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Galbraith: The danger posed by the deficit ‘is zero’

James Galbraith is an economist and the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin. He's also a skeptic of the prevailing concern over America's long-term deficit. With many people now comparing America's fiscal condition to Greece, I spoke with Galbraith to get the other side of the argument. An edited transcript of our conversation follows.

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It's not overstated. It's completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity.

EK: Then why are the bulk of your colleagues so worried about this?

JG: Let's push a bit deeper on the CBO forecasts. They publish a baseline set of projections. One of those projections holds the economy will return to a normal high-employment level with low inflation over the next 10 years. If true, that would be wonderful news. Go down a few lines and they also have the short-term interest rate going up to 5 percent. It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts. And those forecasts are driven partially by the assumption that health-care costs will rise forever at a faster rate than everything else and by interest payments on the debt will hit 20 or 25 percent of GDP.

At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation. And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have. These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story. So everything that is said that is based on the CBO's baseline is, strictly speaking, nonsense.

EK: But couldn't there be a space between the CBO being totally correct and the debt not being a problem? It seems certain, for instance, that health-care costs will continue to rise faster than other sectors of the economy.

JG: No, it's not reasonable. Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.

EK: But putting inflation aside, the gap between spending and revenues won't have other ill effects?

JG: Is there any terrible consequence because we haven't prefunded the defense budget? No. There's only one budget and one borrowing authority and all that matters is what that authority pays. Say I'm the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.

What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.

EK: What are the policy implications of this view?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe.

EK: That does it for my questions, I think.

JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.

The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes.

On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.

By Ezra Klein  |  May 12, 2010; 3:50 PM ET
Categories:  Interviews  
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Comments

So, be extension what Mr. Galbraith is saying is that the most prudent course of action is to increase deficits so as to put more money in the hands of private investors... So, we should take the same actions that Greece did but somehow we won't end up the same?

Or is he saying Greece failed because they didn't run enough of a deficit?

I do financial analysis for a living. Also, monetary policy research is a hobby of mine. I'm pretty well educated in the theories of finance and economics and what Galbraith is saying makes zero sense.

I don't even know where to start on how much economics he had to forget or to never learn to come to the conclusions he stated in his answers.

Wealth is not a zero-sum game but money is. Regardless of how you get the money for Government spending it came from the Private Sector in the form of taxes or bonds. However, a decent amount of of that capital incoming from bonds is coming from outside the country. This is overinflating the short term level of available capital in the US.

Think of the reverse of what happened in the 17th and 18th centuries in Europe where they sent bullion over to Asia in exchange for asian goods (Tea, opium, silk, etc) this led to less available gold and silver bullion in Europe and a big reason they switched to fiat currencies.

Now China send us cash in exchange for bonds. This is a good thing as long as demand for our bonds increases at a faster rate than the interest rate on the outstanding bonds. Otherwise we will see a net outflow of capital back to China as we pay off those bonds and either have to raise taxes or cutting spending to pay for them. This is what happened in Greece.

Demand for any good or service is limited. Currently we still have a large market for or debt but we can't rationally think we have an unlimited market.

Posted by: BradG | May 12, 2010 4:22 PM | Report abuse

A great interview, and a follow-up post from you, Ezra, on the brief periods of surplus since 1790 being followed up in short order by recessions would be very interesting. I'm not actually sure JKG is right about that, but he's surely correct about the theory, BradG's hobby-based confusions notwithstanding. That said, the post-keynesian analysis Galbraith offers is so counter-intuitive that its very hard for people to actually believe it could be true, so its important to back it up empirically: in fact, the period of time when the US was running the biggest deficits in its history (WWII) was also a period of very rapid growth, and was followed by a long period of prosperity. The one time the US actually paid down the national debt to $0 (the mid 1830s) was immediately followed by a severe depression. The BradG's among your readers deserve to have facts like these in front of them; their minds may still recoil, but facts are stubborn things.

Posted by: rwclayton7 | May 12, 2010 4:30 PM | Report abuse

Correct me if I'm wrong, but I think Dr. Galbraith's ideas are premised on the notion that inflation, even if it increases somewhat, is not a problem, so we could print money and keep interest rates low. I also wonder if there is a connection between his thesis and the financialization of the economy; maybe running a deficit is a way to channel money from the financial world back into the real economy.

Posted by: jduptonma | May 12, 2010 4:31 PM | Report abuse

I think this guy is nutty. I mean, WTF is he talking about bowling alleys running out of points?? What does that even mean?

This was one of the most incoherent interviews I've read on here.

Posted by: truth5 | May 12, 2010 4:37 PM | Report abuse

Galbraith is correct as long as money (for lack of a more precise term) is the fiat of a single government: as soon as money becomes individualized and stated (in the form of gold, private property, etc.), the theory fails rather miserably.

There are two excellent proofs (one involving land and one involving gold) of such failure; however, the old adage is never argue with drunks. Those drunk with debt and giddy for spending aren't worth arguing...

Posted by: rmgregory | May 12, 2010 4:51 PM | Report abuse

He touches on something that annoys me to no end about the Government spending debate.

People act as if the government is some separate entity from the rest of the economy. They act as if we just cut Gov't spending, all it will do is effect the deficit. It will not effect the economy. This is totally absurd. Every penny that the government spends eventually ends up as someone's paycheck (it might have to go through several transactions first, mind you). Whenever you cut spending, that is someone with less money (or maybe someone who no longer even has a job). If the cuts are big enough, this will effect the economy as a whole quite a bit as those people no longer have money to spend on goods and services. The tax base will decrease. He is pointing out the opposite. More spending puts more money in the economy.

If spending cuts were coupled with equal tax cuts things may balance out, but then there is no effect on the deficit, so if the deficit is your concern, this changes nothing.

The only decent argument is that if the government isn't doing the borrowing and spending, then the private industry will and thus those who lost salary or jobs from the public cuts can make up for them with the increase in private economic activity that will result. This is good if you believe that private industry is more efficient and productive than government. This is the main point of the so called "crowding out" idea. This point may have a lot of validity during good times. But during a recession, especially a big one, can we really expect the private industry to step up and pick up the slap? If the government borrows less, thus cutting people's pay or laying off workers does that necessarily imply that the private industry will borrow, increase spending, and create new jobs? No, not if the economic situation is still dire enough for them to have no faith in consumers stepping up their behavior. In fact, during a recession, by the government spending more money and giving the population more money in their pocket, this might actually lead to enough of an increase in consumer activity that the government might actually "crowd in" private activity.

yes, all that borrowing will have to be paid back, and with interest, but it strikes me as much wiser to hold off on that payback until the economy is fixed and people are working again. Fixing the debt when people are already broke and jobless be taking even more money and jobs out of the economy seems like precisely the wrong time to do it.

let's get people working, build up consumer confidence, and create enough ease of mind in the private sector for them to ramp up their activity, then, and only then, let's work on transferring all this economic activity back from the public sector to the private sector.

Posted by: nylund | May 12, 2010 4:56 PM | Report abuse

What BradG and truth5 are missing is that US Dollars are a fictional asset, created by the US Treasury, and that the federal government doesn't *need* to borrow money from private banks when it can just issue new money from the Treasury or Fed. That's the Bowling Alley / Points metaphor; a bowling alley can't run out of imaginary points, the government can't run out of imaginary money.

Of course running the presses until they melt would be a bad idea during a time of high inflation, but inflation is flirting with going negative right now! When inflation is negative, there is no incentive for private businesses (or people) to invest in things like factory machinery or automobiles; deflation says the longer you wait, the cheaper it will become. Inflation says the opposite, and gets people making purchases sooner rather than later. This is how you get a stalled economy going again. Cutting spending, whether from the private or public sector (ie, reducing the deficit) means lower demand for goods and services, which means more lay offs, which means less people lower demands for goods and services... it's an economic death spiral. Greece is screwed because, being on the Euro, they can't just print money. But we're not locked in like that, and *volunteering* our economy for years of painful deflation is beyond idiotic.

Posted by: BrettDay | May 12, 2010 5:01 PM | Report abuse

Ezra,

This was a really useful interview, and it was made even better by the comments of nylund, BrettDay, and rwclayton7. I hope that you will continue to explore this line of thought with other economists and policy makers.

This country needs to be very careful about choking the recovery by too quickly pivoting away from rebuilding demand and mitigating the misery index (which gets far too little attention).

It seems like the extreme fiscal ideas of the Paul Ryans of this world get all the attention lately, and there is little sign that the Democrats approach fiscal policy in the manner of Galbraith or Krugman....we are tilted too far to the right in this dialog about deficits.
It is unfortunate that we are not hearing Galbraith's message from any prominent Democratic politicians, but maybe if you shine a little light on his approach that might change just a little bit.

Posted by: Patrick_M | May 12, 2010 5:33 PM | Report abuse

This is all just patently absurd. You cannot have over-taxed companies, consumers afraid to spend, and jobs still being out-sourced while still running up a bigger deficit and say that everything is just “peachy”. Everyone needs to get a creative PLAN B because I see a day when everyone panics and pulls out of the markets….perhaps the day after BP and the rest of the oil companies REALLY crank up prices. GOOD GRIEF this just doesn’t make fiscal sense to me; does it really make sense to others?
kimcrawfordmd.com

Posted by: doctorkim1 | May 12, 2010 5:54 PM | Report abuse

Mr. Galbraith is exactly correct. The federal deficit = savings, to the penny. That is what savings is: money created.

The word "deficit" is misleading and just plain wrong. It properly should be called, "money creation" and federal debt should be called "money created."

The U.S. is a monetarily sovereign nation; Greece is not. We can create money. They cannot. There is no comparison between the two. (Actually, Greece is like California and Illinois.)

The so-called "economists" who warn us about rising federal debt, simply do not understand federal financing, and I would be glad to debate the subject with them any time (and have). There is not one iota of evidence to say federal money creation should be reduced.

Rodger Malcolm Mitchell

Posted by: rmmadvertising | May 12, 2010 6:00 PM | Report abuse

currency devaluation can be seens as a "form" of soverign default as can inflation. both are examples of hidden "taxes" at the very least. see Rogoff and Reinhardt This Time Is Different: Eight Centuries of Financial Folly for historical examples.

Posted by: stantheman21 | May 12, 2010 6:10 PM | Report abuse

As usual, James Galbraith is one of the few rational voices when it comes to discussing the budget deficit. The US government like all sovereign governments can always spend more than it earns – continuously and indefinitely – because the concept of “earning” is redundant. Unlike a household or a corporation, the sovereign government doesn’t need to earn to spend. That is a fundamental part of having a fiat currency system. This is NOT the case in Greece, or any other Euro zone country, because they are users of their currency, not issuers (which is done the by European Central Bank).

The US Federal Government might hide behind institutions (like debt-issuance mechanisms) and rhetoric (like we are running out of money, as our President often writes) but the operational reality is that behind all these smokescreens – the US government is not revenue-constrained.

Which is NOT to say that the government can spend without limit. There is a resource/inflation constraint. But the point goes deeper than this. Trying to prescribe rules about fiscal conduct – like the US government should “pay for its spending” – as stand-alone behavioural constraints – misses the point that the fiscal balance is largely endogenous. Endogenous to what? To the behaviors of the other sectors.

In other words, inflexible fiscal rules that sound fine to the puritanical brigade are unlikely to represent responsible fiscal management when applied to the ultimate goals of government activity – to advance public purpose, such as creating full employment. A mindless focus on government deficits without considering the background economic context, is the best guarantee of more incoherence in our policy making and untold and unnecessary misery for millions of Americans.

Posted by: MAuer1959 | May 12, 2010 6:18 PM | Report abuse

Galbraith is wrong about running surpluses; they are needed to restrain bubbles (Keynes knew that, but of course Greenspan didn't). We usually have recessions because we have had bubbles.

Posted by: dowty | May 12, 2010 6:34 PM | Report abuse

This is like a field day... the amount of errors in this piece is stunning.

"What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate. Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn't be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity."

There's a little something called trading. Traders don't set a trade based on their view of conditions 10 years out. If you buy a 20 year treasury, you aren't forced to own it for 20 years. If you like the 4% yield now, and expect a near-term flight to quality to, say, 3.5%, getting long duration is a good trade. However, you can also rationally believe that 10 years down the road the rate on the 20 year could be 10%. It doesn't matter if you think it would go to 50% - if you think the first move is from 4% to 3.5% over the next year - or even 4% to 4.25% and you're risk adverse - you'd probably be okay owning the bond. Like the tech stocks in 1999/2000, most investors like the recent trends, and think they can get out before prices slip.

