Opinion

Felix Salmon

Counterparties: Krugman-Sachs

By Ben Walsh
March 11, 2013

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints toCounterparties.Reuters@gmail.com.

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:

Alpha
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

The Fed
Why Ben Bernanke has been “the only serious economic actor” in Washington – FT

Investigations
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

Financial Arcana
How the IPO game is rigged: explicit kickbacks – Joe Nocera
Bankrupt 1990s Internet toy company still thinks it was undervalued – Matt Levine

Data Points
The top 10% of households hold 80% of the US stock market’s value – Jared Bernstein

Shocking
People lie about who they are, and what stocks they own on Twitter – Reuters

Inequities
Silicon Valley’s hot new growth industry: Poverty – AP

Servicey
How to write speeches for the President – NPR

Incentives
Last year, the NYPD issued 81,126 tickets for tinted windows, and 19,119 tickets for speeding – NYT

Hackers
Australia’s central bank has been hacked by the Chinese – Australian Financial Review

Sad But True
Intrade is shutting down – Intrade

Ugh
A Barclays banker named “Rich Ricci” owns a racehorse named “Fatcatinthehat” – Mirror

Follow us on Twitter and Facebook.

And, of course, there are many more links at Counterparties.

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •