Jeffrey Sachs on Paul Krugman

by on March 10, 2013 at 1:09 am in Economics, Uncategorized | Permalink

This is an essential read and I agree with Sachs by at least two-thirds; he is on target with his remarks about “crude Keynesianism” and also the desirability of a much longer-term perspective for government spending decisions.  Here is one of many excellent paragraphs:

One of the Obama arguments at the time was that the rush in the stimulus program was needed to avoid a Great Depression. This was and is highly doubtful (though, yes, it is widely accepted). The US economic emergency in late 2008 and early 2009 wasn’t really an aggregate demand crisis but a financial crisis. The chaotic failure of Lehman Brothers had led to an intense panic and credit squeeze. The Fed therefore needed to flood the markets with liquidity, which it rightly did, in order to unwind the panic. The Fed’s action was the real difference with 1933 (when the Fed allowed the banks to fail). It was the Fed, not the fiscal stimulus, which prevented a fall into depression.

And this:

Third, crude Keynesians like Krugman believe that we don’t have to worry about the rising public debt for many years to come, perhaps well into the next decade. This is remarkably shortsighted. The public debt has already soared, from around 41 percent of GDP when Obama came into office to around 76 percent of GDP today (and with no lasting benefit to show for it). If Krugman had his way, and deficits were not restrained, the debt-GDP ratio would already be above 80 percent by now and would be rising rapidly towards 90 percent and above (as shown in the recent CBO alternative scenario).

Read the whole thing.  The article has many of the best paragraphs I have read this year, for instance try the one on the “spending is spending” view:

This approach is disastrous both politically and economically. Progressives like myself believe strongly in the potential role of public investments to address society’s needs – whether for job skills, infrastructure, climate change, or other needs. Yet to mobilize the public’s tax dollars for these purposes, it is vital for government to be a good steward of those tax dollars. To proclaim that spending is spending, waste notwithstanding, is remarkably destructive of the public’s trust. It suggests that governments are indeed profligate stewards of the public’s funds.

TeenageRiot March 10, 2013 at 4:53 am

When a financial crisis wipes out or significantly reduces a household’s wealth, how does this not reduce AD? Am I missing something? Furthermore, when a country’s GDP growth is so inextricably tied to consumer spending–one fueled by credit over the past decade–how does a financial crisis not diminish said consumer spending by considerable amounts? How is this not a reduction in AD? Perhaps I’m being asinine, but I cannot understand how Sachs can decouple the 2008-09 financial crisis from an AD crisis.

dan1111 March 10, 2013 at 5:00 am

He is merely making an argument about what was the primary cause, not denying all connection between the two.

Andrew' March 10, 2013 at 10:06 am

I don’t like that Aggregate Demand is used to mean anything under the sun. A wealth-effect is real and wouldn’t be considered an animal spirit. Thus, the AD shortfall would, in my mind, be that which is over and above (the overshoot) of the real wealth (and deleveraging) effects.

anon March 10, 2013 at 10:19 am

aggregate demand (what we are willing to buy, at a given set of prices) is not anything under the sun…it is not aggregate supply (what we are willing to make, at a given set of prices). the source of wealth effects, that is the co-movement of net worth and consumer spending, is probably a mixture of three things 1) increase in wealth makes people feel wealthier in a lifetime resource kind of way so they spend more 2) an increase in wealth relaxes collateral constraints on borrowing, including ‘the eat your house’ effect of equity extraction 3) rising asset prices makes you raise your outlook for the economy, your income prospects leading to more spending. All three of those fall pretty squarely on the aggregate demand channel … what you are willing to buy. I also think financial innovation, relaxation of credit was more about demand for stuff than the supply of stuff. but you are correct, initial impulses got all mixed up once the recession got going.

john presonna March 10, 2013 at 10:52 am

I saw in the selection above the assertion that this was a financial crisis, so I flipped over and searched the original for the word “mortgage.” Astonishingly, in an analysis of this most recent crash, and the threat to the general economy, that word was not used.

maro60 March 10, 2013 at 5:01 pm

Mark Thoma has a brilliant, detailed takedown of Jeff Sachs (and indiredtly Tyler Cowan) and his OpEd with that ignoramus Joe Scarborough (what was Sachs thinking). I suggest Mr. Cowan read it.

Rich Berger March 11, 2013 at 9:45 pm

If by “brilliant” you mean a string of assertions backed up with almost no facts, yeah, I would agree.

Ashok Rao March 10, 2013 at 5:22 am

Just got around to writing about this piece. I completely agree with Sachs’ prescription, just not his assessment of Krugman which seems rather unfair. Unfortunately, Sachs can’t have the luxury of being both an advocate of public infrastructure and investment while simultaneously fearing our short-run deficit.

My thoughts:

DocMerlin March 10, 2013 at 5:34 am

Its well over 100% now, if you include what is held by the Social Security trust fund (and there is absolutely no reason not to.)

Jan March 10, 2013 at 2:24 pm

Your only counting the trust fund’s deficit, right? Because there’s absolutely no reason to include the whole fund in the calculation.

