Paul Krugman: "deficits saved the world"

Paul Krugman's NYT piece "Deficits Saved the World" looks at a "startling conclusion" from Goldman Sachs' Jan Hatzius: "government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression." It should be required reading, and not just for the pretty picture:


Here I show the private sector surplus and the public sector deficit, both as functions of GDP; the private sector line is upward-sloping because higher GDP means higher income and more savings, the public-sector line is downward-sloping because higher GDP means higher revenues. In equilibrium the private surplus equals the government deficit (not strictly true for any one country if you add in international capital flows, but think of this as a picture for the world economy). To make the figure cleaner I've shown an initial position of balance in both sectors, but this isn't important.


This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we're actually having is awful, but not that awful -- and it's all because of the rise in deficits. Deficits, in other words, saved the world.

Keynes to the rescue!


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Let’s note that Krugman didn’t say anything stupid like “deficits don’t matter;” he merely noted that deficit spending prevented the GDP from falling much further and faster than it has. The deflationary pressures of demand destruction (due to falling wages, unemployment, and increased private savings) combine with systemic illiquidity to make inflation a less-than-immediate concern, as Krugman mentioned here:

…a rising monetary base isn’t inflationary when you’re in a liquidity trap. America’s monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan’s monetary base rose 85 percent between 1997 and 2003; deflation continued apace.

Well then, what about all that government borrowing? All it’s doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.

We’d be in much better shape if we hadn’t blown the late-1990s surplus on tax cuts and Iraq, but staving off a complete collapse on borrowed money is our least-worst option right now…at least it’s buying us some time to get our act together before the bills all come due and inflation actually becomes a threat.

Krugman was practically a pariah while he was criticizing Bush, but now that he’s criticizing Obama he gets plenty of press. The Nobel Prize no doubt helped his profile, but I still wouldn’t call Krugman a “Washington insider.”

I dunno why Krugman, a Nobel-winner would have such a reputation in a world where the so-called free-market has shown itself to be nothing more than neo-feudalism. Gee.

Keynesian economics, which bailed our collective asses out after the Great Depression has been demonized by, well, guess who? Obama hasn't employed enough Keynesian economics--he's still in love with the, burp, free market.

Let's see:

"Does his model consider the hyperinflation we'll be seeing by having a $2 trillion (that's $2,000,000,000,000) deficit?"

What are your specific calculations to back this up? I'm not saying we won't see inflation as a result of the stimulus package, but frankly, we haven't injected enough money into the economy as of yet--though I did see where BofA posted quite a gain in the 2nd quarter today. Yippee for the bankers.

"What will bail us out when the dollar is worthless?"

Dunno. What's bailing the worthless dollar out right now? And why, in a bubble economy, might it be this way?

I believe, or tend to agree, the root of the problem extends much deeper than the blip-coverage it receives in much any of the press--who never seem to question the corporate charter, left-right-center. It's an economic-scheme problem, which, as Douglas Rushkoff has pointed out time and again, and was well-documented in the PBS doc "The Ascent of Money," has its roots in the Renaissance when monarchs were losing money to the rising merchant classes and chose to subvert their loss of economic clout by standardizing money by deligitimizing localized trade standards and monies.

Does this mean a return to the gold standard? Hell if I know. I really don't see what much good that will do.

It seems to me that, to avoid global economic collapse, we have to scale back the enormity of globalism and return somehow to a valid exchange value. No doubt, that's a major overhaul of our economic paradigm--but may be necessary, either by choice...or the hard way. Perhaps a collapse is inevitable before this will happen.

None of these guys are saying, by the way, that commerce and competition are a bad thing; they're just pointing out that the control has been centralized in the hands of a very few--and this obviously means negative results for the many. We're on the precipice of a wonderful opportunity here.

Another great documentary on the history of the corporation is called, curiously enough, The Corporation:

And for levity, there are always the busters of the global ruse, The Yes Men:

Krugman: champion of the beltway. And chums with the banksters.

I am amazed this guy has the reputation he does. Public debt is a good thing??? REALLY??? Does his model consider the hyperinflation we'll be seeing by having a $2 trillion (that's $2,000,000,000,000) deficit? Let alone the interest load on $11.5 trillion (that's $11,500,000,000,000) of previously incurred debts? What will bail us out when the dollar is worthless? We won't be able to print more money (because that's the problem to begin with), and we won't be able to borrow our way out of it (because our money will be worthless), so....

...economic collapse?

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