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The document discusses how Republican views on budget deficits have changed depending on who controls the White House. It argues that deficits no longer help the economy like they did during the financial crisis because the US is now close to full employment. Large tax cuts proposed by Republicans will increase deficits at a time when more government borrowing competes with private investment and likely reduces economic growth. The hypocrisy of Republicans changing their stance on deficits depending on politics has made the US poorer by missing opportunities to boost the economy during downturns and increasing debt when it is no longer helpful.

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nicolas franco rivera
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43 views

Articulo

The document discusses how Republican views on budget deficits have changed depending on who controls the White House. It argues that deficits no longer help the economy like they did during the financial crisis because the US is now close to full employment. Large tax cuts proposed by Republicans will increase deficits at a time when more government borrowing competes with private investment and likely reduces economic growth. The hypocrisy of Republicans changing their stance on deficits depending on politics has made the US poorer by missing opportunities to boost the economy during downturns and increasing debt when it is no longer helpful.

Uploaded by

nicolas franco rivera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Deficits Matter Again

Paul Krugman JAN. 9, 2017

Not long ago prominent Republicans like Paul Ryan, the speaker of the House, liked to warn in
apocalyptic terms about the dangers of budget deficits, declaring that a Greek-style crisis was just
around the corner. But now, suddenly, those very same politicians are perfectly happy with the
prospect of deficits swollen by tax cuts; the budget resolution theyre considering would, according
to their own estimates, add $9 trillion in debt over the next decade. Hey, no problem.

This sudden turnaround comes as a huge shock to absolutely nobody at least nobody with any
sense. All that posturing about the deficit was obvious flimflam, whose purpose was to hobble a
Democratic president, and it was completely predictable that the pretense of being fiscally
responsible would be dropped as soon as the G.O.P. regained the White House.

What wasnt quite so predictable, however, was that Republicans would stop pretending to care
about deficits at almost precisely the moment that deficits were starting to matter again.

Those apocalyptic warnings are still foolish: America, which borrows in its own currency and
therefore cant run out of cash, isnt at all like Greece. But running big deficits is no longer harmless,
let alone desirable.

The way it was: Eight years ago, with the economy in free fall, I wrote that we had entered an era
of depression economics, in which the usual rules of economic policy no longer applied, in which
virtue was vice and prudence was folly. In particular, deficit spending was essential to support the
economy, and attempts to balance the budget would be destructive.

This diagnosis shared by most professional economists didnt come out of thin air; it was based
on well-established macroeconomic principles. Furthermore, the predictions that came out of those
principles held up very well. In the depressed economy that prevailed for years after the financial
crisis, government borrowing didnt drive up interest rates, money creation by the Fed didnt cause
inflation, and nations that tried to slash budget deficits experienced severe recessions.

But these predictions were always conditional, applying only to an economy far from full
employment. That was the kind of economy President Obama inherited; but the Trump-Putin
administration will, instead, come into power at a time when full employment has been more or
less restored.
How do we know that were close to full employment? The low official unemployment rate is just
one indicator. What I find more compelling are two facts: Wages are finally rising reasonably fast,
showing that workers have bargaining power again, and the rate at which workers are quitting their
jobs, an indication of how confident they are of finding new jobs, is back to pre-crisis levels.

What changes once were close to full employment? Basically, government borrowing once again
competes with the private sector for a limited amount of money. This means that deficit spending
no longer provides much if any economic boost, because it drives up interest rates and crowds out
private investment.

Now, government borrowing can still be justified if it serves an important purpose: Interest rates
are still very low, and borrowing at those low rates to invest in much-needed infrastructure is still a
very good idea, both because it would raise productivity and because it would provide a bit
of insurance against future downturns. But while candidate Trump talked about increasing public
investment, theres no sign at all that congressional Republicans are going to make such investment
a priority.

No, theyre going to blow up the deficit mainly by cutting taxes on the wealthy. And that wont do
anything significant to boost the economy or create jobs. In fact, by crowding out investment it will
somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts
in social spending make the poor poorer and undermine security for the middle class. But that, of
course, is the intention.

Again, none of this implies an economic catastrophe. If such a catastrophe does come, it will be
thanks to other policies, like a rollback of financial regulation, or from outside events like a crisis in
China or Europe. And because stuff does happen, and a lot depends on how the U.S. government
responds when it does, we should be concerned that the incoming administration only seems to
take economic advice from people who have consistently been wrong about, well, everything.

But back to deficits: the crucial point is not that Republicans were hypocritical. It is, instead, that
their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits
would have done a lot of good, and are about to blow up deficits at a time when they will do harm.

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