Feyi March 10, 2013 at 4:56 pm

Why not? Or is there some social security piggy bank with lots of cash in it somewhere?

Jan March 10, 2013 at 6:59 pm

Because it is paid by the Social Security revenues that come in the door each month.

Counting the _difference_ between monthly SS revenues and payments is fine, but you don’t tally obligations that you have a steady stream of revenue to cover for as deficit.

maguro March 10, 2013 at 8:00 pm

I would say there’s no reason to consider the SS trust fund in any debt calculation. It’s strictly an accounting fiction.

careless March 11, 2013 at 10:02 pm

Why would you include SS? It’s an accounting fiction when Jan pretends there’s money in the “fund”; it’s still an accounting fiction when it’s stuck on the national debt.

mw March 10, 2013 at 5:47 am

Here’s a ‘longer-term’ perspective–when you allow millions of people to become unemployed for >6 months and do nothing about it, you create a generation of failed lives, depressed tax revenue, and lower economic output. “If Krugman had his way” that would never have happened. And what effect would *that* have had on debt-to-GDP?

careless March 11, 2013 at 10:03 pm

He’s the real lightworker.

buratinovn March 10, 2013 at 5:54 am

Anyone read Paul Krugman knew much better than Jeff Sachs. The Fed at that time and until now has been up against the liquidity trap (it surely can not reduce interest below zero). It may have prevented another Great Depression but without further fiscal stimulus policies the US economy and unemployment rate would be far worse than they are today. The UK, Latvia and other austere countries are good examples of how austere instead of stimulus policies led to economic ‘success’.

Secondly, why is that obsess with debt ratio? When did you economists start believing in the confidence fairy and bond vigilante instead of polls and numbers? Is there any worthy proof of a magic threshold that that ratio should not cross? Don’t cite me some papers that Krugman, Martin Wolf, etc have refuted or debunked completely with major holes or flaws.

Thirdly, that ridiculous straw man ‘spending is spending’ or ‘breaking windows then fixing them’ programs have obviously never been proposed by a Keynesian, let alone a scholar like Paul Krugman. I supposed Jeff Sachs or Tyler Cowen would not think spending on Infrastructure, education, green energy, high-speed internet and mobile network, healthcare insurance is “disastrous both politically and economically”, would they? Attacking a straw man is both ‘deep in thought’ and ‘fashionable’, men.
I praised Cowen for praising Sachs for such ‘essential read’. Said more about their knowledge and thinking than about anything valuable, though.

Ray Lopez March 10, 2013 at 7:24 am

You and Ashok Rao seem to be versed in economics, and you both make good points, yet you both missed the theoretical thrust of Sachs arguments. Let me, a computer programmer, set you both straight.

1/ Sachs is a “big push” advocate for Africa. Hence he likes bigger spending.

2/Sachs (unlike both of you apparently) understands Neo-Keynesianism (NK), which incorporates the work done by Robert Lucas from Rational Expectations in the 1980s into classic Keynesianism (of the Krugman type). Briefly, the latter says: “credibility matters” and hence “duration matters”. Wedded to Keynesianism, NK proscribes: If you promise stimulus that will last a month, people will save the stimulus; If you promise stimulus ‘forever’, people will spend the stimulus.

3/ Sachs does not believe in the Ricardian Equivalence Theorem.

When you educate yourself to my level–that of a layman computer programmer who read the Economist–get back to us. Cheers and thanks for reading.

TMC March 10, 2013 at 11:54 am

Ouch!, but well said.

Ashok Rao March 10, 2013 at 12:55 pm

I actually haven’t studied any formal economics (unless you consider AP ‘formal’) and am myself interested in comp sci (I’m certainly much better with programs than econ models!)

1. I understand that Sachs is pro-development etc etc.

2. You know what else rational expectations says? That when I’m deciding whether to invest in a corporation I sit and calculate the various probabilities of different presidential candidates, their effect on net debt, then chance that taxes are going to increase and consider the extent to which debt will cause interest rates to increase and then figure out what to do. I.e. that we’re working our expectations towards one equilibrium.

The order of causation is just the opposite, that is changes in our expectations change the equilibrium. At least the math in the model works on the false assumption of reverse causality.

Ashok Rao March 10, 2013 at 1:06 pm

And I understand the concepts behind the points he makes, but his paper was of editorial, not ‘theoretical’, thrust.

Ray Lopez March 10, 2013 at 1:26 pm

Sounds good AR, and I fully agree. And next time MR has a post on Real Business Cycle theory, we can both flame it! :-) Oh, I see TC has a sanitized version of RBC on YouTube:

Ashok Rao March 10, 2013 at 2:36 pm

I’m actually a tad bit confused what I said with which you agree. I’m pretty sure I reiterated the same points I made earlier, to which you said, “When you educate yourself to my level–that of a layman computer programmer who read the Economist–get back to us. Cheers and thanks for reading.” !