In addition to this, many funds need to own highly rated bonds with certain maturities, and if they don't see rates moving up in the next few years they won't mind owning treasuries.

Another point to consider, there are almost certainly many investors who expect that the U.S. will choose a mix of entitlement cuts and higher taxes rather than inflation/default.

By the way, Greek 10 year bonds hit a yield of 4.416% on 10/8/2009, and by late Jan2010 they had broken 7%. Low bond yields can be deceiving.

I think Galbraith left out a third option - he doesn't understand the bond market.

Posted by: justin84 | May 12, 2010 6:48 PM | Report abuse

For anyone interested in reading more, I suggest you take a look at this article by Galbraith:

http://www.thenation.com/article/defense-deficits

Posted by: jsrice | May 12, 2010 6:50 PM | Report abuse

"JG: No, I think the danger is zero. It's not overstated. It's completely misstated."

Zero danger? This is absolutely an irresponsible statement.

Posted by: justin84 | May 12, 2010 6:53 PM | Report abuse

"Let's push a bit deeper on the CBO forecasts. They publish a baseline set of projections. One of those projections holds the economy will return to a normal high-employment level with low inflation over the next 10 years. If true, that would be wonderful news. Go down a few lines and they also have the short-term interest rate going up to 5 percent. It's that short-term interest rate combined with that low inflation rate that allows them to generate, quite mechanically, these enormous future deficit forecasts. And those forecasts are driven partially by the assumption that health-care costs will rise forever at a faster rate than everything else and by interest payments on the debt will hit 20 or 25 percent of GDP."

If Mr. Galbraith should look back at history. The 3mo tbill averaged 5.043% from Jan96 to Jun98. The GDP price index only broke 2% for 3 of the 10 quarters from Jan96 to Jun98, and this was a period of declining deficits and high employment.

As for excess health care cost inflation, well, that's how things have been for decades. It's not exactly bizarre to see an assumption that this trend continues for some time into the future.

"At this point, the whole thing is completely incoherent. You cannot write checks to 20 percent to anybody without that money entering the economy and increasing employment and inflation."

You absolutely can. It's very easy. Suppose that Bill has made $100 and was going to use it to buy a nice dinner for his wife. However, he decided to borrow the $100, and Bill made a T bond purchase instead of buying dinner. Now the government makes a purchase using that $100, but that purchase is offset by Bill not buying his dinner. Oooh, but the government also pays Bill $5 in interest - doesn't that increase employment and inflation? Well, the government needs to borrow $5 - thankfully, Steve was also willing to buy Treasuries, and so the government takes $5 from Steve and uses it to pay Bill.

"And if it does that, then debt-to-GDP has to be lower, because inflation figures into how much debt we have."

But it doesn't do that. Unfortunately, Ben Bernanke doesn't want high inflation. He prefers keeping it at 2%. If Ben expects government purchases to increase the velocity of money, aggregate demand and inflation, Ben's going to tighten monetary policy to keep inflation close to his target.

"These numbers need to come together in a coherent story, and the CBO's forecast does not give us a coherent story."

What story, the story of Federal Reserve implicit inflation targeting, or the story of short term rates being 5% in a low inflation high employment environment for years? CBO's forecast is completely coherent as demonstrated by both economic history and public knowledge of Ben's opposition to higher inflation rats(google Brad DeLong and 3% inflation target).

"So everything that is said that is based on the CBO's baseline is, strictly speaking, nonsense."

Or not.

Posted by: justin84 | May 12, 2010 7:14 PM | Report abuse

"EK: But couldn't there be a space between the CBO being totally correct and the debt not being a problem? It seems certain, for instance, that health-care costs will continue to rise faster than other sectors of the economy.

JG: No, it's not reasonable. Share of health-care cost would rise as part of total GDP and the inflation would rise to be nearer to what the rate of health-care inflation is. And if health care does get that expensive, and we're paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there."

The federal reserve targets an inflation rate. If it continues to do so, then inflation will be in the low 2% range on average over time if the Fed is reasonably successful. If price inflation remains rampant in a part of GDP that is expanding, then we will see disinflation in other sectors of the economy.

I'll give him the Paris comment though. Can't argue with buying something from lower cost producers.

Posted by: justin84 | May 12, 2010 7:19 PM | Report abuse

Going off Justin84's first comment about the deficit, I don't understand how Galbraith knows there is no chance that rising bond yields will be become a problem. I agree with Justin84 - it seems like investors are very fickle people and while they believe that US bonds are a safe bet now, that sentiment could change very quickly. I understand the argument for running deficits in a recession, but how do we know this won't become a problem eventually? Galbraith seems to imply that it never will be a problem. Can someone answer this for me?

Posted by: millerjs1 | May 12, 2010 7:21 PM | Report abuse

"EK: But putting inflation aside, the gap between spending and revenues won't have other ill effects?

JG: Is there any terrible consequence because we haven't prefunded the defense budget? No. There's only one budget and one borrowing authority and all that matters is what that authority pays. Say I'm the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.

What people worry about is that the federal government won't be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it."

This seems to me to be a case of money illusion.

The government does not put new resources into the economy. It can take resources and redirect them, but it does not put new resources into the economy. Government purchases can decrease the demand for money/increase velocity, which might somewhat increase economic growth temporarily, but in general the government redistributes rather than adds.

Take the aircraft carrier example. Galbraith directs $1 billion to Ezra's account, and he builds a shipyard and hires workers. These workers and materials are unavailable to do something else - say, build a cruise ship for a private company.

As mentioned above, you can get an increase in money velocity with government purchases, but remember Ben Bernanke is on the lookout for inflation, and he's already setting monetary policy so that it brings 2% inflation over the medium term. Ben will hike interest rates to discourage activity elsewhere before letting inflation run wild.

The government's money comes from either:

A) Direct tax
B) Borrowing
C) Printing money (which is effectively a tax on everyone who holds dollars, redistributing purchasing power to the government from private individuals).

In any case, banks will only demand government bonds if it thinks they are good investments relative to other opportunities. Banks will demand a high premium to hold government bonds - if they buy them at all - if the debt to GDP ratio is 200%, inflation is at 6% and the opposition political party is threatening to force a default in order stop the spending madness.

