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Deficits Saved the World. But How?

Paul Krugman marshals up some evidence to show that our ability to sustain -- and tolerance to run -- big deficits in 2008 and 2009 pretty much saved the world. These deficits, he says, were "mainly the result of automatic stabilizers rather than discretionary policy."

"Automatic stabilizers" is wonk-speak for policies that kick in automatically during a recession. Medicaid is a good example: When people lose their jobs, they lose their income and suddenly become eligible for Medicaid. Thus, they get help, and the government spends more, automatically. But I'd really like to see a breakdown of how much of the increase in government spending was driven by existing programs that swelled to fit the moment -- those "automatic stabilizers" -- and how much was the product of the Federal Reserve's spending increases and the stimulus package and the Treasury's efforts. Anyone know where to find that data?

By Ezra Klein  |  July 15, 2009; 12:00 PM ET
Categories:  Financial Crisis , Solutions  
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That's completely absurd- things are still getting worse. While I understand the desire to reduce the impact of rapid economic change, the money is gone. We've just over leveraged future generations to lessen the impact now. It's going to reduce the impact of the US to compete internationally for at least a decade. We've been running huge deficits since Bush II came into office and it's only getting worse.

The only upside is that the coming inflation will make our labor so cheap that we'll actually be able to start exporting goods again.

Posted by: staticvars | July 15, 2009 12:19 PM | Report abuse

I would assume that the numbers on "stabilizers" could be sussed out of the data at but I admit I haven't tried.

Posted by: tomveiltomveil | July 15, 2009 12:27 PM | Report abuse

@staticvars: "That's completely absurd- things are still getting worse."

That would make total sense if there were only two states that the economy could be in - Doing Great, or Depression. By your logic fire departments are unnecessary because the house is already on fire by the time they get there.

No, the only thing that's absurd is this notion that we're on the verge of massive inflation when we're in the middle of a liquidity trap. It shows how incredibly uninformed most people are about the present state of economic affairs.

Posted by: BigTunaTim | July 15, 2009 12:50 PM | Report abuse

To appreciate Krugman's viewpoint, you have to imagine the consequences of general default in dollar-denominated financial agreements.

In that scenario, we wouldn't be dithering about prospective inflation, we would by now have seen a loss of trust in the US monetary system, resulting in a sudden and massive devaluation of the dollar. Without the bailouts and the Fed actions, America would have found itself suddenly dead broke, because the whole world would have gotten rid of their dollar investments, rapidly and at deep discounts. "Not pretty" doesn't begin to describe what was likely, and hasn't happened.

Some people just want to be poor. I read occasional comments about what a good thing it would be to drive US wages down to "competitive levels," as if general poverty would improve our society. Now that's a silly idea.

Because workforce incomes drive the funding of consumer demand, they also determine the scale of consumer markets. Workforce incomes are the dollars every productive business is trying to bring in its doors. Obviously, driving down workforce incomes is equivalent to forcing the market for goods, and thus the economy as a whole, to contract. This is what a recession is.

If we want to be prosperous again, the path to success is not to drive US wage levels down, it is to bring the wages of foreign work forces up to parity with the value they deliver. If wage levels rise generally, domestic economic cycles around the world will be able to take hold, relieving the dependence of the American consumer to fund foreign economies and the consequent trade imbalances. It is possible to adopt policies that support the pursuit of general prosperity, rather than the exploitation of general poverty.

The trouble with accepting poverty as a standard, as an objective, is that there's no longer anybody making money, no incentive to be productive, no work ethic, no growth, and no opportunity. Should cheaper wages and general poverty be the New American Way?

Posted by: lonquest | July 15, 2009 12:53 PM | Report abuse

To follow up on your comments yesterday. There is nothing like a good ground game.

Posted by: powers1616 | July 15, 2009 1:11 PM | Report abuse

Ezra, you already argued in the last day or so that the stimulus money hasn't really been spent yet. Now you're looking for data on that point?

And what do you mean by "the Federal Reserve's spending increases"? Spending by the Fed increases the money supply. It doesn't figure into the deficit, does it?

Posted by: tomtildrum | July 15, 2009 1:13 PM | Report abuse

I think to get at what Krugman's referring to we would go backwards.

How much of a deficit are we running and how much can we attribute to specific stabalization efforts.

Here is the Feds Balance sheet:

Looks like about $250B from Treasury

Stimulus spent so far I am sure you can find. But what is it, around $50B?

Add those two to get $300B

Now take the budget gap to date of $1000B and subtract the pro-rated structural deficit, you probably know exactly, but I am guessing $450B * 9/12 or $340B.

So of a $660B cyclical gap, $300B is stimulus plus Fed. The rest is "stabilizer"

However, most of the stabilizer is just not cutting services when tax receipts fall. This means as the economy shrinks, government spending as a % of GDP rises acting as a "stabilizer"

Posted by: karlsmith | July 15, 2009 2:15 PM | Report abuse

The biggest automatic stabilizer during Recessions is the expenditures on unemployment insurance by states with matches by Federal Government. You have to go into each state's expenditures for that or you can also check out the BLS.

The other important automatic stabilizer is the decrease in tax revenues that comes from decreased levels of sales and incomes is another major automatic stabilizer. Again, you have to look at state data for the detail but it is generally reported at some point in the National Income Accounts. The Fed Beige book is a good place to look at those.

Those are the major automatic stabilizers in the country but there are more and medicaid is one. Again, you have to look at the national and state income accounts for this information. Hope you have a good staff because the cuts at our university have left me with out a graduate student to do that sort of thing for me ...

Posted by: Dakinikat | July 15, 2009 3:33 PM | Report abuse

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