Very Serious Sam March 10, 2013 at 5:57 am

Good points Sachs makes in this piece. As for the recipe “Just spend and cut taxes, we are told, and the economy will recover and go back to normal”, the tax cut part is especially heavily proposed by Obama’s oponents. Anyway, Keynesianism doesn’t work, this is proven beyond doubt by now.

There is deficit spending always and everywhere. It apparently doesn’t improve things a lot. And in contradiction to Keynes’ request there is almost nowhere almost never any reduction of debt during boom times. Just a bit less deficit spending. If this part could be done, it would be done. But it isn’t. A theory which constantly fails the reality check is confuted.

Ray Lopez March 10, 2013 at 7:48 am

Neo-Keynesianism may work–it’s never been tried properly say its advocates–see my comment upstream VSS. But all these econ theories and their advocates reminds me of arguing with political ideologues here in Greece; they have a pat answer to everything, so it’s not worth the effort to argue. Communism is not refuted by the USSR, since the latter was not true communism. Greece is backwards not because of what it does but because of foreign powers holding it back; if only Istanbul was Constantinople. The CIA is all powerful and rules the world, but being a secret agency stays out of the news so you can’t prove it. Jews monopolize or are over-represented in banking. Well, maybe that last part is true. Carnival of ideologies. My own view: economics is non-linear and has various states that support nearly all theories. Dim the lights in a factory, productivity soars; raise them again higher, and it goes up again. By this logic eventually the world will try nearly every remedy, including printing money. Right now the USA, if it follows Sachs logic, will try and do what Japan did 20 years ago–build ‘long term’ projects like infrastructure, and spend massive amounts of money. It may not work, as it did not in Japan. Right now, Japan is going to try the ‘print money’ route–we’ll see what happens but it might just be inflationary. I predict default and a reset. Compound interest depends on constantly rising prices, and the Hebrews with their “50 yr Jubilee Debt Forgiveness” play may have intuitively grasped the simplest solution to debt: default.

Very Serious Sam March 10, 2013 at 9:06 am

Yes, default and reset, this is what will and must happen eventually. As it did time and again in history. I’m not an economist, and I do not understand more than a few basics. But some decades ago I learned a bit about exponential functions and compounded interests. It became perfectly obvious to me that there is no such thing as neverending growth for economies, and thus for standards of living. Can’t be.

Apparently the pundits, no matter which school, seem to have another view. Unless I’ve missed something, no leading economist ever developed a concept how an economy (and society), or the set of economies (and societies) which form the world, can sustain if there actually is no growth anymore. Let alone, what to do if an economy even contracts.

For instance, all this discussions about public debt. Absolute values are not important to the scholars, only relative to GDP ratios count. But, as for instance Greece learned the hard way, absolute debt levels do matter quite a lot if your economy is shrinking…

Ed March 10, 2013 at 9:36 am

You put your figure on why I take modern economics (at least the mainstream stuff, post Ricardo and Malthus) with a big grain of salt. Eventually the industrial revolution has to end. The growth the world experienced since the late eighteenth century has to stop. Maybe today, maybe around 2100, who knows? And what then? I don’t think the economists even have the language to discuss what happens.

ThomasH March 10, 2013 at 7:52 am

Sachs can make the point that public spending should be efficient without seeming to be unaware that what is efficient when there are unemployed resources and savers are willing to accept very low real returns is much larger activity set than when the econmy is operating near full employment. Krugman spends 99% of his ink arguing against “reduce-the-deficit-to-zero-right-this-minute-ism” and “hyperinfaltion-is-right-around-the-corner-ism.”

Cliff March 10, 2013 at 4:06 pm

Ah, so he spends 99% of his time wrestling with straw-men.

tgs March 13, 2013 at 12:17 am

Haha, zing!

Frederic Mari March 10, 2013 at 8:14 am

I think no one argues for ‘more waste, please’ when they say ‘spending is spending’. I even doubt that they approve of ‘gifts to insiders/special interests’ within that sentence since those guys are unlikely to have a multiplier very much above 0.

It’s just a matter of rating the urgencies. of what do you need more? To get every $ spent wisely and properly accounted for or to get people back into jobs? As soon as you have organisations involved, be they private or public, you will have some waste. It’s inevitable. You should fight against it as hard as you can but the very fact that there is waste should not paralyze you.

As to destroying people’s trust, that certainly is the most potent argument. But it’s a political argument and people are well known to easily be idiots when it comes to counter-intuitive macro management.

Besides, it’s not a problem entirely without solution. Your first fiscal measures could consist of tax cuts (notably, sales taxes and payroll taxes below, say, $50k a year) and that might give you time to plan your infrastructure spending more properly.

You could also slow down on the byzantine federal/state organisational bullshit and reform infrastructure planning. I mean, it’s not like the US is the only country in the world having to build and maintain infrastructure. There’s no reason they should be worse than anyone else at doing it.

Morgan Warstler March 10, 2013 at 11:23 am

This is about productivity gains. If you think about any other issue, you are missing forest.