Posted by: justin84 | May 12, 2010 7:39 PM | Report abuse

"EK: What are the policy implications of this view?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we'd be much better off."

We could have given every unemployed individual $50,000, and told them to take some classes at a community college or university or start a business. That would have cost less than the stimulus bill. Other than the terrible precedent, I might well have preferred that.

The current stimulus bill suggests that the government is very inefficient at creating jobs - even the studies which assume 3 million jobs will be created (which of course ignore changes in the central bank's behavior brought on by fiscal stimulus) show $270,000 per job created or saved.

"And we can certainly afford it. We have an impending energy crisis and a climate crisis."

Okay, I'm on board with a carbon tax. That should allow many alternative energy projects to hit their ROIs and reduce carbon emissions.

"We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people."

No thanks. I don't want a large bloc of working class voters to feel that government has no cost or is almost free.

"Since the beginning of the crisis, I've supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing."

This would reduce the cost of employment to a firm and probably increase employment levels at the margin.

"You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That's one difference between us and Europe."

Does Europe not have estate/wealth taxes? Or rich people? I think the difference is that a smaller welfare state leads to more private individual action.

Posted by: justin84 | May 12, 2010 7:50 PM | Report abuse

The empirical argument is IMO the most persuasive. Not only has the government always run deficits, but the media has always been worrying ineffectually about a deficit crisis that never happens.

I don't think Galbraith is saying that inflation is not a problem, I think he's saying that inflation will generate a signal telling us that government spending is too high and the government will adjust its spending accordingly. But since inflation is incredibly low right now, we're not getting that signal and thus we shouldn't be worried.

Posted by: zosima | May 12, 2010 8:38 PM | Report abuse

p.s. The commenters saying that Greece proves we have something to worry about are just plain dumb. Greece's crisis is a consequence of Greece being an economic and political region that cannot control its own monetary policy. The US has no such problem. But I don't support that will stop y'all from fearfully touting the harbingers of our doom.

Posted by: zosima | May 12, 2010 8:41 PM | Report abuse

At the risk of exposing my hobby-based confusions to Mr. RWClayton7, does it occur to anyone that perhaps the purpose of government isn't to intervene in the economy, tweaking things here and there according to the latest political whim; that fiduciary media itself, created only out of debt to an elite banking establishment is the main problem, and that debts run up by governments to this clique is an absurd way to run an economy?

Posted by: acudoc | May 12, 2010 11:15 PM | Report abuse

"Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession."

That is utterly a stupid assertion.

Balanced budgets of the 90s did not cause a recession. Greenspan's attack on middle-class wealth and the impending swearing-in of a tax-cutting, starve-the-beast, fix-it-when-it-aint-broke fool had more to do with causing the recession.

Posted by: Lomillialor | May 12, 2010 11:21 PM | Report abuse

What Prof. Galbraith doesn't explain here, which may be confusing some, is that Greece and the other EMU countries gave up monetary sovereignty when they went on the euro. Not being monetarily sovereign, they are revenue constrained, like households, firms, and US states. They can "run out of money."

Countries that are monopoly providers of a nonconvertible floating rate currency of issue, such as the US, UK, Japan, Canada, and Australia, are not revenue constrained. They cannot "run out of money," in spite of what President Obama recently said (erroneously). Since these countries issue their own fiat currency, they do not need to fund deficits with taxation or finance it with debt. That idea is a holdover of gold standard days and it is now obsolete in today's monetary system.

There are real constraints on how much currency a country can safely issue. The government as monopoly currency issuer has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues currency in excess of capacity, demand will rise relative to the goods and services available, and inflation will occur due to a glut of money. If the government falls short in maintaining this balance, recession and unemployment result, due to a glut of goods and services. The government attempts to achieve the correct balance through fiscal policy (currency issuance and taxation) and monetary policy (interest rates), based on data and its analysis in terms of sectoral balances.

Posted by: tjfxh | May 12, 2010 11:38 PM | Report abuse

rwclayton is wrong in stating that paying down the debt caused the 1830's depression "The one time the US actually paid down the national debt to $0 (the mid 1830s) was immediately followed by a severe depression." It was caused by President Jackson,having got rid of Biddles bank putting the massive surplus the government ran up (which enabled the debt to be paid down) from the sale of public lands into various state banks who lent it out willy nilly causing a massive bubble to eventual calimitous effect.

Posted by: andrewjackson1 | May 12, 2010 11:49 PM | Report abuse

"...does it occur to anyone that perhaps the purpose of government isn't to intervene in the economy, tweaking things here and there..."

That thought DID occur to the political and financial elites about a decade ago, and so they decided to repeal Glass Steagal.

Sadly, that story did not have a happy ending. If you think our problems stem from too much of a "hands on" approach by government over the financial sector, you are not paying attention.

Posted by: Patrick_M | May 13, 2010 12:01 AM | Report abuse

This is precisely what Paul Krugaman has been saying. As well as another Nobel Prize winning economist, Joseph Stieglitz.

But two Nobel recipients and this reknowned economist must be wrong, because commenters "who do financial analysis for a living" say so. Not just that they're wrong, but that they're completely crazy and have never learned economics.

We need to return to having some respect for expertise and knowledge. The critique from FOX News that Supreme Court nominee Elena Kagan represents a "dummying down" of the Supreme Court may have been the high water mark for what's become a comically absurd distrust of anything that can be called elitism. I hope so anyway.

Posted by: BillEPilgrim | May 13, 2010 1:02 AM | Report abuse

"But two Nobel recipients and this reknowned economist must be wrong, because commenters "who do financial analysis for a living" say so."


Right. Why listen to the real economists who saw it coming?

Note also (if anyone finds depth or merit in the lengthy arguments of justin84) that justin84 argued this week elsewhere on Ezra's blog for the re-legalization of employment discrimination on the basis of race, religion, and gender:

http://voices.washingtonpost.com/ezra-klein/2010/05/will_the_court_become_a_consci.html#comments

Posted by: Patrick_M | May 13, 2010 1:29 AM | Report abuse

Excellent Interview!

Posted by: cezmid | May 13, 2010 4:57 AM | Report abuse

In other words, Cheney was right to say deficits don't matter and Bush was right to slash taxes. If Galbraith is right, then we need to cut taxes more and Obama needs to spend more and everything will be fine.

