing his will, against standing laws and the constitution in order to save lives and the republic. A state is not sovereign if it is continually negotiating the terms of its existence, as an idle political maneuver on the part of a faction. The next generation may reject the faction and wonder how things change for the worse, because of idle political curiosity and a temporary majority.

        Social Security is more than a finance topic, it is a political topic, and how it is handled, resonates the political consequences, not just the technique of so called sound money or banking as its foundation. I agree that it was constructed from the paychecks of the people, and necessarily so. Based on this direct contrbution then, as FDR predicted, it will not be seen as charity to a hard luck case or worse, but a right paid with hard earned cash. But really, more by the time of your life spent laboring, than the wage that your laboring commanded. Our cash contribution is a token of something more important and valuable. We should get as much money out of Social Security in retirement, not because the actuarial math adds up, it does, but because our individual work over a lifetime constitutes a necessary contribution to sustain the life of everyone else, the social order as a whole.

        The particulars of the banking and finance piece should make sense, but it is our work which circulates the capital that creates the social order to begin with. Social Security makes sense out of giving not only a lifetime of work but a lifetime of consent to the political class, to operate our government for the benefit of all. It is both political and economic, the political economy or more narrowly, the macro-economics of the larger unit of analysis than the single firm, the analysis of the whole human enterprise of civilization that we all benefit from today, everyday. And which we strive to transmits beyond our individual lives into the future, just as our fathers and mothers worked to securely build the world we inherited.

          1. lambert strether

            To some, no doubt.

            * * *

            Rather than simply paste a one-liner, let me engage. You write:

            Social Security makes sense out of giving not only a lifetime of work but a lifetime of consent to the political class, to operate our government for the benefit of all.

            Let’s assume that this is the purpose of a nation-state, but not a market-state. How would you rewrite the social contract to maintain consent?

          2. Aquifer

            JT – could you clarify – PT said a lot of things there, precisely of what are you not convinced?

  3. giulio

    > Lately, revenue has fallen far short of spending, mainly because of the > > depressed state of the economy. If you don’t like this, there’s a simple > > > remedy: demand that Congress raise taxes or cut back on spending.

    The above sentence is a positive statement not a normative one. Krugman is saying: if you do not like a budget deficit, the only logically consistent think to do is raising taxes.

    But Krugman is not advocating raising taxes in the current situation. In fact, he has been the strongest supporter of deficit financing in the current contraction. It is all over his blog, columns and interviews. He was advocating a stimulus even larger than the one Summers wanted.

    Bill Black is obviously in bad faith here and dishonestly setting Krugman up as a straw man here. Yves, why do you allow this crap through? This type of intellectual dishonesty reminds me of Regis Debray and his French Marxist friends.

    Note that I, and I dare to say Krugman, are otherwise in agreement with the main point of this blog entry.

    1. Ruben

      Yep, Black does not look good on this one. I read Krugman’s columns and it never crossed my mind that he was advocating balancing the budget in the current situation. That would be contrary to all he has written at length and requires a very twisted reading. Looks a lot like holier-than-thou type of argument. Probably it was time to trash Krugman. A long time has passed since the faithful has not hated Emmanuel Goldstein.

    2. Yves Smith Post author

      Krugman has talked about needing to retire a trillion dollar coin if it is used, so his signals are not as consistent as you suggest. Similarly, he has opposed much in the way of deficit cutting now but repeats the mantra of needing longer term deficit cuts. So I don’t think Bill is as off base as you suggest he is, although he would behoove himself to make the point explicit rather than assume everyone was on the same footing.

      Look, I barely had to look at Krugman’s posts and there is tons of evidence supporting Black’s depiction. He’s just a bit screechy about it, but that tends to be how he writes, plus the stakes actually are high. Krugman most assuredly is carrying Team Dem water for austerity lite, versus Republicans’ Latvia redux version (emphasis mine):

      And just about all budget discussion in Washington and the news media is laid out as if that were still the case. But a lot has happened since then. The orange line shows the effects of those spending cuts and tax hikes: As long as the economy recovers, which is an assumption built into all these projections, the debt ratio will more or less stabilize soon.

      That, sports fans, is the fiscal consolidation fantasy. Michael Hudson debunked that the other day (that just a recent sighting, we’ve been on this case for a while here).

      The IMF has been forced to eat crow and say it doesn’t work, that when economies are weak (their face-saving out) fiscal multipliers are greater than one, which is econ-speak for “cutting fiscal deficits makes debt to GDP ratios worse because the denominator shrinks faster than the numerator”. But Krugman is selling it, just yelling at the Republicans for wanting an extreme version while uncritically selling forecasts that he knows damned well are bogus. He cutely acknowledges the bogus assumption (that the economy stabilizes when it won’t if spending is cut) as if that makes him not responsible for hawking the mispresentation in the graph.

      Similarly, Krugman defends Jack Lew as Treasury pick over at Bill Moyers tonight. I think Krugman is smoking something strong. Obama keeps touting Lew’s record in running surpluses in the Clinton era.

      Krugman is fixated on saying the Republicans are bad guys (true) and Dems are good guys (not true). And even when he says the right thing early on (as in opposing the TARP, as pretty much everyone with an operating brain cell did initially), he falls in with good Dems when they “cave” (which under Obama is going where he wanted to go anyhow, Obama whipped hard for the TARP). He either argues for pragmatism/necessity or goes largely silent and makes a small bleat of weak approval.

