Krugman Watch: the government surplus

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

>New York TIMES / August 23, 2000

>RECKONINGS By PAUL KRUGMAN

>Counting Chickens

>Quick quiz: How big is the federal budget surplus? I don't mean those
projections of a surplus of $2 trillion or more over the next decade --
projections that have turned the election into a referendum on what to do
with the windfall. How big is this year's budget surplus? <

This column makes a very simple point, one that I agree with: if one takes
into account inflation, the growth of needs, and the way in which some
government commitments have been "locked in," the government's budget
surplus is smaller than it appears and will shrink drastically in the future.

The problem here is that PK is coming at the problem not as an economist
schooled in macroeconomics but as an accountant. This approach implies that
the government budget should be balanced, so that  government deficits are
bad, bad, bad. There's nothing in this column that implies otherwise.

But since so many private-sector organizations run deficits (i.e., borrow)
why should the government do so?

Serious macroeconomists know that government debt (the result of government
deficits) is only a problem of it raises the ratio of that debt to GDP, as
during the Reagan years.  But even that kind of increased debt is seen as
worthwhile in many cases. After all, the biggest, most serious, government
debt (relative to GDP) arose due to World War II. Most people would agree
that it was a good thing for the US government to throw away "balanced
budget" strictures in order to win that war. Similarly, there are two other
important reasons that the government might want to run deficits:

-- to invest in infrastructure, science, education, cleaning up the natural
environment, and public health. (The last is important, given the point of
Laurie Garrett's recent book, _Betrayal of Trust_, which argues that most
nations, including the US, have let public health standards fall.) All of
these raise the ability of the economy to handle debt. This is very similar
to the role of deficits for the private sector: individuals and
corporations borrow in order to finance things that pay off in the future.

-- to deal with recessions. As Wynne Godley argues, monetary policy is
unlikely to be sufficient to deal with the collapse of the foreign exchange
and asset bubbles in the future. (His paper on the "Seven Unsustainable
Processes" used to be on-line at the Levy Institute, http://www.levy.org/,
and you can probably order one from them.) Here again, a government deficit
is an investment, one in jump-starting the economy to get it back to a
lower and more reasonable rate of unemployment.

The basic lesson is simply that a deficit _per se_ is not a problem. The
key thing is how the borrowed money is spent. If it's spent on investment,
it's no problem. If it's spent on gambling (like Reagan's "Star Wars"
missile system) it can be. This is basic economics and we shouldn't be
distracted by a static accounting perspective.

From an accounting perspective, we should actually be more concerned with
soaring private-sector debt, which can lead to bankruptcy, if not waves of
bankruptcies. The US government, on the other hand, is unlikely to go
bankrupt within the next 100 years, since the US is still one of the most
powerful nations on earth.

Krugman is on vacation, so this Kounter-Krugman Kolumn is too, for a week
or two.

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine