Paul Krugman vs. President of Estonia

Krugman seems to pick his charts very carefully. Robert Murphy talks about it here: Charting Fun with Krugman

http://www.mises.org/daily/6055/Charting-Fun-with-Krugman

Paar lõiku esimesest graafikust ülalpool on vist väike apsakas: "If US would have had government surplus during good times, I would support some more austerity." Ilmselt peaks olema "more deficits" või "more spending"

What's the point in comparing US economy with Estonia on a macro-level? It's like comparing IBM or Wal-Mart with your grandma's household.

Estonia is "anomaly" because it is so small that macro scale processes can't be observed here the same way they can be in hte US or EU level.

Yes, we can compare GDP per capita and price level - so people can compare income level and policy makers can evaluate their performance. But to make analogies on the fiscal policy level or "austerity" vs PAA is meaningless when taking Estonia as one side argument and USA as another side argument.

Why would you expect your granny's household and WalMart to abide the same rules on managing their business most effectively?

this goes to both sides. What works for houshold, doesn't necessarily work for WalMart and vice versa.

grrr, so does the economy of 1 million people work differently from an economy of 10 million or 100 million or 300 million or 1 billion? Would they all need their own economic theories to explain their workings?

Grrr, surely - one cannot compare US and Estonia directly, there are loads of differences. But whether you are Walmart or Estonian retail-chain - there are still some similarities and I would say that mostly the same economic logic applies.

For example if we take budget deficit and compare it to the GDP (as I did on the first chart), I think you can compare Estonia and US in the context of this article - if US would have had the same surplus as Estonia during good times, they could increase their spending now. Not when the government debt is 100% of GDP and budget deficit 9%.

Well, for instance, USA can control USD supply/recall to/from circulation, Estonia (and other Euro Area members) do not. That is a clear distinction. Analogie with WalMart and granny in this respect would be that WalMart has the possibility and means to issue a bond offer, granny doesn't have the bucks to do that.

I think it is MMT vs Austrians debate. I'm humble enough to admit that I don't have a clear conviction that either one is fully right. They are just theories, approximations of reality. However, actions of all participants in the economy based on either one of those theories will "self-fullfill the prophecy". The result - nobody knows what is "right" or what is the outcome. We (the economy) are just "going somewhere", but don't know why or where exactly. Wea re in the process, influencing it with our theories, but it doesn't mean it makes the theory correct, rather actions of agents "prove" some theories correct by their very actions.

to Austerlane:
There are definitely some clear distinctions. Size matters. Other forces are in effect in Estonia vs USA and China. That's why Estonia chose to anchor currency with some bigger entity instead of free float.

Size matters - smaller currencies would be eaten for lunch if the entities issuing them would act the same way USA can act (and acts). So, from this it follows tha smaller entity has more constraints and less freedom in this matter. From that it follows that the actions and policies smaller entity does compared to bigger entity are different (if we assume that the target is to maximise result - GDP growth or efficiency, or whatever is chosen as a target by the entity).

K. lepik wrote: if US would have had the same surplus as Estonia during good times, they could increase their spending now. Not when the government debt is 100% of GDP and budget deficit 9%.

In fact this is a fallacy. Estonia can "run out of money", USA cannot. Period.

Kristjan Lepiku kirjutist edasi arendav ja täiendav käsitlus eesti keeles: http://mises.ee/2012/06/08/p31/

Esimeses lõigus on väärt lingid Krugmani varasematele ütelustele Eesti kohta.

Don't get me wrong, I'm not defending Krugman, just that comparing Estonian fiscal policy decisions to US policy decisions is meaningless

Grr, I still think that the correct comparison to Walmart is local retail-chain and not someones grandmother.

I know the usual MMT argument that US cannot run out of money, can print as much as it wants and therefore can have huge deficits. I would call this approach reckless, because in the end this will bring very high inflation and very high interest on US government debt.

This also means that in the end you still have to take care of the government budget deficits and government debt. There is no such thing as "free lunch" and money printing surely isn't that as well.

grr, i'm just wondering, where's your confidence coming from. Would you care to elaborate on the "USA cannot run out of money?" Are you saying QEs won't affect the US economy other than just creating one on one purchasing power to the amount printed?

Frankly, it sounds absurd. Even Bernanke (who prob. has the views close to your statement) has just admitted, that potential QE3 runs the risk of "diminishing returns," (http://www.bloomberg.com/news/2012-06-07/bernanke-says-more-qe-may-boost-growth-sees-diminished-returns.html).

Sure, the US has a lot more leaveway, but at the end of the day, how does it prove that austerity won't have the same benefits for the US as it does for Estonia?

CapM, Lepik,

MMT is not suggesting you can print money infinitely and have no troubles. What they are saying is turning Austrian view upside down, or seeing the matter from the other side of the coin.

The MMT main argument seems to be that money creation itself does not bring inflation. There is no causal link. Money creation is just a book-keeping procedure. Inflation is caused by demand. Demand can come from private sector or public sector (to simplify and not bring trade in for the moment) and if public sector runs a deficit, private sector must contract the same amount if we predicate that money supply = 0. In that sense MMT is like Austrian view, just that causal links are elswhere. So, basically, everybody is talking about the same thing just with different definitions and viewpoints. Krugman says austerity sucks, Austrians say money printing sucks, both seem to agree that it is the timing that is the root cause - procyclic vs anticyclic.

If private sector contracts and you do austerity on public sector, you exacerbate the problem - Krugman et al.

If public sector runs a deficit in good times, it cannot print itself out with new money in bad times, you exacerbate the problem - Austrians.

Both cry "you suck", but the truth is they both blow.

Capm: Sure, the US has a lot more leaveway, but at the end of the day, how does it prove that austerity won't have the same benefits for the US as it does for Estonia?

1) Estonia and Latvia could do austerity because they are small and capital flows in from the outside - 25% of state budget comes from European funds. What fund will give USA 4 trillion dollars (25% of US GDP) per year to go through with the austerity? Because they have no such "rich daddy", they fund themselves via government deficit - and because they can (run deficit). Simple.

2) Mobile workforce - many people from Latvia and Estonia went to work abroad (5-10% workforce) in the crisis. Where would you suggest to go find work for approx. 10-20 million people from USA?? Build a raft from old debris and row to Venezuela or Cuba??

Just think what would have been the situation in Estonia and Latvia if there were no help from European funds and work abroad - social catastrophe! (which it basically is, in Latvia anyway)

ok, I was mixing GDP with state budget, apples-to-apples would be 11% of GDP (Estonian state budget ~5 BEUR, with foreign aid 6,3 BEUR, GDP 12 BEUR, so 1,3/12=11%)

11% of 15 trillion USD = 1,6 trillion dollars instead of 4.

I wrote: (to simplify and not bring trade in for the moment) and if public sector runs a deficit, private sector must contract the same amount if we predicate that money supply = 0.

Of course I meant:
if public sector runs a deficit, private sector must expand the same amount if we predicate that money supply = 0.

Or the same could be said by: if public sector runs a surplus, private sector must contract the same amount if we predicate that money supply = 0.

Yes, grr, you are correct indeed on the fact that stimulus (either external, such as the case for the Balts, or internal, such as for the US) is going to support growth in the short run, create jobs etc.
And you are also quite right to say that both the Austrian as well as Krugman/Keynes et al are probably (partially) wrong. Or suck, if you will.

Nevertheless, funding stimulus with foreign debt (about half of the US bonds are purchased abroad) and / or QE simply cannot be sustainable in the long run. Even for supereconomies that already have huge liabilities on their balance sheet. Sure, with more QEs the debt can be inflated away, but this is going to createt a social catastrophy times greateer than you're talking about. And in fact, I can't picture a scenario, where the current amount of debt is not going to have to be inflated away- especially since about half of the US debt is held by foreigners, there's no way the Americans are going to manage to refinance their current liabilities with issuing new ones, and on top of that, keep on stimulating their economy for how ever long it takes (which, as you say, is possible, because they can't run out of money). I could go on, but I believe I have said enough to point out the fallacies in your logic.

Hope this at least somewhat changes your perspective- there are no good solutions, but Estonia clearly proves that strong emphasis on austerity (combined with some limited stimulus) is probably the most sustainable one. And in that sense, it is hard to see, how the example would not apply for the US.

Let's ask questions like this.
Can the whole world go bankrupt? No
Can USA go bankrupt? No
Can Spain go bankrupt? Yes
Can Estonia go bankrupt? Yes

If US does austerity, other big blocks should run budget deficits or their private sectors demand more goods and services, otherwise the whole world will go to depression.

You must not forget that banks also create money. So it is the job of central banks and fiscal policy makers to smooth the mountains and valleys fractional reserve banking creates (basically amplifying the growth AND the contraction of economy)

>Nevertheless, funding stimulus with foreign debt (about half of the US bonds are purchased abroad) and / or QE simply cannot be sustainable in the long run.

What exactly is not sustainable?
http://www.usgovernmentspending.com/spending_chart_1920_2017USp_12s1li011lcn_G0fG0t_US_Federal_Deficit_As_Percent_O

In the long run private sector tends to save, accumulate rather than spend all. Therefore public sector must run deficit or the balance sheet won't tally. And in order to keep resources in circulation and make an incentive to invest for capital owners, modest inflation is introduced. If private sector tends to save, public sector must spend and central banks put the numbers to the account.

Grr,

1. I agree that you have to look at all details when comparing Estonia to western world and the incoming funds from Europe have supported Estonia well in 2009-2011 (although the correct amount is about 7% of GDP)

2. What bothers me with western world is that there is no more toleration for economic downturns. I think we have structural problems in US and W-Europe and to cure that there is no quick way. To adapt to the "new normal" there should be a toleration for a -2% GDP for couple of years, but I don't see this at the moment. As soon as we reach one quarter of negative growth, there are cries for stimulus everywhere.

3. One of the biggest problems that I have with MMT is on quote that you brought out "money printing does not bring inflation". To me that is nonsense. One has to understand that inflation is a long term process and if you print money it takes time for see the full impact on the system. Inflation effects can be 12-24 months away from the moment you print money. So I think 2013-2014 can be the time when people are scratching their heads and starting to wonder about the high level of inflation.

Btw, even Krugman admitted in his last post that "size does not matter that much" and Baltics are an important case in relation to other countries:

"Some readers have urged me not to spend time on Latvia, Estonia, etc., on the grounds that they are too small to matter. Sorry, but that’s not true. For one thing, every economy — even a small one — is potentially a “natural experiment” that teaches us more about how economies in general work. Beyond that, the Baltics now loom large in the imagination of austerity’s defenders, particularly since Ireland keeps refusing to play along and be a success story."
http://krugman.blogs.nytimes.com/2012/06/08/why-the-baltics-matter/

grrr

It seems like there is fundamental differences in understanding how things work.

For a small nation as estonia it is obvious that you have to spend as much as you earn. First of all becuse it is reasonable and second of all no one will give us loans as big as the loans that for example usa,greece, spain got and usa still can get.

Estonia was actually forced to use all these austerity measures because political decision was to get euro in estonia. That ment we had to fulfill the standards of mastricht. So there was no way for us to take loans for stimulating economy. We had to save.

We got the euro and it all looked very good form outside. But it ment that people had do give up 5-15% of their salaries , both public and private sector. It ment that all the services that our country provides were downgraded.

Was it worth it? Yes it was because we got euro and therefor some sort of assurance for all foreign investors who would invest their money in our country.

But that is not the point that I want to make. Point is that when we entered the euro-zone we got to dinner too late. It means that we have to take part in all sorts of stimulus packages for counties whom have taken too many loans and whom dept is bigger or allmost bigger then their gdp.

And that is what Krugman and as I understand You are preaching. Take loans and consume and throw money at the problem. It seems ludicrous to me and to my fellow countrymen.

You say that USA can not go bankrupt. It is true but not due to hard-working mentality of american people. It is because Usa can print money. But is that the solution?How does China for example, take it? There are limited resources for everything in this world. And usa is no exeption.

But I have already wondered off-topic. And what I originaly wanted to say is that it is insulting to read these kind of statements Krugman made. Especially considering that these statements are based on boom era numbers.

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” Cicero – 55 BC

What Have We Learned In 2066 Years?