As in, “hey we can give you better more responsive govt. with fewer employees”

Productivity gains are actual Real economic growth. Econc risis is when you get your best prod. growth, you cut away the fat.

The job of fiscal folks is to deliver the same gains as the private sector. The rest takes care of itself. Give up hat 4% productivity gains YOY and you ca have all the fiscal you want.

Ex: infinite infrastructure but only with non-union labor and fast track rubber stamp EPA. You get unlimited roads and bridges, but you have to WANT to whack sticky wages and prices.

derek March 10, 2013 at 11:33 am

>I think no one argues for ‘more waste, please’ when they say ‘spending is spending’

Then you go on to argue the opposite. Look at what you are proposing. Taking money from someone, or borrowing against some future income to do something that has no value at all except the fact that it is spent.

That is exactly the point Sachs is making. These types of actions require political support. The results are very seldom what is promised, there may be jobs but they disappear as soon as the money stops.

This makes everyone angry, especially those who have to pay. So they won’t allow it again, which may be the net result of the action. This is exactly what happened in 2010. A congress was voted in with the express purpose of stopping the Obama administration from spending more money and implementing more expensive entitlements.

W.E. Heasley March 10, 2013 at 8:21 am

Mr. Sachs makes an argument that his form of Keynesianism is better than Mr. Krugman’s form of Keynesianism. Basically, as a debate point, Mr. Sachs has the best house in a bad neighborhood rather than Krugman’s claim of the best house in the bad neighborhood. As the debate points are laid out, the reader is driven away from the possibility that both approaches are charlatanism and lead to Sachs trumping Krugman as counterfactual charlatanism is better than deployed charlatanism.

Both approaches devised, at the kitchen tables of competing bad homes in a bad neighborhood, are central planning deployed policy via politicos through the mechanism of government. Yet one is wasteful and caters to special interest whereas the other is a wonderful altruistic approach. Nay, nay. Public choice theory predicts politicos through the mechanism of government will, in their own self-interest, cater to special interests resulting in wasteful spending. Hence skip this debate point as it is based on one approach resulting in altruism while it simultaneously accusing the other, which is a similarly deployed approach, of non-altruism. That is, the debate point is one of: central planning expert A is better than central planning expert B.

Although the date points are many, the final discussed here is time and circumstance. Sachs argument is that he can predict time and circumstance and hence his centrally planned procedure, deployed by politicos through the mechanism of government, mirrors exact time and circumstance of the many. Actually Sachs prescription not only can predict and mirror the exact time and circumstance of the many, it enhances the time and circumstance of the many. Yes, better outcomes, as experts centrally planning outcomes is assumed by Sachs to enhance time and circumstance of the many. Brilliantly ridiculous.

anon March 10, 2013 at 8:57 am

I agree with Sachs (and I bet Krugman would too) that the government is a steward of our nation’s resources and thus, to the extent possible, should chart a thoughtful long-run course. Seeing as it’s about the only group still running serious programs for the aged and the infirm and supporting most of the basic research and education in this country, I think the government’s track record is pretty good (relative to the real world alternatives). Name one firm or institution who without government support is doing more to support the long run. I would even agree that now is probably the time to shift to more long-run policies like education, immigration, infrastructure, regulatory reform, etc.

My big concern with the article is the odd spinning of recent history to support his argument. The idea that in the fall of 2008 and spring of 2009 that the government should have been more focused on long-term infrastructure projects is pretty wild. First, there is an internal contradiction in the article. The Fed is held up as averting the Great Depression 2.0 and yet, one could argue that they pushed aside the long-term demons of moral hazard as they addressed the very real dangers of short-term financial system collapse. Could you imagine if instead of bailing out AIG, the Fed had announced they would first take “several months to design and advocate for” a plan to address ‘too big to fail’? I suspect we’d be arguing about something else today …

Second, we can argue endlessly over what ’caused’ the Great Recession or what gave it the ‘Great’ designation….but in some ways by early 2009 it didn’t matter so much, as the problems were everywhere. In the second half of 2008, real GDP, including consumer spending, was plummeting … this was not just a financial crisis, it was very real and people, not just Wall Street folks were freaking out. I am not going argue about stability or size of multipliers. I don’t think we got the biggest possible bang for the buck with the stimulus programs, but we got some bang and we needed it.

Finally, can anyone tell me how much a long-term unemployed or under-employed person adds to our long term debt? Our people, our human capital are often hard to account for and yet so valuable. Isn’t it better (even in a wonky potential GDP sense) to keep someone employed temporarily with AD policies until the long-run re-training programs are up and running? The short-run and the long-run are not mortal enemies and much of this writing plays up a false dichotomy.

john personna March 10, 2013 at 10:59 am

There is a bit of “knowing what we know now” in his prescriptions for 2008.

UnlearningEcon March 10, 2013 at 9:46 am

“Third, crude Keynesians like Krugman believe that we don’t have to worry about the rising public debt for many years to come, perhaps well into the next decade. This is remarkably shortsighted. The public debt has already soared, from around 41 percent of GDP when Obama came into office to around 76 percent of GDP today (and with no lasting benefit to show for it). If Krugman had his way, and deficits were not restrained, the debt-GDP ratio would already be above 80 percent by now and would be rising rapidly towards 90 percent and above (as shown in the recent CBO alternative scenario).”

