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Fresh off debating the deficit with Joe Scarborough on Charlie Rose, Paul Krugman is now tangling with fellow lefty economist Jeffrey Sachs. At issue is the government’s post-crisis stimulus spending, and the basic tenets of Keynesianism. Or at least that’s what Sachs would have you believe.
Sachs and Scarborough co-authored a Washington Post op-ed titled “Deficits Do Matter”, accusing Krugman of a crude interpretation of Keynes. Specifically, they say that short-term stimulus spending hasn’t achieved increased growth. (Krugman, by contrast, has long called the stimulus too small.) Sachs and Scarborough warn that things will only get worse as the US population ages, and healthcare costs increase. Keynes wouldn’t have approved, they say:
Keynes worried about the long-term buildup of public debt and called for balancing the budget over the course of a business cycle — allowing deficits during downturns to be offset by surpluses during good times. Unfortunately, Republicans and Democrats spent the past decade supporting reckless tax cuts, irresponsible wars and budget commitments without supporting revenue.
The econoblogosphere has waded in to sort things out. Brad DeLong points to a citation error in Sachs’s op-ed: “to support the claim that Krugman said deficits don’t matter, Scarborough and Sachs point to Krugman saying explicitly that people who say deficits don’t matter are wrong”. Mark Thoma does a nice job of pointing out some of the less charitable parts of Sachs and Scarborough’s piece: Krugman doesn’t deny that the US has a long-term debt problem, and he’s backed stimulus spending because “short-run multipliers are sufficiently large, there is substantial cyclical unemployment, and our debt problems are not immediate.”
Ryan Cooper pushes back on Sachs’ claim that the 2009 stimulus wasn’t worth it. The stimulus spent money, he says, on precisely the things Sachs wants to spend money on: renewable energy, as well as rail and highway maintenance. Dean Baker notes that the stimulus is estimated to have created 2-3 million jobs.
Sachs took to his Huffington Post blog to respond in detail to these criticisms, sticking to his thesis that short-term stimulus does little to help the economy, and erodes the public’s belief that government spending can be effective. Tyler Cowen agrees, and calls for a “much longer-term perspective for government spending decisions”. Krugman isn’t changing his views in response. He might not need to. In the larger context of fiscal policy, as evidenced by Sachs’ recent FT column, there’s not much they disagree on. — Ben Walsh
UPDATE: Mike Konczal adds to the back and forth by dissecting the flaws with progressive attacks on Keynesianism.
On to today’s links:
You can’t predict a recession in real time — but if you could… – Calculated Risk
John Paulson may be moving to the magical land of no capital gains taxes (Puerto Rico) – Bloomberg
“The important fact is that we haven’t set a nominal stock-market record in six years” – Robert Shiller
“Evidence suggests that a little less than half of the decline in bond yields since 2007 has been due to QE” – FT
A hilariously ostentatious hedge fund manager was arrested in Florence after 5 years on the lam – Bloomberg
SEC accuses Illinois of securities fraud for allegedly misleading investors about its pension plans – NYT
Full complaint: SEC vs. Illinois – SEC
And, of course, there are many more links at Counterparties.