The head cheerleader for the left exhorts the faithful (aka, the few, the proud, the oblivious) to ignore the latest jobs report:
The headline number came in a bit below expectations, but that’s probably just the noisiness in the data. The best hypothesis about the US economy this past year and more is that it has been steadily adding jobs at a pace roughly fast enough to keep up with but not get ahead of population growth. Today’s report was consistent with a continuation of that story. Nothing to see here.
These aren't the alarming stats you've been looking for.
But Krugman delivered the real comedy gold in his previous post, where he explained that Obama's speech sounded like Soviet-era science fiction, and that was a good thing. I kid you not:
A while back I mentioned, in a quite different context, an essay by Isaac Asimov (?) on Soviet science fiction, in which he argued that the two main themes of Western sci-fi — “what if” and “if only” — were ruled out; instead, writers wrote on the theme “if only this goes on”.
And that was the theme of Obama’s speech last night. And you know what? That was perfectly fine.
Debt and deleveraging: Uneven progress on the path to growth
Safely reducing debt and clearing the way for economic growth in the aftermath of the global credit bubble will take many years and involve difficult choices, as MGI’s 2010 report showed.
Two years later, major economies have only just begun deleveraging. In only three of the largest mature economies—the United States, Australia, and South Korea—has the ratio of total debt relative to GDP fallen. The private sector leads in debt reduction, and government debt has continued to rise, due to recession. However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.
The deleveraging episodes of Sweden and Finland in the 1990s are particularly relevant today. They show two distinct phases of deleveraging. In the first, households, corporations, and financial institutions reduce debt significantly over several years, while economic growth is negative or minimal and government debt rises. In the second phase, growth rebounds and government debt is reduced gradually over many years.
In short, the government becomes the borrower of last resort while private borrowers reduce their leverage.
In a recent post, Krugman cites this notion as the surest sign that the US economy is on the mend:
But is the economy being cleaned up?
The best case for that proposition, I think, comes if you believe that excessive household debt was at the core of the issue. Obviously this is a view I like; Gauti Eggertsson and I have done some formal modeling (pdf), and Atif Mian and Amir Sufi (pdf) have provided strong empirical evidence.
And if that’s what you think the problem is, we have in fact made significant progress. Here’s the ratio of household liabilities to GDP:
Between debt repayment, defaults, and — since recovery began in mid-2009 — rising income, the US has made a lot of progress in deleveraging.
Hmm, per McKinsey (January 2012), "Two-thirds of household debt reduction is due to defaults on home loans and consumer debt." Then I guess one-third is due to repayments and rising income.
In any case, an obvious implication is that tax cuts for individuals that are saved rather than spent still are helpful in restoring the economy because they reduce household debt, with an offsetting increase in government debt. What, then is Krugman's current objection to tax cuts as non-stimulative?
Well, in his recent model of the household debt effect he introduces a new variation on his opposition to tax cuts for the rich:
Also note the middle term: in this model tax cuts and transfer payments are effective in
raising aggregate demand, as long as they fall on debt-constrained agents. In practice, of course, it’s presumably impossible to target such cuts entirely on the debt-constrained, so the old fashioned notion that government spending gets more bang for the buck than taxes or transfers survives. And the model also suggests that if tax cuts are the tool chosen, it matters greatly who receives them.
Conceptually, I am sure there were some people so well off that none of the financial turbulence of the last few years affected their likely consumption/savings decisions in a way that would have been significantly altered by a tax cut.
However, Obama wants to raise taxes on "the rich" starting at $250,000 per year, which is not really the land of private jets and Cayman accounts. Is Krugman really sure that most small business owners netting $300,000 per year have not had any trouble getting a small business loan in the last few years?
And how about high-earning lawyers and financiers whose incomes have fallen (if they kept their job) and whose home is no longer a ready financial backstop by way of a second mortgage - are they really not debt constrained at all as they pack their kids off to college or private school, put their parents in nursing homes, and do all the other hateful things "the rich" do?
People who want to base our national tax policy on the lifestyle of Donald Trump and Warren Buffet are making a mistake.