This just begs the question of what exactly the problem is. Big numbers!!!!! Wooo!!!!

derek March 10, 2013 at 11:36 am

So you think it’s ok for the Fed to bend the yield curve to keep government borrowing costs low so that they can continue paying for pensions and hip replacements?

UnlearningEcon March 10, 2013 at 5:04 pm


bjssp March 10, 2013 at 10:21 am

There’s not near as much difference between these two guys as Sachs wants to believe.

You’ve got to love how Sachs claims Krugman has never “quantified” his call for more stimulus, which is easily debunked. Try this, for starters:

You’ve also got to like how Sachs seems unable to piece together what Krugman might do in the deficit. He’s made positive comments about the proposal to limit deductions for high income earners, as he does here: He also, rightly or wrongly, has been a staunch advocate of a public option and, even more urgently, single payer. That’s far from the only thing that might be done, but it’s certainly not something to be ignored. That Sachs isn’t aware of this, or just ignores it, is odd.

I guess we should just ask him how he feels about rolling back all of the Bush tax cuts. I doubt he’d give us much trouble, when the economy is stronger. Hell, he seemed mildly supportive of the House Progressive Caucus proposals, which contained much larger tax increases than the White House was proposing.

You can also note that, since the deficit is largely a product of the recession, largely goes away on its own. He’s made one post in the last two days on this and several similar ones: This makes a lot of sense to me, but Sachs seems to think the issue is far more structural.

As far as the debt goes, what has Obama done to make this so much worse? Sachs might be right that the debt to GDP ratio would be really high–if Krugman is wrong. If Krugman was right, and we got a better recovery, we’d have less debt, because the economy would have been stronger. And again, I don’t think Krugman would argue with Sachs that we need long-term investment AND that this should be paid for rather than constantly put off, as we saw with various spending during the Bush years. If budget balanced multiplier stimulus, a la Robert Shiller, was an option, I doubt Krugman would hesitate to sign on. He might prefer not paying for it at the moment (the key words here being “at the moment”), but much like with the ACA, he wouldn’t let the perfect be the enemy of the good.

I’ll link to Dean Baker, who does a great job of spanking Sachs:

Orange14 March 10, 2013 at 10:25 am

Professor Sachs should be glad that Britain is doing so well these days. Maybe he a closet Osborne adviser.

Yancey Ward March 10, 2013 at 11:12 am

I wouldn’t trust either one of them to run a lemonade stand.

tt March 10, 2013 at 11:29 am

where were all these people back with
Dick “Deficits don’t matter” Cheney ?

Brian Donohue March 10, 2013 at 11:33 am

Nice effort by Sachs, but he’s already being eviscerated by the deficit deniers here and elsewhere.

I thought this might provide an opportunity for liberals to wake up and reflect, but judging by the reaction here and at HuffPo, that ain’t gonna happen.

Representative reaction: “people are known to easily be idiots when it come to counter-intuitive macro management”

Ok, says the American people, I’ma listen one more time real close to your story about how if we only dig a hole and fill it in, we’ll all be better off. So, enjoy life in you little self-referential clueless ivory tower of consensus.

Zach March 10, 2013 at 11:42 am

Such long-term investment programs are very different from quick-and-dirty Keynesian “stimulus” packages such as temporary tax cuts. Long-
The Administration should indeed have taken several months in 2009 to design and advocate for long-term investment programs for renewable energy, fast intercity rail, large-scale highway upgrading, large-scale skill and job training, and so forth, rather than rushing to pass a stimulus package of hundreds of billions of dollars of shortsighted and largely ineffective temporary tax cuts and transfer programs.

This is the real trouble with Keynesianism. The investments that would actually yield a positive return on the dollar are in short supply. Even Sachs’s ideal stimulus if full of liberal hobbyhorses and rent seekers.

1) renewable energy — very old idea, huge money sink. Existing technologies are not competitive with oil, nor are there immediate prospects for technologies which are.

2) fast intercity rail — liberal hobbyhorse. Huge money sink. Very dubious that it will compete with airline travel on either a speed or a cost basis. Beloved of rent seekers who will either build the new rail lines or else acquire them for pennies on the dollar after the inevitable failure.

3) large-scale highway upgrading — may possibly have merit, but this is a regular line item in the budget, with dedicated tax revenues. Very long lead times. There’s already a competitive process to identify high value projects — lots of danger that new money will just finance the losers.

4) large-scale skill and job training — liberal hobbyhorse. Also a feature of regular budgets, and most programs to date have had very disappointing results. Uncomfortable question — is the problem that American workers are lacking in skills, or is it that the wages for a large class of jobs are collapsing below the point where American workers can profitably fill them? (America being a more expensive place than China, etc).

5) and so forth — let’s hope there’s a lot of this, because the big ticket items are uninspiring.

A WPA-style public beautification campaign might actually be possible to implement in a few years and have some lasting value, while not competing with regularly budgeted items. But are you really planning on saving the economy with some courthouses and murals?

derek March 10, 2013 at 1:09 pm

I think the key is #4. Almost every initiative since 2008 has had the effect of making it either in the short run or long run more expensive to do business in the US. Borrowing money to paint murals in an already uncompetitive economy is ridiculous.

I challenge even the assumption that slowdowns should be responded to at all. Capitalism works only as well as it’s inherent discipline mechanisms. A downturn as severe as 2008 was due to fundamental failures in competence, strategy, policy, regulatory structure, and so on. It was the culmination of the unheard of second bubble of a generation collapsing. Everyone needed a really good drubbing down for the collective stupidity that was considered as sound. If these drubbings had been allowed to proceed unhindered over the previous decades, the magnitude would have been far less.

So we have the strange situation where incomes are stagnant or falling, GDP is growing very slowly, along with employment, and we have the makings of a third bubble in a generation in asset prices. You would almost think that the Fed is simply doing damage.

I also think that US business elite have lost the skill and ability to effectively manage labor. The solution for almost two decades now has been to outsource. If someone put together a venture that employed 40k or so, similar to the Apple manufacturing, would it actually produce anything? Could it? Why would anyone try?

Zach March 10, 2013 at 2:16 pm

I think we’re basically in agreement, but I’d add that if things like job retraining, etc. were even marginally effective — say, if they gave 90 cents of value for every dollar invested — they’d be worth doing. Blue collar workers are Americans in good standing, and if we can lessen the impacts of the recession in a cost effective way, then we ought to do that. What I’m opposed to is the possibility that we’re only going to get 10 cents worth of helping, or zero.

derek March 11, 2013 at 1:19 am

The devil is in the details. There is a tendency to academicize things too much. There is a cultural revulsion in the US among the educated towards the education required for a working class job. The best is to have employers involved in the education either directly by apprenticeship type arrangements or indirectly by having them design the courses that potential employees could take. A friend at the local community college describes the battles with the administration and faculty over the programs that he teaches; process control, and things similar. Local manufacturing hires almost everyone out of his courses because they are short, to the point and gets folks qualified to start. The faculty wanted the courses to be longer and more expensive.

I would also seriously look at the barriers to employer training schemes. They almost don’t exist anymore but they are the best arrangement possible for an employee. It used to be good for employers. Why not any more?

These things aren’t about money, they are assumptions that are expressed through policy.

steve March 12, 2013 at 10:46 am

Yes, I didn’t know whether to laugh or cry when I read Sachs’ list of supposedly wise investments. If they are the best options he can come up with, then maybe we are no worse off with the “spending is spending” approach.

Two projects I might consider are freight rail infrastructure improvements and nuclear power development.

Li'l Em-Kel March 10, 2013 at 11:55 am

Geez, now I know why they call Economics the Dismal Science. I have never read such a muddle-headed collection of claptrap as this discussion. Not only can nobody figure out what the future holds, these economic-financial-fiscal policy “experts” can’t even figure out what happened in the past! You guys would fit right in with the railbirds who make bad decisions and good excuses nine times a day at Aqueduct.

MJ March 10, 2013 at 2:28 pm

Here is Daniel Kuehn on the issue:

Sachs, to say the least, is not exactly keen to assess Krugman in ways that make his argument strongest. It’s telling that TC, who demands exactly that in a worthwhile discussion, labels this as one of the best things to have heppened this year. Mood affiliation?

MJ March 10, 2013 at 4:01 pm

Update from Kuehn with links pointing to posts from Thoma, econospeak, Delong, and Wren-Lewis on the Sachs piece(s):

And this on Tyler Cowen:”Tyler Cowen thinks it’s “essential reading”. That’s disappointing. Like I said, as analysis of the situation Sachs’s Huffington Post piece especially wasn’t all that bad. It would be nice if Cowen would acknowledge that it was a horribly executed and entirely uncalled for hit piece on Krugman that as a result probably makes good policy less likely.”

Often people who mean to critisize Krugman aim their criticism at what they think the unwashed masses might believe him to have said, rather than to what he actually said.

MJ March 10, 2013 at 5:24 pm
TallDave March 10, 2013 at 8:00 pm

Krugman’s work on Japan is supposed to be the example? How’s Japan doing with all that fiscal stimulus? They’ve pushed debt to incredibly high levels with virtually no growth to show for it. Krugman’s only argument is “well, it could have been even worse!” Japan’s problem is that monetary policy has been too tight, which they’re finally figuring out after decades of crude Keynesian failure.

Then he argues there’s all kind of evidence fiscal expansion works, except there’s actually none at all because no one in Europe is crazy enough to try it when the bond markets are already scared by current debt levels. Again, his argument is “things would be great if they’d only tried fiscal expansion, since things aren’t great that proves I’m right” But fiscal expansion is how they got in this mess — and despite all the talk of austerity most countries are still spending more than in 2007. The antidote to poison isn’t more poison.

