By Henry Blodget | Daily Ticker – 04/24/2013
For the past five years, a fierce war of words and policies has been fought in America and other economically challenged countries around the world.
On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This "stimulus" spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again.
On the other side were economists and politicians who wanted to cut spending to reduce deficits and "restore confidence." Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and "confidence" would return.
This debate has not just been academic.
Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called "Austerians" fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts.
Over the course of this debate, evidence has gradually piled up that the "Austerians" were wrong. Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries' deficits also remained strikingly high.
So the empirical evidence increasingly favored the Nobel-prize winning Paul Krugman and the other economists and politicians arguing that governments could continue to spend aggressively until economic health was restored.
AND THEN, LAST WEEK, A STARTLING DISCOVERY OBLITERATED ONE OF THE KEY PREMISES UPON WHICH THE WHOLE AUSTERITY MOVEMENT WAS BASED.
AN ACADEMIC PAPER THAT FOUND THAT A RATIO OF 90%-DEBT-TO-GDP WAS A THRESHOLD ABOVE WHICH COUNTRIES EXPERIENCED SLOW OR NO ECONOMIC GROWTH WAS FOUND TO CONTAIN AN ARITHMETIC CALCULATION ERROR.
ONCE THE ERROR WAS CORRECTED, THE "90% DEBT-TO-GDP THRESHOLD" INSTANTLY DISAPPEARED. HIGHER GOVERNMENT DEBT LEVELS STILL CORRELATED WITH SLOWER ECONOMIC GROWTH, BUT THE RELATIONSHIP WAS NOT NEARLY AS PRONOUNCED. AND THERE WAS NO DANGEROUS POINT-OF-NO-RETURN THAT COUNTRIES HAD TO AVOID EXCEEDING AT ALL COSTS.
THE DISCOVERY OF THIS SIMPLE MATH ERROR ELIMINATED ONE OF THE KEY "FACTS" UPON WHICH THE AUSTERITY MOVEMENT WAS BASED.
It also, in my opinion, settled the "stimulus vs. austerity" argument once and for all.
The argument is over. Paul Krugman has won. The only question now is whether the folks who have been arguing that we have no choice but to cut government spending while the economy is still weak will be big enough to admit that.
The discovery of the calculation error, after all, came only a few months after the United States voluntarily cut spending through a government "sequester." This sequester is hurting the U.S. economy, and it is also depriving American citizens of some basic services--like a fully staffed air-traffic control system--that most first-world countries regard as a given in a developed economy. And with America's government deficit already shrinking (thanks to the rollback of some tax cuts and a modest increase in taxes), it is now even clearer that the sequester did not have to be adopted.
Yes, at some point, the American government needs to come together and figure out a smart long-term plan for containing healthcare and military costs, which are the real budget-busters in our government spending. That long-term plan does not need to be adopted immediately, however.
And IN THE MEANTIME, FOR THE SAKE OF THE COUNTRY, IT WOULD BE NICE IF OUR GOVERNMENT CAME TOGETHER AND AGREED TO RESTORE FULL FUNDING FOR BASIC SERVICES.
BECAUSE THE CURRENT STATE OF GOVERNMENT DYSFUNCTION IN THE UNITED STATES IS NOT JUST ECONOMICALLY HARMFUL. IT IS ALSO EMBARRASSING, DEPRESSING, AND BASED ON A PREMISE THAT IS NOW DEMONSTRABLY FALSE.
Sentiment: Strong Buy
Wow--in several paragraphs, he resolved the nation's problem. But wait--in fact, Government spending has barely been cut, and in fact has not truly been cut at all. The only cuts the Government Budget has seen are cuts to the automatic inflationary increases that occur by law. Krugman has far from won. He makes some good points, but shouldn't the government's bailouts have worked under his theories by now? And they have not worked like he professes. A bigger issue that will improve the middle class, would be large corporations paying their employees a higher wage in comparison to what they have increased their CEO's pay to. That would increase discretionary spending, and give a solid boost to the economy since the biggest driver of the economy is discretionary spending, not Government spending, or CEO pay.
"A bigger issue that will improve the middle class, would be large corporations paying their employees a higher wage in comparison to what they have increased their CEO's pay to. That would increase discretionary spending, and give a solid boost to the economy since the biggest driver of the economy is discretionary spending, not Government spending, or CEO pay. "
Good point Scuba, but I believe Krugman has mentioned this also, because it makes a lot of sense.
"The argument is over. Paul Krugman has won. The only question now is whether the folks who have been arguing that we have no choice but to cut government spending while the economy is still weak will be big enough to admit that."
So at what level of GDP does government spending become problematic? While the data fix pointed out in the article reduced the concern over the impact to the economies - it surely did NOTHING to improve those economies - the growth still stinks.
We have had massive government spending over the past 5 years with modest results at best. I find it interesting that the Keynesian's argue for increased spending to put more money in the economy, but then many of them also argue for tax increases which mitigate their own stimulus.
It obviously makes no sense to cut spending during a contraction, but at some point you need to put the breaks on government stimulus - growth in the 3% range would begin to address our deficit problem. What is lacking are any real efforts to deal with our entitlement debt issues.
You have to ask yourself, why with borrowing rates at the lowest level in history, we are not seeing more economic growth? A variety of factors are holding back activity. Take housing, affordability has never been better, but while things have improved, they are no where near the activity you'd expect based on affordability.
And for the record Keep, you've swung and missed yet again, I'm no a Tea Partier.
Re: "Elk, good post, but you know you broke a few teaparty hearts, like, Deme, Boos, Fighter, Doc, and Theres, to name a few."
Yes, keep, but they are all real fighters and can take inspiration from this new article from THE ONION:
CITING BATTLE OF AGINCOURT, TIM DUNCAN URGES LAKERS NOT TO GET TOO DISCOURAGED BY GAME 1 LOSS
THE ONION SPORTS NEWS IN BRIEF • Sports • Nba Basketball • Optimism • Issue 49•17 • Apr 23, 2013
SAN ANTONIO—Following the Lakers’ 91-79 loss in Game 1 of their playoff series, Spurs power forward Tim Duncan reportedly urged his opponents Tuesday not to be discouraged, reminding them of England’s underdog victory against the French during the Battle of Agincourt in 1415. “Remember, the English were outnumbered 6 to 1, so they had the odds stacked against them, too,” said Duncan, noting that the Lakers should remain focused and positive, “much like the English knights bravely marching into Pas-de-Calais amidst a bloody Hundred Years’ War.” “If Henry V taught us anything that day, it’s that an organized, cohesive unit can turn around any so-called lost cause, so keep your heads up. Sometimes you simply need to find an innovative new approach, as the King did setting his longbowmen on the flanks of the defile to attack Charles d’Albert’s oncoming cavalry.” Duncan added that while the Lakers should take heart from England’s unexpected military triumph, they should also always honor the memory of the estimated 10,000 soldiers from both sides who gave their lives during the 15th-century battle.
UPDATE: Duncan reportedly just called Lakers head coach Mike D’Antoni to offer inspirational quotes from famed king and military leader Frederick II of Prussia.
Sentiment: Strong Buy
Elk .....where is the infrastructure money? why did mismanaged companies like ACTC get money from the american recovery and investment act........Is Gary's paycheck helping out middle class folks?