If you have a depressed economy where the central bank wishes to but cannot lower short-term interest rates, then it is a fact that with a Keynesian spending multiplier of μ, a marginal tax-and-transfer share of τ, a hysteresis shadow of present depression cast upon future economic growth of η, and a long-term real government borrowing rate of r, increasing government spending now reduces the long-run burden of financing the debt if:
τμη/r > 1 - μτ
For consensus τ and μ or 0.33 and 1.5, and for a (lowballed) η of 0.1, this means that it is fiscally prudent to boost spending now as long as you do not expect the weighted-average real interest rate on government debt to be above 5%/year in the long-run--the nominal rate to be above 7%/year--in the future. For a lowballed multiplier μ of 1.0, you have to expect the weighted-average real interest rate on government debt to be above 3.75%/year in the long-run.
Even a moment's look back at history reveals that real interest rates above 3.75%/year--let alone above 5%/year are above the range in which the U.S. can expect to see interest rates remain for the long run.
When Richard Haass of the Council on Foreign Relations says, therefore, that Paul Krugman "is right until he is wrong"--i.e., until interest rates rise--he is forecasting that interest rates will not just normalize to historical norms but rise far beyond historical norms and stay outside the historical range on the upside indefinitely.
And, of course, Richard Haass does not know that that is what he is forecasting. He is a Very Serious Person.
Incestuous Amplification, Economics Edition: Back during the early days of the Iraq debacle, I learned that the military has a term for how highly dubious ideas become not just accepted, but viewed as certainties. “Incestuous amplification” happen when a closed group of people repeat the same things to each other – and when accepting the group’s preconceptions itself becomes a necessary ticket to being in the in-group…. We saw that in the run-up to Iraq…. Which brings me to the fiscal debate, characterized by the particular form of incestuous amplification Greg Sargent calls the Beltway Deficit Feedback Loop. I’ve already blogged about my Morning Joe appearance and Scarborough’s reaction, which was to insist that almost no mainstream economists share my view that deficit fear is vastly overblown. As Joe Weisenthal points out, the reality is that among those who have expressed views very similar to mine are the chief economist of Goldman Sachs; the former Treasury secretary and head of the National Economic Council; the former deputy chairman of the Federal Reserve; and the economics editor of the Financial Times. The point isn’t that these people are necessarily right (although they are), it is that Scarborough’s attempt at argument through authority is easily refuted by even a casual stroll through recent economic punditry….
And at this point, of course, all the Very Serious People have committed their reputations so thoroughly to the official doctrine that they almost literally can’t hear any contrary evidence.
Joe Scarborough and the Beltway Deficit Feedback Loop: Joe Weisenthal responded this morning to Scarborough with a list of 10 prominent economists and public officials who largely agree with Krugman that deficit hysteria is misguided and overblown. As Weisenthal puts it: “there are plenty of economists and economically-literate minds who think that, to varying degrees, the deficit is not what we should be worrying about.”
That’s true, but it’s worth reflecting on why Scarborough believes Krugman’s views are so marginal and isolated. It gets back to what I’ve called the “Beltway Deficit Feedback Loop.” The relentless bipartisan focus on the deficit convinces voters to be worried about it, which in turn leads lawmakers to spend still more time talking about it and less time talking about the economy, a phenomenon that is self-reinforcing. This is exacerbated by some commentators and news orgs, who continue to treat the deficit scolds with a great deal of deference, while marginalizing the opinion that we should prioritize boosting the economy and job creation as a means of getting the country’s fiscal problems under control over time without savage spending cuts that will hurt a lot of people. Back in 2011 one study actually confirmed that newspapers were spending far more time talking about the deficit than the economy — at a time when the recovery was in serious peril.
The Morning Joe crew’s reaction to Krugman perfectly captures this phenomenon. They treated him as a pariah. According to Scarborough, Mika Brzezinski compared Krugman’s “head in the sand” approach to that of climate deniers…. Of course, these folks only reacted to Krugman this way because they were apparently unaware of all the prominent voices who agree with him, thanks to the aforementioned Beltway Deficit Feedback Loop.
Yet the GOP position on the deficit — that it is such an urgent problem that we should dramatically downsize government right away to get it under control — is the one that should be seen as marginal, at odds with the consensus among many mainstream economists, and even out of touch with reality. Republicans are now claiming they will wipe out the deficit in 10 years with no new revenues, which would require extraordinarily deep and savage cuts to government. It’s a fundamentally unserious position. Indeed, this position is fundamentally unserious about deficit reduction. The very same Republicans telling us the deficit is an urgent problem that must be solved through spending cuts alone won’t even specify which specific spending cuts would achieve the levels of deficit reduction they themselves say we need. This deserves far more sneering disdain than Krugman’s argument does.