Posted by: Lomillialor | May 13, 2010 7:13 AM | Report abuse

Well That certainly makes me have more confidence in our academics and universities. Life is simple - spend all you got, don't worry about going into debt, and be happy! Greece really did not happen...

Notice this professor talked about taxing estates and putting the money into universities... a little self-serving, are we?

We know who Ezra Klein is, but this academic obviously is another Obama Kool-Aid drinker. I wonder if he balances his personal budget?

Posted by: wilsan | May 13, 2010 7:44 AM | Report abuse

I find it telling that the folks advocating higher debt are those who will be dead when it is time to pay it back.

News Flash: The Boomers (right and left) have sold this country down the river over the past 3 decades.

The left spends money on what it wants (social programs), cuts taxes on the poor / lower middle class, and borrows the rest.

The right spends money on what it wants (defense and corporate welfare), cuts taxes on the rich / upper middle classe, and borrows the rest.

Is it really so hard to live within our means?

Posted by: paulthiel1 | May 13, 2010 8:07 AM | Report abuse

The chestnuts don't roll far from the tree. Just like his father, whose career as an economist was based completely on narrative and was never sullied by any actual data about the world, this Mr. Galbraith assures us that the deficit means nothing. What a crock !

Posted by: dan1138 | May 13, 2010 8:21 AM | Report abuse

Being european and living in Denmark the notion of deficits not mattering worries me - because that means that all of our best economers are dead wrong. I always thought that what made a country great was if its businesses were able to produce goods that were in demand so that the country as a whole would "make money"... like a big company. What the interview is saying is that that does not matter as long as someone is willing to lend you money against owning a share of the company... and that is correct...but only for so long as the company value increases faster than what is being "sold" in this way... when/if that tide turns, then one day the lenders will own the whole company... and then what?
It also strikes me, that America has always stood as a beacon of private enterprise and opportunism - not as a nation that is stimulated only by Government spending.
(pardon my inefficient English, I trust the meaning is evident).

Posted by: koraltop | May 13, 2010 8:27 AM | Report abuse

The plague of the Galbraith family on economic theory continues.

I wonder if he believes, as his father did, that the Soviet system was a great success?

Posted by: ksr_pgh | May 13, 2010 8:43 AM | Report abuse

If it was April 1st, this interview could be read in it's proper context. If Galbraith is correct (and most of the modern world knows he is not), why have budgets at all? Why even have the concept of deficits? The government could satisfy every human need on the planet by printing money while not having to worry about the consequences. This interview should be filed under Big Lie. If you say something ridiculous often enough, someone might actually believe it. How pitiful.

Posted by: rubydid | May 13, 2010 9:18 AM | Report abuse

I was wondering when Ezra would meet up with the Modern Monetary Theory guys. I think they make some good points but I am troubled by the interest rate issue and justin84 makes the point I've been thinking about: "Ben will hike interest rates to discourage activity elsewhere before letting inflation run wild."
For more on MMT Google Bill Mitchell ("The Billy Blog"), L. Randall Wray, Warren Mosler.

Posted by: famattjr | May 13, 2010 9:19 AM | Report abuse

If the government can just print money, then why do I have to pay taxes?

Posted by: desmotronix | May 13, 2010 9:58 AM | Report abuse

Isn't it amazing how the LAWS OF ECONOMICS, and ETHICS, and TRUTH take a 180 degree turn, when the DEMOCRATS are in control. Now, Deficits are GOOD. We need MORE Deficits. We need to PRINT MORE MONEY. Inflation? Who cares?
This 'Interview' ranks up there with Woodward, allegedly 'Interviewing' a COMATOSE William Brady, from his Hospital bed.
If you've ever wondered why Galbraith is NEVER mentioned as a REFERENCE to good Economic Theory? Here ya go.

Posted by: GoomyGommy | May 13, 2010 10:12 AM | Report abuse

The MMT boys say the only reason for taxes is to regulate aggregate demand. Govt., in their view, in fact does not need taxes, they exist only "to give value to money" and to soak up demand. Spending comes before, not after, taxes; if a society came together from a mass of individuals, they could not tax, then spend, since there would be no money, they would have to spend first.
http://bilbo.economicoutlook.net/blog/?p=4157

Posted by: famattjr | May 13, 2010 10:17 AM | Report abuse

It is shocking that James Galbraith is not seeing what is happening in Greece and Western Europe. Everything that the progressive mind desires, has been put into practice in Greece.

Ron Paul 2012. :)

Posted by: AustrianSchool | May 13, 2010 10:50 AM | Report abuse

The assumption that "The government's spending creates the bank's demand for bonds, because they want a higher return on the money that the government is putting into the economy" is problematic as the banks will divert money into suboptimal investments when interest rates are artificially low. Deals that should not be made are completed. Think subprime mortgage mess and many leveraged buyouts. The easy money and subsequent inflation policy Galbraith encourages destroys the accumulated wealth of savers.

Posted by: onekama_mi | May 13, 2010 10:55 AM | Report abuse

I think justin84 nailed it.

Mr. Galbraith's analysis is too static, ignoring the likely effects of -and reactions to -government intervention.

Posted by: JT_Nichols | May 13, 2010 11:01 AM | Report abuse

Funny how I am seeing these "don't worry, be happy" articles regarding the deficit from the same people who were saying deficits under Bush were leading to fiscal Armageddon.

If what Mr. Galbraith is saying were true, why not crank up the printing presses and pay off everyone's mortgage tomorrow? That would end the housing crisis overnight right?

I seem to remember a few example in history where certain countries had the same beliefs as Mr. Galbraith and did try to do what he is prescribing and things didn't work out so well.

Posted by: KRoyall1 | May 13, 2010 11:13 AM | Report abuse

I guess we should eliminate taxes too, just print money at will.

Posted by: KRoyall1 | May 13, 2010 11:16 AM | Report abuse

This is an amazing graph showing the PIIGS debt. http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=global

Italy owes France (French banks) $511 billion, a sum nearly equal to 20% of France's GDP. Good luck with that.

The miasma of a progressive welfare state is evident. America should ditch ObamaCare implementation, reform its entitlements, and go back to the Constitution while there is still time.

Posted by: AustrianSchool | May 13, 2010 11:20 AM | Report abuse

It's hard to believe any sane person could believe this tripe. Government spending creates jobs. OK. Does not private spending create jobs?

