Krugman Again

Excellent analysis in today’s HuffPo.

Some of my readers know that when it comes to inflation and the deficit – the biggest concerns of CNBC talking heads, WSJ editorial page and conservatives in general – I’m a dove. That means that I do not think that addressing inflation and deficit should be as high on our list of priorities as addressing unemployment. In other words I’m an unemployment hawk and deficit dove. Just like Paul Krugman.

This “deficit” obsession of the media has completely overshadowed the real problem that plagues Americans today – unemployment. But unemployment doesn’t get the same amount of urgency of “experts” on TV.

I like to compare the current predicament (budget deficits vs. unemployment) to a person with too much credit card debt who just crashed his car: do you think that the amount of debt he has should prevent him from getting his car repaired immediately? Even if it means additional charges on a credit card? I think it shouldn’t, but according to deficit hawks it should. They argue that he should first reduce his credit card debt and only then go to the auto-repair shop. They don’t give the same degree of urgency to his ability to get around town and get to work as they do to the level of his indebtness.

There will be a time for us to address both inflation (that has stubbornly NOT appeared despite dire warning coming from various hawks for years) and the debt. But that time isn’t now.


6 thoughts on “Krugman Again

  1. Vladimir says:

    I wouldn’t argue a larger point(importance of addressing unemployment vs deficits), as it is an endless time pit as it is impossible to either prove or disprove either side of the argument, hence it remains an exercise in intellectual masturbation. Moreover, I somewhat agree that unemployment is a bigger concern.

    All I really wanted to say here is that the wrecked car example works both ways. Yes, if there is still open to buy on the card left ( i.e. creditors still willing to extend credit) – he can fix the car. However, the way the dude is driving and spending, he’ll max out pretty soon and then he will have no means of fixing a car and no means of finding a job. Moreover, all those interest payments will ruin his standard of living. He is screwed completely. That is the scenario deficits hawks are trying to avoid.

  2. I hear you. But on the other hand, if he fixes his car and has means to get to his place of employment, he’ll eventually pay off his debt. And another important aspect – he’s the only guy in town with the best credit, despite his driving indiscretions.

    • Anonymous says:

      Having the best credit among the worst is not a sound business practice, I am sure you know. At some point credit will dry up or rather become prohibitively expensive….it is not a case where u don’t have to outrun the bear, just outrun the next guy….:)

  3. You just stated the problem and then the solution. Precisely, the US just have to outrun everybody else and it will. US debt (and not European) is still the go to place for the Chinese and other large-scale investors who have trillions to invest. While I exercise the possibility of credit drying up, I doubt that it happen in an overnight manner: neither those investors, nor Bernanke are suicidal. Bernanke can keep printing the money (QE is essentially printing), which Europeans btw can’t do, until unemployment is in the 6% range and/or inflation starts to rise (its around 2% now). Only then we should start worrying about credit drying up.

    • Anonymous says:

      I respectfully disagree. Once again, you can’t run business by simply striving to be the best of the worst. As you stated yourself, Investors are not suicidal, they will stop putting money in once the risk risk/reward is not there. The trillions will sit on sidelines, trickle elsewhere or, like I said before, simply require much higher rate. Also, assuming that US will forever, or even for long, remain the safest or rather most attractive place to invest is not a good assumption to make.

  4. In times like these striving for excellence, while praiseworthy, is delusional, we just have to scrape by for a few years before the situation stabilizes. US happens to be the luckiest of the bunch. But I understand your sentiment – it’s rather widespread: you think that US creditworthiness is artificial and not fundamental and it all hangs on Bernanke supporting it until one day it all collapses. I understand that line of thought but I disagree with it. I give bernanke much more benefit of the doubt. It’s not like we’re going to wake up one day and inflation is high and no one wants to buy US Tsys. There will be no “Lehman weekend”. This transition will be gradual, taking months or even years and all the bond traders will price that in long before Bernanke will actually announce a raise in interest rates. Unless, of course, Congress does something stupid.

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