Where Krugman is correct is that monetary policy has been too tight. But he keeps implying there’s nothing monetary authorities can do to push NDGP higher, which is obviously wrong. The reason he keeps saying this, as best anyone can tell, is that he does, in fact, favor fiscal expansion generally for ideological reasons.

MJ March 10, 2013 at 8:32 pm

Well, no, your first paragraph just shows that you are oblivious to what his Japan paper from 1998 is about.

I have no idea what the second paragraph means. First, the fact that Europe is contracting under what he calls “austerity” is, in and of itself, the evidence – stimulus works in both directions. Second, regarding the US stimulus, the debate is about the studies that have been collected by Dylan Matthews at wonkblog during an argument about “evidence” during the campaign:

Third, Krugman does not say whatever you have read into whatever you are referring to, but just that monetary stimulus doesn’t work via the regular channels (that is, when one is not in a liquidity trap). Why he prefers the fiscal option is related to these changed circumstances, and you might want to read what he actually said about monetary vs fiscal options in a liquidity trap. This does not mean that you cannot disagree, but it would avoid that you burn down straw men.

Please, next time aroud provide links to what you are talking about, even in a comment section I am not willing to discuss what somebody is fantasizing together. I am also not interesting to get a shorthand version of what you read at Scott Sumners blog. If you feel fit to argue with Krugman’s positions yourself, do it – if you are just regurgitating someone else’s points, be honest and reference them.

TallDave March 12, 2013 at 11:15 pm

You have no idea what you’re talking about and I’m not wasting any more time on you.

TallDave March 12, 2013 at 11:17 pm

Seriously, I don’t mind having a conversation but you need to have some level of grasp on reality and you just are not there, and my time is limited.

Al March 10, 2013 at 3:11 pm

What was so great about the quotes Cowen supplied? In one of them, Sachs obviously employs a rhetorical trick to conflate Krugman’s wasteful spending vs. no spending argument with an infrastructure spending vs. wasteful spending argument. This is not a good economic essay. It’s just a political editorial.

maguro March 10, 2013 at 4:05 pm

How is Krugman’s argument of “wasteful spending vs. no spending” anything other than a rhetorical trick? No one is seriously proposing “no spending”.

Al March 10, 2013 at 3:15 pm

There is no spending is spending view, unless you have political blinders on. There is a bad spending is less bad than no spending view. Is this blog still about economics?

Brian Donohue March 10, 2013 at 3:41 pm

‘a bad spending is less bad than no spending view.’

Forsooth, man, this is the almost-universal view of economists, repeated and defended here and elsewhere ad nauseum.

Only a handful of economists, like Kling, seem to consistently avoid this magical thinking.

The American people understand that ‘bad spending is bad spending’. Period. They correctly laugh in the face of the wisdom of crowds of economists. Good for them.

TallDave March 10, 2013 at 7:48 pm

Fiscal restraint, monetary stimulus. Government spending isn’t efficient enough to raise living standards in this range of %GDP. If it was, the Nordic countries and Canada wouldn’t be moving in the opposite direction.

Me March 10, 2013 at 11:51 pm

I love it when liberal economists argue. They are like two sissies with their heads yanked backed slapping at each other. My money is on Sachs. He’s not as trollish as Krugman, who appears to be getting shorter and rounder by the week.

Adam March 11, 2013 at 12:03 pm

I could not disagree more about the need for a much longer term perspective on government spending decisions. Doing so requires longer term projections, which are inherently uncertain (i.e., wrong) and thus requires making poor short and medium term policy choices on the basis of poor, uncertain views of what will happen well in the future. It also ignores the path dependence of those projections on current policy decisions.

It’s the one thing about which Krugman has been most right. It’s absolutely ludicrous to be making cuts in discretionary spending now, especially if we can reasonably expect them to slow growth (i.e., future revenue) because we are concerned about future spending obligations on health care ten years from now. At best, it’s irrelevant. At worst, it will only exacerbate the problem.

I’m really starting to think that in a perfect world, the CBO would only be allowed to do five year projections. Anything longer than that says more about the assumptions used in the projection (principally the growth assumption) than about anything in the real world.

Finally, I actually doubt that Tyler believes what he says. If long term projections were rosy, I doubt Tyler would say we should be stressing them to get more spending now. I suspect Tyler likes a longer term decision horizon now because it fits with his policy preferences for lower spending.

Brian Donohue March 11, 2013 at 12:36 pm

This is the heart of the matter. If we spend $100 billion more on infrastructure today (or digging holes and filling them up even), what will be the impact on unemployment?

3 months from now? Decrease.
6 months from now? Almost surely decrease
1 year from now? Probably decrease
5 years from now? No clue.

To the extent economists want to stay within their ‘zone of expertise’, they restrict their comments to short-term impacts. This, of course, is hard-wired into Keynesian DNA anyway.

But you know what: you don’t need a PhD in economics to answer any of those questions.