Posted by: devildogdon | May 13, 2010 11:20 AM | Report abuse

The problem of debt is a very little detail called "interest rate of the debt". That´s money that goes to private investors, many of them abroad.

And inflation is something disastrous, that you can´t control without recessive interest rates and a very regressive tax. Frankly, Ezra Klein has relatives in Brazil. He should ask them about inflation and study the effects of the "foreign debt" on public finances there.

Posted by: andrekenji | May 13, 2010 11:31 AM | Report abuse

BaaaHHAHAHAH!
ZERO DANGER?
Is that what you would tell your daughter upon discovery she had put $90,000 from Louie "the Killa" in Louisville?
ZERO DANGER?
What was that bank danger that TARP was supposed to help with? The one that had us on the edge of the precipice? Which storyu is it, libs? Your gonna hafta pick one!
Hang on to this article, Ezra!
Your gonna want to interview this guy again. He will be trying to explain how the Obama administration messed up what could'a/would'a/should'a been a great plan if it had just been handled correctly.
Lib's may not be right; but they are never wrong! Hey, I know, Ezra! For an encore, why not interview Kim Sung "makes me ill" in North Korea on freedom and justice?
What an amazingly stupid article from the People's Republic of WaPo!

Posted by: trevithick | May 13, 2010 11:43 AM | Report abuse

Uh, what about the size of the debt service itself? When the debt service becomes a large part of the annual federal budget, you have a problem. That's why this is all so much faculty lounge claptrap.

Posted by: sladenyv1 | May 13, 2010 11:54 AM | Report abuse

ezra klein hits a new low in blatant shilling and employs dick cheney's argument in the process. i love it!

Gailbraith is a neo-keynsian idiot. if nothing else you end up spending hundreds of billions every year on INTEREST payments. opportunity costs are, well, costs.

remember sub-prime loans? well we have an entire subprime budget!

Posted by: dummypants | May 13, 2010 11:57 AM | Report abuse

Beware anyone selling you a free lunch. We can just print money to solve our problems? Yeah right, until nobody wants to get paid in dollars and just wants Euros or Yuan. Taxation is what gives value to money, by limiting its supply. An open-ended printing press is a recipe for disaster.

What we actually need to do is address the long-term deficit drivers, which are primarily Medicare and Social Security. We can freeze other government spending at say 10% below current levels and be OK.

This will allow us to stimulate the economy in the short-run using fiscal and monetary policy. Hopefully, we will stop spending the stimulus and start investing it, say in nuclear power plants that pay for themselves while creating jobs and addressing our clean energy future.

P.S. Japan has enormous currency reserves, over $1 trillion, so it has a huge cushion to comfort bondholders that it will pay its obligations. The U.S.? $127 billion in reserves. Further, the Japanese buy their government's bonds, while 75% of America's bonds are bought by foreigners.

Posted by: Factified | May 13, 2010 12:08 PM | Report abuse

So, if there is an ever increasing number of Government employees and a shrinking private sector to buy bonds and tax, then where doesMr. James Gailbraith get production from? All money stems from the private sector. We create it or we owe it.
This Keyensian Blather is nice in some classroom, but his Phillips curve hasn't worked for thirty years. I agree that 'some' deficit spending is good. We all do it for mortgages or car loans, the big items that are difficult to pay for as we go. This whacko, thinks it is ok to throw money at the study of pheremones in college classrooms - which is where some of my tax dollars are going.
Gailbraith is an Idiot.

Posted by: duelles1 | May 13, 2010 12:27 PM | Report abuse

Deficits don't matter? Well then why am I one of the 53% that is actually paying income taxes? Heck we make less than some people that pay 0, what's wrong with this pucture? Why are some tha make $50k getting money back on top of paying nothing?

Posted by: Yanks49 | May 13, 2010 12:27 PM | Report abuse

Other than Comrade Paul Krugman, I have not seen anyone say that deficits do not matter. This man is a fool..but that is redundant because he is an academic and an economist. He does not live in the real world. China holds nearly a trillion dollars of our debt. The 2 past and the current chair of the Fed say that our debt is unsustainable. All major entitlements (Social Security, Medicare, and Medicaid) are seriously underfunded. The Fed is holding interest rates low but this cannot last. Soon we will see higher interest rates which means our debt service will rise. We will be forced to raise taxes and eventually private sector borrowing will be affected.. the feds crowd out the private lending market with government borrowing. This clown is just plain wrong.

Posted by: manzoa | May 13, 2010 12:31 PM | Report abuse

"Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession."

Entirely incorrect. Look at the historic data. The last period of not running a deficit was during the Clinton years which lead to sustained economic growth till the housing bubble burst.

Posted by: Ted14 | May 13, 2010 12:52 PM | Report abuse

"The last period of not running a deficit was during the Clinton years which lead to sustained economic growth till the housing bubble burst."


Ted14,

Wrong. The economy went into recession during Bush's first term. The housing bubble helped pull us out of that recession, and then we fell back in after it burst.

Posted by: Patrick_M | May 13, 2010 1:04 PM | Report abuse

Someone ask Gailbraith why the Federal Government keeps taking "points" out of my paycheck every week, when they apparently have a money tree already.

Posted by: MostlyRight | May 13, 2010 1:12 PM | Report abuse

While it is true that the dollar is a fictional asset, it only has the value that people perceive it as having, and that value tends to be directly related to the difficulty of acquiring them, vrs the difficulty of acquiring items they value.

To put it another way, you can't eat dollar bills. Making more dollars does not change the amount of bread in the system.

The bugger is, if the dollar loses it's value, the people who make bread will have no mechanism for trading the bread they make, for the machinery they need to make it. I think I'd better get a mixer now, rather than later.

Voyager

Posted by: HarryVoyager | May 13, 2010 1:19 PM | Report abuse

Typical Keynesian rubbish. Galbraith is a moron,and Ezra Klein is a limp-wristed liberal twerp.

Posted by: pmilatty | May 13, 2010 1:28 PM | Report abuse

Milton Friedman on John K. Galbraith (James Galbraith's dad):

"Many reformers – Galbraith is not alone in this – have as their basic objection to a free market that it frustrates them in achieving their reforms, because it enables people to have what they want, not what the reformers want. Hence every reformer has a strong tendency to be averse to a free market."

Like father, like son.

Posted by: MostlyRight | May 13, 2010 1:31 PM | Report abuse

The man's argument is based on the premise that the US govt always run governments and that when we don't bad things happen.

Totally incorrect.

Check out the Treasury Department's website and look up the history of government debt.

In 1791 our debt was $75M. In 1860 our debt was $64M. Somehow in 69 years our debt actually declined. Hard to do if you are running deficits every year. For the most part betweeen 1791 and the mid 1960s we ran deficits during wars and during times of extreme economic hardship (1837, 1857, 1873, 1893, 1930s Depression). The reality is that until the last 45 years the norm was to run an annual surplus except during war time and recession. Why isn't this WaPo reporter prepared with this basic info on US debt so he can challenge him when he saws something so blatantly wrong??

Posted by: ajwright1 | May 13, 2010 1:43 PM | Report abuse

Is this dumb or what? For a saner view try "This Time Is Different: Eight Centuries of Financial Folly" By Rogoff and Reinhart. Fools have been promoting runaway government spending and debt as a panacea for centuries (at least 8 centuries according to R&R). It always ends in tragedy.

Try to find one economist who agrees with Galbraith? Forget the Republicans / conservatives. Would P. Krugman embrace Galbraith's ideas? No.

Like his father, Galbraith is a pseudo-intellectual at best. There is a reason that Galbraith senior never won the Nobel prize. Let me quote from the NYT.

'Why, then, wasn't his work more warmly received by his fellow economists?

A succinct answer was offered by Milton Friedman, himself one of the first Nobel laureates in economics and both a longtime friend and passionate intellectual adversary of Mr. Galbraith. Interviewed just after Mr. Galbraith's death, he characterized Mr. Galbraith's work as "not so much economics as it is sociology."'

Posted by: peter_schaeffer | May 13, 2010 2:07 PM | Report abuse

Gailbraith is a joke. As justin said, his answer to the first question should prove what a complete fool this guy is. Yeah, 10 year bonds are at 4% right now, that doesn't mean ANYTHING. They could double in a matter of a few years easily. Bonds have been on a 30 year rally in this country. What on earth makes Gailbraith think they cannot turn and go the other way?

Posted by: truth5 | May 13, 2010 2:24 PM | Report abuse

WOW, Ezra, you completely failed in the follow-up question category! His first answer is completely falacious. Just because the 20 yr treasury market hasn't gone up yet is not in any way proof that there isn't a problem.

1. The Markets have been wrong before. Remember the HOUSING CRISIS? Otherwise smart, self-serving people were buying up 'safe' mortgages as the crisis loomed. We all saw how that worked out for us.

2. Waiting until it does go through the roof, ala Greece, would be foolish. Greece had a problem long before their rates skyrocketed. Fools like this 'economist' argued that Greece could borrow more, promise more spending and things would be fine, until now, when it is too late for Greece to escape their self-made trap without serious economic pain. Listening to fools who tell us we don't have a problem because our long term problems havent become immediate catastrophies yet is the dumbest thing we could do.

3. Markets are not perfectly rational. They are the best system ever invented by far, but to dismiss the notion that they might not be perfect with the absurd, false, conclusion that if they arent we cant regulate them is insanity. We can not predict perfectly the results of regulations when a market is not perfectly rational but that doesn't mean you simply don't try to regulate at all. AND, even if it did, it would be falacious to conclude that because if they are irational, and you've concluded falsely that you can't effectively regulate them that proves we don't have a long term debt problem. No such conclusion follows. It would only mean that he doesn't have any idea what to do about it.

His conclusions are completely unsupported by his arguments. It's a bait and switch and completely falacious.

4. The US is being propped up by our hegemony position. Our long term treasuries are safer than other developed countries, or are believed to be, so they sell at a premium which depresses the interest rate we are paying below what it otherwise would be. This helps us now, but that doesn't mean it will always be there. Regardless, it does mean that our 4% 20 yr interest rate is artificially suppressed. Yet that low rate is precisely what he cites as his sole evidence that we arent facing a crisis.

There's more problems with his illogical conclusions but that's just a taste. I've never seen such drivel presented in a respectable media outlet. To be sure, people have said stupid things before but they usually at least pretend to have a rational behind what they are saying.

3.

The logical falacies on this one quesiton alone are enough

Posted by: michaelp0429 | May 13, 2010 2:29 PM | Report abuse

Wow! The problem with Greece is that they haven't spent enough money? I never thought of it that way. This solves all of our problems. Obama just needs to increase spending, debt, and taxes. Those are all good for us? I'm sure when Obama and the Left Wing Elites in Congress read this article that they will be happy to increase spending, debt, and taxes. I know Gold has soared to record prices....but with this kind of advice being followed by our Government I think I'll buy some!!!!

Posted by: valwayne | May 13, 2010 2:35 PM | Report abuse

GALBRAITH IS WRONG.

Too many economists do not realize that they are not "scientists" but "opinionists."

The reality of DEBT means that someone else has some CONTROL over the debtor, China over the U.S. in this case.

The U.S. MUST regain its independence from any debt. Period.

The U.S. Policy must be to not only PAY for every expenditure, but to pay DOWN the national debt with the result that the standard of living for every American would rise.

If it means higher taxes to do it, then do it. If it means to cut expenditures to do it, then do that, OR BOTH!

But, the current CORRUPTION of the American economy, meaning our household's and that of all of our neighbors' is NOT acceptable to us, nor to most Americans.

Going "to the party and sending the bill" to future generations is as corrupt as it gets. And, the U.S. IS corrupt thanks to the corruption of the Congress, the White House and their owners: Wall Street that benefits from such huge debts.

Secession of the states FROM such irresponsible government policy may BE the answer since Wall Street owns the decision-makers in Congress. And, IF Wall Street then demands that the U.S. Government send troops against the seceding citizens, Wall Street should consider what just occurred on Times Square recently that has the FBI in a tizzy as it was so easy for someone to place fraudulent bombs in a vehicle.

Now consider what millions of Americans will do in response IF their homes and jobs, families, etc. continue to be destroyed by WALL STREET's toadies called the Congress?

What Mr. Galbraith does NOT factor into his worthless "opinions" is the abject ANGER of Americans who will NOT tolerate any more sell outs of their hard-earned assets and lives via national deficits that only benefit the already RICH on Wall Street.