      1. Ruben

        Reading the entire post by Krugman makes it pretty clear, at least to me, an innocent bystander from a kingdom far away, that he is saying “can you just shut up you deficit scolds so we can focus now on the real problem, unemployment”. He finishes the linked blog entry by saying “Can we now start talking about unemployment?”.

        His tone in talking about the “deficit issue” is most likely motivated by his belief that he is carefully read in the White House, so he doesn’t want to sound too far off on a topic that is taken seriously in that big white house.

        In addition, when he has written that the deficit is an issue in the long term, he has quoted Keynes: “in the long term we are all dead”.

        1. TK421

          Mr. Krugman thinks the government should be spending to fight unemployment, but he thinks the money thus spent will have to be paid back some day. He is closer to the side of the angels than president Obama (who isn’t?) but still has a ways to go.

        2. juliania

          “His tone in talking about the “deficit issue” is most likely motivated by his belief that he is carefully read in the White House, so he doesn’t want to sound too far off…”

          In other words, he is buying into the narrative, which is what is being said here.

      2. jake chase

        Krugman is a ‘balancer’, one of those acrobats who believe moderate stupidity is an advance over complete ignorance, and he is enough of a careerist to value his status among elected Democrats, whose only real objective is power for themselves, and whose strategy involves being slightly less subservient to financial and corporate power, but subservient enough to assure sinecures for themselves after retirement from office.

  4. giulio

    if Bill and you think that running permanent deficits in excess of the seignorage consistent with whatever inflation is appropriate is feasible when the nominal interest rate exceeds the rate of growth of nominal GDP, we can agree to disagree.

    P.S. As for Krugman, he has always mentioned multipliers => 1.5 in the current situation

    1. Ben Johannson

      The absolute size of deficits and debt is not of any particular concern given the United States can pay any liability. The only concern is whether yield payments can grow so large as to become inflationary, which is unlikely given how Treasury bids work and the fact that we can cease issuing them at any time.

  5. donna

    Good morning .ONE more time you give in ”epyphania”the reason of the depression economic in USA and EU .
    thank you

  6. denim

    No one has shown that even a dime of the payroll tax holiday money was spent wisely enough to create even one job in America. It did, however, put the FICA safenet at risk to being harmed by its foes, the conservatives. And maybe it funded the purchase of a few Asian and other offshore made gadgets.

    1. Ben Johannson

      The money doesn’t have to be spent in a way you consider “wise”. If someone took the entire annual value of the cur and blew it on a single hand on a casino boat, they generated employment for the dealer, the waiters, the cooks and the crew. And that money gets spent again after those people are paid.

      Social Security is not in danger because of a FICA cut, it is in danger because there are people who desperately want to cut it.

      1. J Sterling

        But it is possible to cut taxes on people who aren’t going to use the tax cut to employ labor. There are such people, they’re called “rich”. Taxing them is not contractionary in a recession, and giving them money is not expansionary in a recession.

        (It’s rich people withdrawing their money from labor employment that cause, and prolong, recessions in the first place. That’s why you first get the stock market panic, then you get the laying off of workers, then you get the increase in social security costs. If wacky theories like “the great shirk” were true, you would first get social security, then workers quitting one by one—not laid off en masse—then the stock market plunging)

        Taking money from rich people is expansionary in a recession, giving them money is contractionary. Conversely, taxing poor people is contractionary, and giving them money is expansionary.

        Macroeconomists who claim that “people” will do such-and-such in response to a given policy, without acknowledging that there are different kinds of people, should not be listened to. Far too many macroeconomists give no more than lip service to the concept of heterogeneous agents.

        1. Ben Johannson

          I don’t necessarily disagree. An income tax cut for the wealthy will have little stimulatory effect given they spend a relatively small proportion of their incomes, but a FICA cut primarily benefits those on limited budgets. That’s why payroll tax cuts appear to have a high multiplier association, because the middle-class and poor have to spend most or all of what they bring in.

        2. Yves Smith Post author

          No, you have it backwards.

          Rich people don’t consume as much as poor or middle class people as a % of their income. Spending or tax cuts targeting lower income people is vastly more productive in terms of stimulus than giving breaks to the rich.

          And jobs are created these days by small businesses, which in many cases don’t require a lot of capital. Think of what it takes to open a tailoring business, or an upscale gym, or set up a bookkeeping operation.

      2. different clue

        The FICA cut was engineered by the Catfood Conspirators who wanted to make that cut permanent in order to use it to cut Social Security. So yes, the FICA cut was/is dangerous to Social Security, exactly as it was designed to be.

    2. My Wag

      The FICA tax cut was actually paid into the SS Trust Fund and bonds for were issued for the full value.

      1. dumpthedlc

        Please show the documentation to this assertation as I can not find any evidence that the funds from the reduction in the FICA has been refunded to the SS trust. What you also show is how the re-capitalization of this cut is in complete conflict to how SS funding is mandated, the slipery slope to welfarizing SS.

    3. jrs

      Another thing that is never brought up about the payroll tax, people only ever look at the employee part. What about the employer part? If you are an employee your employer just got YOUR LABOR for a heck of a lot cheaper, when payroll taxes were cut (and your promised SS benefits were cut in return).

      1. different clue

        I may be wrong, but I believe the employER part of FICA was NOT cut. But I welcome any correction to the contrary.

        If I am correct, that the employER part of FICA was NOT cut; my theory is this: Obama wanted to make the FICA tax “holiday” permanent so as to create pressure for his next step: reduce employER FICA taxes by the same amount to defund Social Security harder and faster. And every Catfood Democrat who wants to bring back the so-called FICA tax “holiday” reveals themselves to be equal co-conspirators in the eventual plan to reduce the employER FICA tax as well.