Of course what we want to know, what we need to know, is what the long-term impact will be. But these models can never tell us this with any degree of accuracy. So I prefer to chuck ‘em out and rely on common sense questions like “How is it even possible that digging up holes and filling them in can make us all richer?” As soon as someone tries to provide an answer (and Krugman has) I immediately tune them out and file them under the kool-aid drinkers.

Adam March 11, 2013 at 12:51 pm

Um. Okay. Except that the answer to that is pretty common sense. If there is a positive multiplier (a question that can be disputed but for which there is empirical evidence), then more employment in the short term also means more employment in the mid and long term, all else equal.

Brian Donohue March 11, 2013 at 1:08 pm

All else equal, yes. But of course all else is not equal, because the $100 billion we borrow today means $100 billion (more) that we owe in the future. As far as I’m concerned, the whole edifice of Keynesian economics is dedicated to some free lunch here that I think is bogus.

There isn’t a government department out there that can’t patiently explain how, for every dollar spent, $3 (or whatever) is generated. They are very good at these stories, since it’s the basis of their lifeblood. But of course this isn’t true, it’s not nearly so easy as this. If it was, we’d all have been farting through silk long ago based on the perpetual-motion machine that is government spending.

It’s not as if we haven’t been running the Keynesian playbook for five years now. Stimulus, tax cuts, going on $5 trillion in new debt. I say it’s time to put the crack pipe down for a bit.

And my view is the outlier view here. Sheesh.

Adam March 11, 2013 at 3:22 pm

Okay, well, there’s a lot wrong here.

First of all, you’re “paying back” $100 billion in the future out of a bigger pot. The strict Ricardian equivalence you imply is, simply, wrong.

Second, I don’t think I’ve ever seen a government department make that argument.

Third, we absolutely have not been running the Keynesian playbook. We’ve had a little bit of stimulus for two years at the federal level, coupled with massive austerity at the state and local level and three years of modest austerity at the federal level.

Finally, yes, all else won’t be equal, but none of what you mention if the reason why. Other things outside the control of government will also happen, so it will always and forever be impossible to measure.

But really, you’ve given up the game when you say there will be positive employment effects for a year.

Brian Donohue March 11, 2013 at 3:52 pm

Adam, I thank you for this (presumably non-satirical) summary of the Keynesian worldview.

The Anti-Gnostic March 12, 2013 at 7:44 am

First of all, you’re “paying back” $100 billion in the future out of a bigger pot.

When the private sector leverages, they gamble on future profits. Sometimes it works, sometimes it doesn’t, and presumably we all agree that ‘freedom to fail’ is important. Government lacks even that signal; it just raises taxes or issues more debt, and points to aggregate statistics to justify its choices. It’s not that they can never get it right, just that there’s a lot of built-in reasons for them to get it wrong.

Nathan W March 11, 2013 at 1:56 pm

The phrase “with no lasting benefit to show for it” suggests that we know what situation the economy would have been in if there was no stimulus.

john hartigan March 11, 2013 at 9:56 pm

Where is President Obama quoted as predicting a depression?

john hartigan March 11, 2013 at 9:59 pm

Where is Prof. Krugman quoted as forecasting low rates into the next decade?

Hunter Roberson March 11, 2013 at 11:27 pm

I believe in this 100 percent. If we had not pushed the stimulus program then we would have gone into another depression. Being that because of the recession, we closed the hardware store that my family owned and operated for 59 years (Roberson’s Supply), we got a little taste of what it would be like. I am only 19 but I am in some history classes and one of our topics is the Great Depression. I have learned the lifestyle that some people had and knowing that we can prevent a depression and we are not doing our best gets under my skin from time to time. America does not need to be under that status again.

The Other Jim March 12, 2013 at 10:22 am

>It suggests that governments are indeed profligate stewards of the public’s funds.

No, we don’t need anyone to “proclaim” or “suggest” that the Fed’s primary goal is to amass and squander money, first by taxation and then by borrowing. We need only look at decades of reality. Though it is nice that an economist, of all people, noticed.

Bonus points for referring to Krugman as “crude.” One can feel his rage over that for miles.

Steve J March 12, 2013 at 10:27 pm

This has got to be one of the funniest set of comments I have seen in a while. A huge tax and spend guy gets adored by people who hate taxing and spending simply because he bashes Krugman. You can think about what Sachs is proposing for 10 seconds and realize these ideas have ZERO chance of ever becoming policy. What a joke…

TallDave March 13, 2013 at 9:24 am

Yeah, as you can see from MJ above, the Krugmentariat may not know what Krugman is advocating, but they’re pretty damn sure he must be right! :)

Steve J March 13, 2013 at 12:20 pm

I thought there was a general understanding that Krugman is a pundit first and an economist second. In his role as a pundit he often ignores anything other than first order effects to maintain a clear message. I think the Krugmentariat finds it hard to believe a bunch of layman understand this better than renowned economists. Krugman is often derided for toppling strawmen. The same people who usually deride Krugman are not applying the same standard to Sachs.

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