Monday, December 17, 2012

Paul Krugman on Deficit - Simplification

Well, I stumbled over this post by Krugman on accident. I just read on Mark Thoma's blog a bit and found this article. If I sticked to socialist-speak, I'd say I read from the "Klassenfeind" (class enemy). However, I concur with some of the items iterated by Krugman:

  • I don't think that 1 Trillion dollars in deficit poses a problem right now
  • The deficit and the projections do mirror the economic stiuation of course
  • Some of the debt is not really debt to anyone else than to us-self.
However, I am less optimistic on the outlook. Neither do I think that 1 trillion adequately captures future loss of income due to an ageing population, nor do I think that current balance sheets rightly capture the hidden costs of many social measures (health insurance, medicare, pensions etc.).
I don't know if Krugman has any kind of scientific background in financial economics, but I wager he knows the basics. So it is even more distressing to see him disregard future tabs on the balance sheet that any kind of private company would rightly include in todays calculation. 

Also, as Krugman indicates multiple times, the problem with the deficit depends on two things. Continuing low level inflation (around 2%) and economic recovery. Since we just expanded the money supply and at some time the new money will be put into the system and expand the base and properly reflect in the real economy (though there is some argument against this chain of events), we are not yet seeing the levels of inflation that should be here. 

I think once the economy leaves the valley of depression, we will see more of a backlash. While 2% Inflation is tolerable and quite ok, double digit inflation would be the beginning of hyper-inflation and as you might have guessed not so good. But let's assume the best, that the Fed and the banks succeed in keeping inflation low (but not too low, we don't want negative inflation!), that still leaves the second part of the equation ( and I am not even talking about a balanced fiscal sheet).

I am here with Tyler Cowen and his Great Stagnation. I don't think we will see 2 or 3 % growth in saturated western democracies that plucked all low hanging fruits. We have integrated women into society, enhanced land-use and expanded it. We have integrated foreigners and optimized transportation and communication speed. We have standardized most of our processes and applications thus reducing inefficiencies. We applied most of the basic patents of the 19th century to 21st century applications, while not postulating any new low hanging fruits!

I am not saying that we won't grow, we just won't grow faster than inflation and that's the b*tch.
This alone might be enough to make the debt unservicable in the long run, because the scales actually tip in the direction of a low growth western world, except some genuis comes up with a cutting-edge technology that simplifies some mechnical means or that gives us a new cheap power source to utilize (biology/chemistry anyone?). Aside from that we have to live with a low growth world and that means we have to deal with our fiscal problems now instead of later. Because even if 1 trillion is not even 60% of GDP and thus entirely servicable in the long run. It will not stay that way.

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