  7. Antoine

    You look terrible on this one…this is plain bad faith. Krugman has been advocating loudly against austerity, and some misquoted columns or out of context blogposts will not turn this around…

  8. Rob in FL

    Antoine is right, Krugman’s quote is out of context. The quote does NOT reflect his view, rather he was saying that if the Republicans believe the Austerity nonsense they should not take the country hostage but they should state their case in a sensible way (like the did in the quote as an EXAMPLE of legitimate discourse). In an interview with Bill Moyers dated 01/11/2013 (, Krugman clearly states he believes additional stimulus is needed. There seems to be some fetish industry comprised of people who want to show Dr. Krugman is being intellectually inconsistant, well he is not. I read all his blogging, columns and view many of his interviews and I will attest to his consistency.

    1. YankeeFrank

      Nobody has claimed Krugman is directly demanding austerity. The problem with Krugman, as I see it, is that he promotes the myth that tax receipts “fund” government spending, and that we must thus, in the medium term, either reduce spending or increase taxes. Not right now, but in a few years or whatever. The problem with this is that it promotes the fallacy I stated above. Government can fund any spending it wants at any time. It doesn’t need to sell bonds to offset spending, and it doesn’t need to raise taxes to “pay for” its spending.

      1. Beppo

        Exactly, his kind of reasonable talk in support of unreasonable measures is what allows popular discourse to be dominated by purely fictional ideas that only benefit the elite. This is why we stay mired in thinktank generated cruelties of faux common sense that make the world worse for most of us.

  9. Don Pelton

    Referring to “deficit scolds,” Krugman yesterday said (and this doesn’t sound like he’s promoting a dangerous myth … but rather, debunking it):

    “They have staked their careers on crusading against supposedly intractable deficits, and they have their hearts (and more important, their wallets) set on exploiting the alleged fiscal crisis to dismantle social insurance programs. Good news will be a blow to everything they want, and will be furiously and vigorously denied.

    But once again: deficits are receding as an issue before our eyes.”

  10. Schofield

    Obama and Krugman count themselves as smart individuals but not to recognise that the Federal Reserve creates money from nothing to purchase toxic mortgage backed securities from the banks to socialize the losses of many rich people shows the degree of Neo-Liberal brain washing they’ve undergone in the sense that if money can be created without pre-funding to provide stimulus for the rich it can also be done for the economy as a whole and the not-so-rich!

    1. from Mexico

      Schofield said:

      …if money can be created without pre-funding to provide stimulus for the rich it can also be done for the economy as a whole and the not-so-rich!

      That is a heresy worthy of being burned at the stake in post-Reagan America, where hypocrisy is the only ideology that matters.

      Krugman, however, is more concerned with keeping the Reaganites from meeting such a fiery end. He realizes it is necessary to throw the 99% some very small percentage of the newly created money in order to keep the proles pacified, and to demonstrate that they, and not the 1%, are the real beneficiaries of monetary expansion.

      Is this being a realist or an opportunist?

      One thing is for sure, though, and that is that Krugman is no radical, nor is he an idealist.

      1. different clue

        His support for NAFTA in particular, and Free Trade Agreements in general, is proof enough of that. I guess I do tend to hold a grudge.

    2. Ms G

      “Obama and Krugman count themselves as smart individuals but not to recognise that the Federal Reserve creates money from nothing to purchase toxic mortgage backed securities from the banks to socialize the losses of many rich people shows the degree of Neo-Liberal brain washing they’ve undergone …”

      Krugman refusing to publicly concede what most everyone knows to be a basic fact — that the Fed creates money out of thin air (or that the US is a sovereign with the power to issue fiat money out of thin air) — can no longer be attributed (if it ever could be) to “neo liberal brainwashing.”

      At this stage in the game he’s continuing to deny the obvious either because he’s so desperate to hang on to his paycheck and “haute reputation” or because he’s truly a moron, which he isn’t.

      1. Ms G

        A third possibility is hubris, of course — that Krugman is just too cowardly to fess up that for his entire illustrious career, there’s been a giant (and oh-so-basic) hole in his macro-economics “expertise.”

        A similar sort of shame-based arrogance as that displayed by the masters of the “art,” such as Dimon, Blankfein, Holder, Breuer, and the rest of them.

  11. billwilson

    The discussion fails to address the real issues behind the debt problem. The austerity vs. spend til the patient improves is a false one.

    China and Japan have tried the keep stimulating at all costs route. Japan is now on the edge of a precipice and China is full of lousy investments that will start to bite back once the tap is turned off … which it must be at some point.

    The US economy has major structural problems that are not being addressed, and the rush to stimulate without addressing them just ensures that the stimulus will eventually fail.

    Among the issues:
    1. +16% of GDP spent on health care, almost double what others spend. The only consistent job creator the last 4 years has been health care (usually 30,000+ a month). Sure there are jobs, but the results (health outcomes) are worse than in almost all other developed nations. Not a great base for a future economy – spending more to get less (and this is 16% of the economy)
    2. Massive defense spending. Over $1 trillion a year spent on defense (once you add in all the bits hidden in other departments). That is about 50% of global defense expenditures. This again is unsustainable (ask Rome?), but making it harder is that this spending permeates the entire country … but produces nothing of value.
    3. Prisons, The US incarcerates a higher percentage of folks that anyone else, close to 1% of the population. Sure this is economically stimulative to an extent (prison guards, construction, food, etc), but it also removes 1% of the population from the productive economy (and probably close to 2% of the work force).
    4. Trade deficits. The US runs trade deficits equal to about $500 billion a year. That is a nice “hole” in the economy. Recessions usually help close this hole … but competitive devaluations (along with economic stimulus) have made this adjustment all but impossible.
    5. Financial system. The US financial system remains predatory and parasitic. Ultra low interest rates and failed reform mean capital markets are effectively broken – not a good situation in a capitalist economy.

    So the result is an attempt to resuscitate an economy that is in need of major surgery, not just a blood transfusion.

    The problem is that the major economies in the world have unbalanced economies, in part because fx adjustments have failed to fix them (thanks mainly to China). We now have all major central banks printing and a looming competitive devaluation war. There will be another great recession ahead given current trajectories.

    Unfortunately, and no one wants to hear this, the only solution is a major reset.

    The US with debt/GDP over 100% and climbing, even though more slowly, really has no way out, just a Japan like slow decline. (Let’s remember that some of the deficit improvement comes from much lower financing costs on the debt as refinancing continues and the US moves more and more debt to short term). The economy has stabilized, but that is about all that can be hoped for. The headwinds (demographics, debt, etc) will prevent the kind of growth needed to escape the debt trap (barring some major tech breakthrough that reshapes the world).

    1. from Mexico

      I don’t think anyone has made the claim that MMT is some elixir which will solve the problems you cite. The claim, as Stephanie Kelton has put it, is that MMT “expands the policy space.” The goal is to remove contrived and arbitrary limitations that have been put on the policy space by right-wing ideologues, leaving more weapons in the poicymakers’ arsenal to fight the GFC.

      Furthermore, I notice you completely ignore the elephant in the room, which is not the rather insignificant increase in public debt, but private debt which has literally exploded off the chart.

      I agree that “the only solution is a major reset.” The sixty four dollar question is how the debt is going to be mitigated. FDR chose to keep the debt structure in place, but to lessen its drag on the economy through a combination of gradual inflation and economic growth. Steve Keen has suggested a more precipitous solution, a debt jubilee. The austerians advocate keeping the debt structure in place, but to exacerbate its drag on the economy through a combination of deflation and economic contraction. I think what Black and others are pointing out is that austerity is really no solution at all, that it results in a deflationary debt spiral, and in the end will fail in preserving the debt structure.

      1. Nathanael

        “private debt which has literally exploded off the chart.”

        Yep. And most of us, unlike the US government, are unable to print fiat money, or at least not much (I can write checks, and they’re fiat until someone tries to cash them). Though I’d like to print money — anyone want to join me and start a bank? :-)

        I believe that despite the legal restrictions, the state government of California has the practical power to print money (and it *proved* it with the ‘scrip’ in previous years). I’m not sure what other entities in the US truly have the reputational power to print money.

        1. jonboinAR

          I’ll try this again:
          payments on its debt to the Fed? If the Fed is really a privately owned bank and the Treasury renegs, then that bankrupts the Fed, no? So, then, in order to keep the whole thing going, charade or whatever it is, the Treasury does have to make payments and those payments must relate to the size of its debt. To make those payments, the Treasury would have to tax, else where will it get the money? In that case, then the national debt CAN bankrupt us all.

          Or can’t it? SOMEONE TELL ME!!!

    2. Daniel From Paris

      Some nice “common sense” commenting in this sea of MMT nonsense.

      That neo-con stuff à la Reagan-and-Bush is possibly even worse offers very little satisfaction to a non-US reader. Well indeed none!

      As a foreigner I especially loved the liberals of the previous century (a standard for intellectual honesty) as much as I learned to love the honest US business person of the same era (yes that was a standard for plain honesty).

      But sure the main issue is elsewhere:

      To-day’s America is now in a hole, most of its forces hell bent on:

      a) either consuming what the world still can with no view of paying their bills back except with “one trillion dollar” coins (give some anticipation on the long term exchange rates with anything with a value…),

      b) sinking the rest of their money on military budgets.

      By the way, that most of their economists, both right and left, just ignore the Wall-Street+Washington conundrum just add the shame for the country.

      America was about producing wealth and prosperity during its short but brilliant history.

      A wealth-building country does not need an academia to twist the meaning of the words “deficits”, “money” and economic aggregates to get an economic framework afoot.

      No schadenfreude here. Europe is no better on those issues. We have no “one trillion Euro” coins here (Thanks Angela and her social-democrat predecessor) and no feeling for this fury of brainwashed economics. But our growth engines are even lesss robust and the chances of a fast recovery no better.

      We could possibly at least have a working legal system. And that is the reason I follow on this blog since its early days. Despite the nonsensical MMT.

      Do not forget the legal stuff, Yves!

      1. Nathanael

        I suggest you learn some economics. MMT describes the way modern banking actually works.

        As for the trillion dollar coin, it’s just an accounting gimmick, which is fine, because it’s designed to deal with the debt ceiling, which is ALSO just an accounting gimmick. (Sigh.)

  12. michael hudson

    Here’s where we Modern Monetary Theorists (MMT) at UMKC differ from Prof. Krugman. The issue came up last spring (March, I think) where he got into an argument with Steve Keen. (You can google the debate all over the web). Krugman claims that banks do NOT create credit. Keen claims — and we all agree — that they DO create endogenous credit. (Randall Wray’s new book on money lays out the details.) The UMKC economics blog New Economic Perspectives regularly details our disagreement.
    Krugman remains an “old Keynesian,” and we are post-Keynesians. This means that we are not obliged to defend the Obama administration’s policies but can criticize the president when he pushes yet a new Tea Party/Rubinomics Treasury Secretary such as Jack Lew. We can push for a Public Option in banking, and for calling financial fraud for what it is.
    But most of all, in terms of economic theory, we distinguish running a budget deficit to subsidize Wall Street (the $13 trillion in added government debt since September 2008) from budget deficits to spend into the economy and promote employment.
    Prof. Krugman remains a neoclassical Keynesian at heart. That’s why we need to “reform the reformers.” I haven’t been able to do this even at international conferences where Prof. Krugman and I are on the same panel. The problem is one of scope as well as analysis.

  13. michael hudson

    Here’s the disagreement:
    Banking Mysticism, Continued, “The Conscience of a Liberal,” March 30, 2012.
    “As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits
    This is all wrong, and if you think about how the people in your story are assumed to behave — as opposed to getting bogged down in abstract algebra — it should be obvious that it’s all wrong.
    First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand. I hope this isn’t controversial, although given what usually happens when we discuss banks, I assume that even this proposition will spur outrage.”

    Our MMT theory is indeed that loans create deposits. To Paul Krugman, this is heresy.

    1. Nathanael

      Yep. On this, Krugman is simply and plainly wrong as a matter of simple fact.

      The fact is that the loan officers issue loans without looking at reserves. They write checks without checking whether the bank has any money.

      A separate department then goes “OMG, we loaned out more money than we had. Better borrow some from the Federal Reserve.” Which they do, overnight, at the “discount window”.

      Then another department goes “Ah, the discount window is expensive, better chase up some deposits” and tries to do so so that the bank can reduce the amount it’s borrowed from the Fed.

      Krugman doesn’t understand this. Yet it is simply empirical fact. Loans come first in the modern system. Loans came after deposits in the *19th century Free Banking system*, but we aren’t *living* under that system.

    2. Calgacus

      Yes, Keynesian Krugman should uhh, read more Keynes (Treatise). Who like the “large majority of economists” (of 1930) knew that “bank loans and bank investments do create deposits”. (Schumpeter, History, p.1114)

  14. YankeeFrank

    Krugman is intellectually lazy and dishonest at this point. He knows MMT has made huge strides in clarifying the way our economy works, but if he admits that it is superior to his neoclassical system, he admits that much of his life’s work is flawed, and that his columns are full of mistakes. He’s in a credibility trap of his own devising, and he paid for his success by trumpeting the global economy and nafta-like trade deals in the 90s. He’s better than the Chicago school economists, but only marginally, because he still insists that fraud is not a problem with our banking system and that we must pay for government spending with taxes. In other words, he supports palliatives to help alleviate the suffering that is extant in our society (to a limited extent), but does not admit that the whole system needs reform. Instead, his work provides a basis for keeping the powerful in their positions.

  15. michael hudson

    (Sorry, this conclusion was cut off from my earlier comment):

    The government also can create new money – freely. It does not HAVE to borrow. It didn’t borrow when it created the $13 trillion to give Wall Street. It doesn’t have to borrow to pay Social Security. Yet Mr. Krugman on Friday wrote that “the Fed could and would offset the Treasury’s cash withdrawals by selling other assets or borrowing more from banks.”
    Government money creation does not involve paying interest. Borrowing from the banks and bondholders does. The financial sector insists on a budget balance when it is a means of cutting back social spending – but not when the spending is on AIG, Citibank or other Wall Street giants.
    Unless one recognizes the difference – in policy aims as well as monetary theory – one does not understand modern monetary theory.

  16. Buckaroobanzai

    Professor Krugman also makes this comment:

    “If the revenue brought in by those legally established tax rates falls short of the costs of those legally established programs, the Treasury Department normally borrows the difference.”

    My understanding of the payments system and Federal Deficit is that the US makes its own money by spending it. If Federal spending exceeds tax revenue (which it has for all but 7 times in our history) the difference is maintained as a credit balance in the Treasury’s account at the Fed. It is not funded. Treasury Securities have a roll in setting interest rate targets and supporting monetary policy, but they do not fund our deficit.

    Professor Krugman is creating an erroneous assumption that we have to Fund (borrow) to be able to spend. That’s just not true and its stoking fears of a cataclysmic bankruptcy and visions of Chinese repo men showing up at our door to repossess our cars and our couches.

    1. Nathanael

      Krugman is technically correct, but you are mostly correct.

      The way it works is that the government “borrows” the difference… by issuing “bonds”… which are promptly purchased by the Federal Reserve… using Federal Reserve Notes, which is basically money printed by the Federal Reserve.

      So we have a stupid legal structure under which the government “borrows” money from the Federal Reserve, which prints the money.

      This benefits nobody except rich bankers who have shares in the Federal Reserve.

      It would be just as good, and better, if the Treasury printed the money directly. Or coined it.

      1. jonboinAR

        What I want to know is, does the Treasury have to make payments on its debt to the Fed? If the Fed is really a privately owned bank and the Treasury renegs, then that bankrupts the Fed, no? So, then, in order to keep the whole thing going, charade or whatever it is, the Treasury does have to make payments and those payments must relate to the size of its debt. To make those payments, the Treasury would have to tax, else where will it get the money? In that case, then the national debt CAN bankrupt us all.

        Or can’t it? SOMEONE TELL ME!!!

  17. p fitzimon

    I just saw Krugman on Bill Moyers show where he very explicitly denounced austerity and criticized President Obama’s support for deficit cutting.

  18. jsmith

    While the farcical nonsense on the need for austerity continues, here’s an interesting post on the compatibility between MMT and Marxism.

    “Although, from a Marxist perspective, the apparent intention and actual effect of the policy is contemptible – the preservation of the capitalist system – it remains the case that the policy action itself runs counter to the logic of capital and the dictates of private profit. As long as there is a desire (at least among the elites) to maintain a role for the profit motive, it will be necessary for profitability to be propped up in this way. The Keynesian, like the Marxist, recognizes that capitalism is inherently flawed and that left to its own devices it cannot stand. It is only by overriding its internal logic, whenever necessary, through the implementation of deficit spending not dictated by the profit motive that the system can be preserved for the benefit of capitalists, and most Keynesians apparently choose to support policies to prop up the system in this way.’

    “MMT indicates that in those situations where it is deemed desirable to override the logic of capital, sovereign currency-issuing governments have more policy freedom than other governments. Yet, although fiscal policy can be used in the way advocated by many Keynesians – i.e. merely as a means of preserving what is, from a Marxist perspective, a despicable system – it is equally clear that fiscal policy need not be used in this way. It could instead be used to initiate economic activity along lines altogether different, for instance through the public provision of free goods and services, or for that matter the complete elimination of wage labor, or in fact any form of monetary economy that could be conceived. The fact such alternative social systems are not advocated or openly countenanced by modern monetary theorists means that such policy or systemic proposals are not ‘MMT’ – since, as we have learned in recent months (see here), MMT comes with a particular suite of reformist policy prescriptions – but, nonetheless, an understanding of MMT makes clear the potential sustainability of such social alternatives.”

    1. jsmith

      From the embedded link about the blog, included here b/c I think many will find it interesting:

      “Reading Randall Wray’s very interesting keynote address to the recent CofFEE conference in Newcastle, Australia, it is clear that he includes the specific policy prescriptions and theoretical heritage of the academic MMTers as part and parcel of MMT. This might be summarized as:

      MMT = (1) an understanding of monetary operations + (2) stock-flow consistency + (3) Minsky + (4) Functional Finance + (5) Job Guarantee

      I am essentially in agreement with the MMT analysis in these areas, although I would prefer the Job Guarantee to be combined with an unconditional basic income. But I am also interested in exploring: (i) the extent to which Marx and Kalecki can be made compatible with MMT; and (ii) the insights MMT might offer in thinking about a possible transition to a post-capitalist society.”

      1. jsmith

        Sorry to be a bore but some really good stuff. Apologies if old-hat.

        More from the blog from last year on how Krugman really does believe in MMT tenets but still retains a theoretical framework which disallows him from putting it all together.

        Clearly, Krugman has based his argument on the following observable facts:

        1. The U.S. government is a currency issuer, not currency user.

        2. The U.S. government allows the exchange rate to float.

        3. The rate of interest under a flexible exchange-rate sovereign currency regime is set as a matter of policy rather than being market determined.

        4. The U.S. government does not have large debt denominated in foreign currency.

        These four points are precisely the points emphasized by modern monetary theorists, 1 and 2 taken together being the meaning of currency sovereignty and the characteristics of what modern monetary theory (MMT) describes as a “modern monetary system”.

        From a heterodox perspective, of course, the IS-LM is not an ideal choice of model, it having been disowned long ago by its creator (Hicks), so Krugman’s working will not win the hearts of many Post Keynesians and modern monetary theorists. Still, the IS-LM model remains a stalwart in the mainstream, and we are not the ones in need of convincing. Perhaps Krugman’s argument will have better persuasive power with insiders, or at least with the many in the general public who understandably, if unfortunately, place their faith in the authority of mainstream thinkers in prominent positions rather than attempt to reason for themselves.

        In any case, Krugman’s view strikingly resembles the MMT position on what is a fundamental point: markets cannot dictate the terms on which a currency sovereign issues its own liabilities.

      2. Susan the other

        Jsmith, thanks for the links to I really enjoyed not just the editorial by “peter” but all the comments because they were so lucid and so matter-of-fact. If we can get a few members of Congress to read this kind of rational open-mindedness, it would be progress. It would be so very ironic if the great obstructionist, Obama, were end-run by the craziest Congress we have ever elected…

  19. Brooklin Bridge

    Krugman suffers from the same problem that AARP does. He wants a seat at the big boys table, for fun, profit and prestige, considerably more than he wants to explain, over and over and over, what’s actually going on, because that is not glamorous, nor profitable, nor influential. So he criticizes Obama with tacit agreement and praises him with feint criticism.

  20. rob

    My main problem with paul krugman, is that he is always supportive of the establishment lines.Sometimes,his support, is couched as opposition.This is a useful tactic.It catches those in opposition,who are heading away from orthodoxy.It allows them the freedom to “feel” their disagreement,but then reels them back into an acceptable orbit, with the consent of the “those who know better”.
    I happen to agree with alot of what krugman says.Often ,he fits the description of a progressive.Often he is giving a voice to a contrary view to the fox/cnn take on things.His regularity in supporting the neo-liberal agenda,while trying to seem like he isn’t;speaks louder than anything.It is akin to when JP Morgan,used to have “experts”,politicians,and “players” in every party, and political movement.Whether the democratic candidate,or the republican candidate,or the communist,or the radical right candidate was speaking,they were saying something the establishment, could “use”.Even permitting these people to “not be intentionally helping the establishmnet”, the ones who were “allowed” were useful. the real radicals were just “attacked from all sides” and taken out of historical record.This has worked forever, and paul krugman seems to fit nicely within this framework.
    My problem with most establishment types,is not that I doubt they know alot ,about alot of things.I can’t imagine they don’t usually have a pretty good understanding of things.It is specifically due to their opinion,they feel justified to tell the public whatever they “think” the public “needs” to hear;so as to come away with the proper impression. This does not mean the public needs to know anything resembling a “truth”.The thing the public needs to hear, is the means.the object is the “ends”These people feel that the means is justified by the “end”.Due to this overriding fact, peoples opinions and “answers” can’t be taken at face value.This is something always present when listening to people who are in self-elected circles of opinion like “think-tanks”.or “institutes”,which benefit and exist because of corporate/.01% money….like the council on foreign relations.Like paul krugman.Even discounting the “conspiracy theories”, there is the echo chamber effect. the problem of “groupthink”…that comes from class orientation,education,professional reinforcement,etc.These people are the product of “networks”

