We Salute Jane Galt's Positive Attitude

In an admirable attempt to find something nice to say about Paul Krugman, the mysterious Jane Galt lauds his latest effort as "outstanding".

In her comments, Ms. Galt assures us that she is not being sarcastic - she thinks "the column is a very good look at what I consider to be a major macroeconomic weakness of the American economy: our propensity to borrow from abroad to finance our current consumption, with no clear idea where the growth is going to come from that will allow us to pay back that money without pinching. Unless we have unrealistic growth, Krugman is right: the current account must eventually correct, which means our currency must fall."

In an update, Ms. Galt refers us to Arnold Kling as a voice of reason. Don Luskin, and The Man Sans Q have more. I absurdly compress their Soundbite: Prof. Krugman is applying a model developed to predict third world debt crises to a developed economy, and he is using a Dowdified version fo the Lehman Bros. press release for his scary quote.

Prof. Brad DeLong is less worried than the Special Agent Krugman about the consequences of a dollar collapse - as Prof. Krugman himself noted, our foreign debt is denominated in dollars, which makes a big difference in the impacy of a dollar collapse on lives in the US. And, Prof. DeLong provides an anonymous dissent - the proportion of dollar assets held by foreigners is not in divergence from historical norms, so what is the worry?

My soundbite - the US employed tax cuts and interest rate cuts to stimulate our economy during a recession; that was sensible. Since we are a somewhat open economy, demand in the US creates jobs overseas. This is also a good thing - although Mr. Greenspan is no doubt frustrated that his efforts have led to robust employment in China rather then here, consider the alternatives - a weak job market in the US may result in such political instability that we elect a Democrat as President in 2004; a weak job market in China could result in violent revolution.

The US is the global leader and the global engine of growth - policies to raise taxes or reduce our current account defict while Japan and Europe totter near recession would be madness.

And in the long run? The Economist has a fascinating feature providing a wealth of country briefings, and quick summary statistics. So, I see that the US, Germany, and France had a debt/GDP ratio in 2002 of roughly 60%; Japan was at 145%.

Budget deficits? In 2002, Germany and France had deficits of more than 3% of GDP; the US was less than 2% (projections are a bit less encouraging); Japan was more than 7%.

And the demographic problem facing Europe and Japan is well known - they have generous health and social insurance, high taxes, rigid labor markets, a below-replacement birth rate, and no signifcant ability to absorb immigrants.

So who is facing a long term crisis? By the one measure of the current account, the US has a problem. Viewed more broadly, the problems lie elsewhere. And, as at least one of the posters above noted, investors can only flee the dollar in preference for another currency; neither the Euro nor the yen seem to be an obvious safe haven.

MORE: A link to the CBO budget projections. What is the possible timing of the imminent fiscal threat? Prof. Krugman warns us that " The crisis won't come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out.

But at a certain point we'll have a Wile E. Coyote moment."

Hmm. Shalle we say, less than ten? Over that period, the CBO projects debt held by the public (as a percent of GDP) to soar from 34% all the way to 40% before falling back below 34% (although projections are less optimistic if tax breaks scheduled to expire are extended; whetehr they will be in the face of imminent financial panic is a separate question).

And what of the Economist's 60% figure I cited earlier? The balance appears to be the Social Security trust fund, and the Government retirement funds, "Principally Civil Service Retirement, Military Retirement, Medicare, and Unemployment Insurance." The gross federal debt as a percent of GDP appears to rise from 60% to less than 70% before leveling off.

Comments

[HH]

The economic news today (and for weeks now actually) is good for the country and not good for our dear Prof. I'm sure he's combing the blogosphere for more spin...

[TM]

Hey, Hammer. Cautious optimism, buddy. The next step will be speculation (sorry, dramatic assertion) about a double dip recession, but we may be running out of time for the second dip.

[Kevin Drum]

The Damocles model uses a number of measures, and current account deficit is only one of them. In their model, the U.S. comes out significantly worse than France, Germany, etc.

Which is not to say they don't also have problems. Nor is it to say that the Damocles model necessarily works well for a country like the U.S. -- as Krugman rather plainly stated.

So what's the problem?

[Tom Bowler]

Jane says "the column is a very good look at what I consider to be a major macroeconomic weakness of the American economy: our propensity to borrow from abroad to finance our current consumption, with no clear idea where the growth is going to come from..."

I guess I would have to ask, isn't it characteristic of a free market economy that you really can't be sure what direction it's going to grow? Isn't the economy going to grow according to where businesses find profits? I suppose if you work on Wall Street you might like to be able to make a good guess before you place you bets, but from a macroeconomic standpoint, do we need to have a clear idea of where as opposed to how much?

I could easily believe that Krugman would like to see our government step in to guide the growth of our economy in a way that is compatible with the environment and fair for the less fortunate. Growth could be even be assisted in such a manner. I would also expect that applying Krugman's judgement as to what is good and fair would choke off any hope for growth.

Somehow I don't see Jane going along with that.

[TM]

From his column:

If our political system can't bring itself to choose one alternative or the other — and so far the commander in chief refuses even to admit that we have a problem — we will eventually face a nasty financial crisis.

...What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.

I think we are way beyond analysis, and well into hype. For example, how likely is the "worst case scenario" where the US Gov't can't even borrow?

Is this column being written by Paul Krugman, noted economist considered a candidate for his work in foreign trade? Or by Paul Krugman, political polemicist?

[mukesh]

test