The Thread Needler

Bob Versus Krugman on the Debt Ceiling

The intellectual leader of modern Progressivism, Paul Krugman, has made a sustained, powerful argument over the last two years for additional stimulus spending. Progressives across the country, myself included, have taken up and amplified that argument.

From an intellectual standpoint, Krugman’s argument is unimpeachable. Greater spending will stimulate demand and create jobs; spending cuts will hurt the economy.

Trust me. I get Krugman’s arguments.

Too bad he does not seem to understand anyone elses’ arguments - especially arguments coming from our President.

Krugman’s column today lashes out at the Obama administration for yesterday’s debt ceiling agreement.

Worst of all, Krugman lets the real perpetrators of the crisis (the House GOP) off the hook, preferring to direct his ire exclusively towards the President.

Krugman begins with an accurate assessment of America’s economic and budget woes:

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse.

Right on.

Of course, this is not a new argument. Krugman and others have been making it for more than two years.

Of course the President is aware of this argument. Not only that: this argument, I believe, has been the main consideration in the President’s decision making over the last two years (even if he goes out of his way to conceal that fact, preferring the politically successful rhetoric of deficit-cutting to the politically failed rhetoric of Keynesian populism).

That’s why each of President Obama’s budget decisions have been taken to either: A) increase the budget deficit as much as the given situation allows or B) reduce spending as little as the given situation allows.

Krugman provides strong evidence for this thesis in a litany of the President’s supposed cave-ins.

He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling. Maybe it’s just me, but I see a pattern here.

I disagree with Krugman’s assessment of these deals. I’ll take them one at a time.

In December, the President supported a tax cut deal that substantially increased the deficit. It included two of the most stimulative policies available to the President: an extension of unemployment insurance and a 2% break on the regressive payroll tax. In order to secure these stimulative policies in negotiations, the President conceded the Republicans’ top demand and agreed to temporarily extend Bush’s tax cuts for the rich. That concession was not great policy, but since growth matters more than deficits in a liquidity trap, it was a reasonable concession to aid growth. Certainly not surrender.

In the Spring, when Republicans threatened to shut down the government, based on the Progressive reaction it certainly seemed like the President had surrendered. Progressives were howling so loud you would have thought he had privatized Medicare. Instead he agreed to optical cuts of about $32 billion and real cuts of barely one billion dollars next year. Truly, a drop in the bucket compared to the size of the overall economy. So, again, I don’t call that surrender.

Does the debt ceiling deal represent “surrender?” Maybe, but I don’t think so. The President has been pushing modest, medium-term deficit reduction since he was elected. He has floated cuts of about four trillion dollars since this Spring. The $2.5 trillion in cuts included in this deal (much of it cut from the Pentagon), combined with the $1.2 trillion in new revenue that can be raised by allowing the Bush tax cuts on high-earners to expire, gets him to his original goal of about four trillion dollars in deficit reduction.

In the grand scheme, these are modest cuts, and the vast majority of them will not come for a few years. Hopefully, by then, the economy will have recovered. If not, then we will have worse problems than deficits or deficit-reduction.

Next, Krugman finds another tack to attack Obama: he should have raised the debt ceiling earlier:

First of all, he could and should have demanded an increase in the debt ceiling back in December. When asked why he didn’t, he replied that he was sure that Republicans would act responsibly. Great call.

To back up his claim that President Obama was “sure that Republicans would act responsibly,” Krugman cites a press conference immediately following December’s tax cut deal in which the President predicted that Republicans would be reasonable when it came time to raise the debt limit.

As usual, the great economist is not so great at understanding politics. That is to say, politicians do not usually say what they really think at press conferences.

My guess: the President did demand a debt-ceiling increase in December and was rebuffed. Should he have fought for it? Sure. But then again, the Republicans are the ones who held the debt ceiling hostage, so why not blame them?

What about non-Congressional options, asks Krugman?:

And even now, the Obama administration could have resorted to legal maneuvering to sidestep the debt ceiling, using any of several options. In ordinary circumstances, this might have been an extreme step. But faced with the reality of what is happening, namely raw extortion on the part of a party that, after all, only controls one house of Congress, it would have been totally justifiable.

Apparently Krugman supports the platinum coin option. I admit, I would have liked to see this tried, just for the fun and novelty of it. But it would have likely caused greater problems, like a debt-downgrade. The fourteenth amendment option is more reasonable, but it still would have been an unprecedented step that would have further tarnished the American political system’s reputation.

Wrapping it up, Krugman again displays his keen political insight:

It is, of course, a political catastrophe for Democrats, who just a few weeks ago seemed to have Republicans on the run over their plan to dismantle Medicare; now Mr. Obama has thrown all that away.

Um, no. The deal the President agreed to shields Medicare beneficiaries from any benefit cuts. On the other hand, the Republicans tried to privatize Medicare. Contrast is what wins elections, and there is still plenty of contrast between the two parties on this issue.

And finally, he ends with a dash of cynicism:

In the long run, however, Democrats won’t be the only losers. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.

Yes, we could just give up and wallow in cynicism like the good professor suggests. Or we could help Democrats win the next election.

Do you remember any debt-default crises that damaged the economy when Democrats were in charge of the House?

Me neither.

Indeed, this entire issue has arisen as a direct result of Republicans seizing control of the House of Representatives.

But you would not know that by reading Krugman. You would think there was one and only one person to blame for what has happened in recent days: that person being a Progressive, that person being a Democrat, that person being the man living at 1600 Pennsylvania Avenue.

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7 Responses

  1. 01.08.2011 at 7:30 pm

    Two things. First, Krugman has also been ripping the news coverage of the debt ceiling debate, the House Republicans, and the Tea Party. The reason he rips more on Obama is that, unlike the others mentioned above, Obama is supposed to be on our side. Instead, in the debt ceiling debate he put forward positions to the right of those of the average Republican voter.

    I also think you’re wrong on the 14th amendment option. How can you think it “would have further tarnished the American political system’s reputation”? Having to vote to increase the amount of debt after spending and tax levels have already been approved is a ridiculous idea on all counts. I would think that any person who followed the argument at all would realize that this is a prudent departure from an antiquated and unnecessary tradition. I think the fact that we will have to have continuing negotiations about raising the debt ceiling is far more damaging than fixing this problem.

    • 01.08.2011 at 8:28 pm

      Krugman has payed lip-service to blaming the real culprits (the Republicans), but he’s reserved most of his ammo for what appears to me to be a sustained, deliberate campaign to turn Obama’s base against him. Which is fine. Maybe Krugman thinks his tactics will result in more progressive policies. I disagree with him about that.

      What annoys me is when he omits key information, like in his column today in which he didn’t mention that only a small fraction of the cuts in this deal hit before 2013. And that all it will take to reverse those cuts is for Congress to pass a new law before they are enacted. That shouldn’t be very hard if Democrats regain control of Congress, as I suspect they will. The entire deal is a vague, symbolic blueprint that doesn’t do much of anything in the near future. It’s trivial, so to call it a “disaster” and “catastophe,” as Krugman has, is absurd, IMO.

      As for the fourteenth, it could potentially be challenged in court and if not the President’s actions in invoking it could be used as a basis for impeachment. So invoking the fourteenth would solve the short term dilemma, but it would put the faith and credit of the United States in the hands of either the Supreme Court or the jurors (Senators) in a trial of the President, either one of which would be even more embarrassing then the already extremely embarrassing Congressional fighting of the past few weeks.

      • 02.08.2011 at 5:45 pm

        No one has standing to bring a suit. It will not get to the Supreme Court. Impeachment is possible, but I certainly don’t think it would result in his removal from office, not nearly enough votes. Plus, I think it would be worth it to rid ourselves of having this debate again, which otherwise we will have to do over and over. The faith and credit of the United States is already in the hands of Senators; using the 14th amendment would take it out of those hands.

        • 03.08.2011 at 12:32 am

          okay. set aside the court challenge.

          “the validity of the public debt of the United States … shall not be questioned,” says the fourteenth amendment. How would missing a payment to seniors on social security result in the debt being “questioned?” As I read it, the amendment may authorize the government to borrow to cover interest payments, since missing one of those would result in the debt being “questioned” i.e. default. But SS, medicare, military pay, unemployment benefits, payments to states, etc, are all liabilities, not debts. So I don’t see how the Constitution authorizes the President to make those payments by issuing new debt if the Congress has barred him from issuing new debt. And I don’t think the President should declare a new Constitutional principle just because such a declaration would be convenient & couldn’t be challenged.

          On a broader note, I was doing some math in my head during my commute, and I do believe the President is now set up to get through the entire 111th Tea Party Congress only having implemented about 80 billion in real spending cuts (this is an approximation) over two years. That’s not too bad, considering the Tea Partiers wanted to cut more than that much in their first six months (100 billlion was the pledge) and they control the House.

          • 03.08.2011 at 2:49 pm

            I think you’re making a distinction that doesn’t exist. We don’t separate our fiscal deficit into liabilities and debt. What you call liabilities are simply debt owed to the public. And if you think not paying our “liabilities” would not result in others questioning the validity of our debt, you’re crazy.

            And your second point, really? Congratulations! The small, vocal faction of the minority party only fulfilled 80% of its goal despite its party not controlling the Senate or the White House! Crack open the champagne!

          • 03.08.2011 at 3:37 pm

            We issue debt to fulfill liabilities. There is a clear distinction between previously issued debt and promised future liabilities. How can it be debt if it doesn’t even exist yet? If no one owns it? If no one is paying interest on it? If Congress decided to cut future Social Security payments, by your definition that would be unconstitutional as Congress would be questioning previously incurred “debt.” But it wouldn’t be, because Congress would only be changing its liabilities in the future.

            Here’s how a former head of the Office of Legal Counsel sees it:

            While it could be argued that this provision requires the federal government to continue paying interest on previously issued bonds that were authorized by law, I don’t think it could be read to permit the Executive Branch to incur new debt that is not authorized by law (i.e., to issue new Treasury bonds beyond the authorized limit set by Congress). Paying interest on previously issued debt is a current expense obligation of the United States, and funds to make such current expense payments are ordinarily appropriated in the current budget. I don’t believe that the Executive Branch would be empowered by this provision in the Fourteenth Amendment to issue new debt in order to meet current interest payment obligations on previously issued debt, where the issuance of the new debt would cause the United States to exceed a statutory debt ceiling set by Congress, and I also don’t think it would empower the Executive Branch to expend funds out of the Treasury on interest payments not covered by current appropriations of Congress. In other words, I don’t believe it trumps the bedrock imperative of the Appropriations Clause of the Constitution, Article I, section 9, clause 7, which stipulates: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”

            And $100 billion in cuts over the last six months of the fiscal year pro-rated equals $200 billion in cuts per fiscal year. So that means the Tea Party had in mind at least $400 billion in cuts during their first term controlling the House. And they also wanted other things, like fundamental entitlement reform and endless deregulation. In the end, what they’ll get is 80 billion in cuts. That sure is bad negotiating – on THEIR PART.

  2. 03.08.2011 at 8:35 pm

    But barring changes to the law, those liabilities become debt when the date of payment rolls around. Social Security recipients would be owed money by the government; how is that not a government debt? Sure, there is no interest, but if a government stops paying Social Security, it is not fulfilling its obligations, its debts. Am I missing something?

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