    1. Glenn Condell

      Well said.

      You could replace the words ‘Paul Krugman’ with ‘Barack Obama’ in that first para and it would still work.

      If ‘us’ is the 99%,
      and those in public life ostensibly to help ‘us’ are ‘they’,
      and they are either with us or against us..

      then those who pretend to be ‘us’ while furthering the interests of ‘they’ are the worst of the worst.

      I would rather share a meal with Cheney or Dubya, or Norquist or Rove, or Dimon or Madoff, than with the two-faced dissemblers and well-dressed grifters who do the dirty work (massaging and neutralising, steering and scolding) of the 1% out at the coalface where their wealth and power intersect with the community they suck their lifeblood from.

      ‘They’ are already there, at the apex of what we almost all deem worthwhile in this life, with enough to be worth defending with all the asocial tools we humans have at our disposal from the threat of the dispossessed mob. ‘We’ in that mob generally know we will never get there and many of us are becoming aware that any chance we ever had of even reaching a low-lying way-station has been compromised for a very long time by the infiltration of ‘them’ into the governing mechanisms of our political economy which are supposed to provide optimal outcomes for ‘us’.

      It is the carrot of becoming one of them that turns some of us into those slippery, shape-shifting in-betweeners that dog our political machinery and the social infrastructure (especially in communications and education) which supports it.

      It is the turncoat aspect that fuels the special category of contempt some of us feel for these people. The decision to join rather than try to beat them, however hopelessly quixotic that quest admittedly is.

      1. different clue

        If one can’t beat them directly, and one does not wish to join them, is it possible to undermine them? And undermine the system they serve?

        Work to rule? Spend to rule? Live to rule? Passive obstructionism? Uncivil obedience? (“I obey but I do not comply). Mass Leaderless Economic Rebellion? etc. etc.?

        1. Glenn Condell

          Less and less possible I reckon dc. They have a lock on the system, so we need a new system, one which gets away from (a) the situation we have where political accountability only occurs every 4 years, and (b) corruptible parties and individuals, in favour of platforms of measures that critical masses of people can indicate agreement with. Citizens ought to have voter IDs that permit them to register preferences on a secure nationwide government database on issues in real time and have this collected and promulgated to representatives and the media immediately, so that backsliding fealty to 1% interests is obvious, day after day until that particular stooge is voted out (this should be every year)

          1. Mel

            Apparently in Greece people are creating small amounts of municipal money so that they can organize their daily existence together.

            It occurs to me that there’s a pretty exact correspondence between Modern Monetary Theory and Modern Legal Theory. MLT states that governments have the ability to create laws for themselves, without having to get them from somebody else first. Just as with MMT, this isn’t the way the US govt is doing it, but that’s not an inherent requirement of the system. It’s just a choice somebody made.

  21. AMAGI

    There has been no austerity enacted or implemented in the USA…you don’t run $1.2T deficits yearly and call that austerity…our problem is we are spending way in excess of our productive means…you have too much that you cannot afford…deficit spending will not fix the problem…matter of fact it is poor and debunked economic thought.

    1. Mel

      There’s been tons of austerity. States and municipalities are going broke. The fact that this is happening alongside a $1.2T excess of spending over receipts is the amusing wrinkle in the process.

    2. Nathanael

      The reason for the “deficits” is that money is being shovelled into the pockets of a tiny (0.1%) group of billionaires. Mostly bank CEOs. Of course, they just sit on the money.

      There’s been austerity for everyone else. But free money for billionaire bank CEO criminals!

      Does that explain what’s going on?

  22. LAS

    The technical MMT theory still eludes me as I am not a trained economist. I am a consumer market researcher and social researcher, and I feel our economy is not very efficient in meeting human needs and seems to be getting worse. If the wider population in the country has decreasing resources to spend (diminished earned income and/or social insurance income), the population cannot command the economy to make or deliver the goods and services it needs and human want grows. Things only get more inefficient when the power to spend is highly concentrated among bankers, lawyers and CEO types. I like Krugman but I’ve never seen him argue this point pursuasively to my satisfaction – about the importance of distribution when we talk about stimulus. The average person is increasingly compromised in the quality and quantity of what they’re getting from this economy. I do not think parking the stimulus function for the nation with banks is at all the way to go. But a government that doesn’t see human needs as the priority to direct stimulus and investment is not all that much better. That was one of the most striking things about the FDR adminstration apart from this one; FDR had a wide net of people investigating and reporting on human needs and he listened to them. All the austerity demands are to deny the needs of the population as our true underlying reason for policy.

  23. Hugh

    Our central economic, and political, problem is kleptocracy with its resultant class war and massive and unsustainable wealth inequalities.

    Krugman and Obama, Summers and Romer, Geithner, even Black to a great extent, are all Establishmentarians, but the Establishment to which they belong is comprised of the rich and the elites who serve them.

    Obama does not understand . . . Obama understands what he wants to understand. He serves the monied interests of the 1% and doesn’t give a tinker’s damn about the rest of us.

    For about the millionth time, these are not mistakes or mistaken beliefs. There is no incompetence. Only crime, –which above all others Black should know about.

    Our public discourse is a sham. The rich and the elites have substituted their good for the general good. So all the talk of these Establishmentarians is really about what best serves their interests. Some feel the slaves would be more productive if they were given more bread. Others think they should just suck it up. That’s the real spectrum of the Establishment debate.

    Bill Black for all his criticisms stays very much within Establishment lines. He cuts Summers of all people slack. He calls a neoliberal-lite like Romer a great macroeconomist. He speaks of the recovery. Hey Bill, there has been no recovery for most Americans. Almost all of what gains have occurred went to the 1%. For most Americans, the recession never ended. Their losses were never made good.

    In an important way, Black and Krugman are very much alike. Both go only so far and no further. To be sure, Black has gone further than Krugman in describing a “criminogenic environment” but neither completes the analysis. Both continue to back the system as a whole. Both believe it is essentially sound and capable not just of reform but self-reform. Both continue to belong to the Establishment which runs it. And in doing so, both lose credibility.

    They are like reformers who think if the tsar only knew, if he only understood, if he had better ministers. What they will not see is that the tsar is the problem because the tsarist system is the problem. It is not a question of having a better tsar or having better ministers. It is the system itself.

    This is what I mean by not completing the analysis. 2008 was not a Bush problem or a Republican problem. Its roots lay in both parties and extended the length and breadth of government, the Congress, the courts, the media, academia, the rich, the elites, and Wall Street. In other words, the system. Yet Black and Krugman continue to depict this and its aftermath as a bunch or a few red flashing lights, not the system going red as a whole. They continue to pound the line that if Obama/tsar only knew or understood, if he only had better ministers than Geithner, all would be well, or at least on the road to being well.

    Black and Krugman can criticize Obama, his advisers, and the Democrats all they want but until they reject them and system they rode in on, they are continuing to support that system, the system which is looting and destroying the rest of us.

    1. Nathanael

      Obama is not serving the long-term interests of the 1%.

      Obama, like the Republicans, is serving the extremely short-term (less than 10 years) interests of the 0.1%.

      This is very important to realize. When everything starts coming apart at the seams, members of the 1% who are not members of the 0.1%, and members of the 0.1% who think more than 10 years ahead, will likely be just as interested in overthrowing the current kleptocracy as everyone else. They will be useful.

  24. kris

    There is a huge misunderstanding of Mr Krugman’s intentions here on NC and in the media.

    I am a conservative right winger. This the only left wing blog I read. You know why?

    Because there’s no HATE from the owner and the major contributors of the blog. I don’t mind the hate from the commenters.

    Everybody’s got this wrong. Krugman is not a liberal, he’s not a left winger. MR KRUGMAN IS A CONSERVATIVE HATER.

    That’s the reason he lives for, annihilation and distruction of anything conservative.
    That’s why you’ll see him bouncing his ideas around and back and forth because he’s got an agenda: Hate conservatives as much as possible.

    1. Yves Smith Post author

      Krugman is Manichean: Republicans bad, Dems good. When Dems do bad things, they are confused, misinformed, lousy at dealing with bad Rs, etc. It is really annoying how he gives the Dems a free pass SO often.

      The Dems sell out ordinary people too, but they wrap it in pretty technocratic sheen and pretend to be nicer than they are. As Matt Stoller has said, they are authoritarians who are in favor of gay rights.

      1. Nathanael

        Krugman’s not stupid, he’s just optimistic. Another couple of deliberate dives by Obama and he’ll figure out who’s side Obama is on. Should be interesting.

        1. different clue

          If it only takes two more deliberate dives for Obama to get SS/Mcare/Mcaide destroyed by law, then what does it matter if Krugman understands after that? Krugman will have
          been the very model of Lenin’s Useful Idiot. The damage having then been done, Krugman will be free to scream and cry all he wants while Obama laughs all the way to the bank.

  25. progressive humanist

    Hard to read from this cheap mobile, but it’s posts & comments like this one that are trademark NC jewels!

    Thx to Ms. Yves , & BB & co @ KC! Thx also to Bill for talking to Amy Goodman and PRI Friday; both ran morning & evening on Pacifica!

    Keep speaker’s corner alive. Tea party roots & left are getting closer to useful coalition- building everyday. Breaking the “divide the 99% & conquer” dynamic is an important step.

  26. Mike

    Hi there,

    Why this: “A Great Recession will cause a dramatic rise in the federal budget deficit because revenues will fall sharply and the demand for government services in the form of unemployment compensation, Medicaid, and food stamps (SNAP) increase.” ??

    And not this: “A Great Recession…and the demand for government services in the form of defense spending and defense contracts increases.” ??

    What’s the difference between me getting food stamps and a defense contractor getting a contract to build weapons or anything else for that matter?

    1. Mel

      The difference is that defense spending is usually considered to be part of the baseline, that’s paid out in good times or in bad. If defense spending goes up during a recession it’s usually assumed that it would have gone up without the recession too. Defense spending might go down during a recession. Maybe. It can be cyclical.

      Safety-net payments are usually attributed to the recession. They’re counter-cyclical spending.

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