And, one needs to consider that "9-11" has already occurred. Just what does Mr. Galbraith think is going to happen on Wall Street when Americans have had ENOUGH?

The FBI has already held meetings about that scenario and they are terrified about it because there are not enough agents, or military personnel to stop the American citizens from taking THAT into their own hands!

Think about it. The FBI and national security agencies are.

Posted by: gglenc | May 13, 2010 2:45 PM | Report abuse

Ezra, what are you doing? Do you just find some fool whose theory supports your predisposed world view, and put it out as if it has any value? It's amazing anyone takes this theory as plausible? Did the last 100 years of history not happen? Does he really think the deficit spending during WW2, which fueled an economy depressed by the Great Depression supports his premise on deficit spending? Even his argument on the role of inflation is ahistorical. This argument is fallacious, historically invalid, and fails even the common sense test. Because it's counterintuitive, we should accept it, and risk our fiscal future since the rest of us paeons just don't understand? Get real. We're doomed if we don't get a handle on the deficit. We even have commentor's recommending that Democratic Party pols start referring to Krugman and Galbraith?! Krugman won the Nobel Prize for a completely different subject, and his column, which only exists because of the dysfunction known as the NYT, is viewed as delusional by so many contemporary economists.

Posted by: Daniel_Canales | May 13, 2010 3:34 PM | Report abuse

This guy is deeeply and totally wrong.

We need to purge ourselves, as a nation of a ideals like his, his ilk (Paul Krugman, et. al.).

I am not surprised that the author's dad is the clueless leftist John Kenneth Galbraith.

Please Mr. Galbraith, just go away.

Posted by: tr_cincy1 | May 13, 2010 3:35 PM | Report abuse

If the government can just print money, then why do I have to pay taxes?

Posted by: desmotronix

Answer: According to people who think like this, you don't. Or, at least, half the population of the US doesn't have to pay income taxes, and everything will be hunky dory. In Germany between the world wars, people went to the market with wheelbarrows of cash thanks to this kind of logic.
I love the line about the thought being so simple that the mind recoils. Simplicity is generally not as well-known for inspiring recoil as, say, horrible monstrosity. Apparently, a propensity for dangerous economic irrationality is a heritable trait. In fact, I'm no Gregor Mendel, but it seems that this Galbraith's mother must have been an idiot as well.

Posted by: reheiler | May 13, 2010 3:38 PM | Report abuse

"Note also (if anyone finds depth or merit in the lengthy arguments of justin84) that justin84 argued this week elsewhere on Ezra's blog for the re-legalization of employment discrimination on the basis of race, religion, and gender:"

Patrick,

Granted this post is a day old and I doubt anyone will read this, I'd like to respond to this, if only because not everyone will click on your link (though I thank you for providing it).

1) The U.S. is a fairly tolerant society now, and systematic discrimination is largely a thing of the past. This isn't to say that there is no discrimination - its just not a major barrier any longer.

2) The abolition of discrimination laws is hardly going to bring back 'white trade only' or working conditions for women reminiscent of Anchorman. Tolerance is part of the culture now.

3) Where there is remaining discrimination, the law isn't very effective at stamping it out (e.g. resumes with African-American names receive fewer call backs in some studies).

4) Since no one is forced to work for anyone, and since not every employer discriminates (many prefer minorities/women to prove their multi-culutral credentials), no one can be consistently underpaid compared to their economic worth if they don't want to be. What if they don't know it? I submit that no one is entitled to any wage other than what they agree upon with their employer, and if they are being paid equal to or more than the amount they are willing to work for, they are not being exploited.

5) Giving the government the right to interfere in this manner cuts both ways. Discrimination used to have legal backing from government.

In summary - that the U.S. probably doesn't get much benefit out of anti-discrimination laws where discrimination still exists, that the U.S. is fairly tolerant overall, the fact that people are free to work for those who doesn't discriminate against them, there being negative entitlement mentalities created by such laws and perhaps most important of all the historical example of government taking the wrong side of the issue all suggest to me that it is best for government to stay out of it.

Posted by: justin84 | May 13, 2010 4:20 PM | Report abuse

FYI, not everyone at the University of Texas is an bonehead:

http://blogs.mccombs.utexas.edu/alumni-news/2010/04/15/michael-granof-on-the-treasury-departments-2009-financial-report-is-the-sky-falling

This is from a member of the Federal Accounting Standards Advisory Board.

Posted by: healed | May 13, 2010 4:20 PM | Report abuse

Justin84:
Your statement
"1) The U.S. is a fairly tolerant society now, and systematic discrimination is largely a thing of the past. This isn't to say that there is no discrimination - its just not a major barrier any longer. "

Is demonstrably false. For example, women make up more than 50% of the population, yet they are far under-represented in business, especially in upper managment and CEOs. Blacks, Latinos and Asians are also under-represented. This is true in the political sphere as well. And anyone who's been paying attention to the crusade against homosexuals would disagree that this society is tolerant.

If your statement were true, I would expect to find very little difference between the general population statistics and that of any reasonably large sample.

I also disagree that the law and governments intervention in this area has been unproductive. Great strides have been made, yet there is still a long way to go.

As far as being "free to work", your premise is some sort of objectivist malarky. The instance you cite (e.g. resumes with African-American names receive fewer call backs in some studies) argues against your point: those people have fewer opportunities, and rather than live on the street they choose a job that is the result of lesser opportunity.

For someone who is all "free market", if the demand is less, what happens to the price? If there are fewer employers willing to hire blacks, wouldn't that automatically lead to lower wages for them?

Posted by: dpc2003 | May 13, 2010 5:19 PM | Report abuse

Ezra should have asked how well James' mom knew Unity Metford, Hitler's girlfriend, while she dormed with her at the University of Munich, and if she ever expressed an opinion of how printing money worked out for Germany.

Or why the Washington Post's readers should care what another trust fund baby intellectual with Daddy issues thinks.

Or how many of his viewpoints come from real world experience vs. growing up between Cambridge and the family summer home in Vermont, with a progressive daddy opinionator in an ivory tower intellectual cocoon.

Or maybe Ezra should just look in the mirror and ask himself why he finds it necessary to seek out people like Galbraith to interview in the first place.

Posted by: MostlyRight | May 13, 2010 5:29 PM | Report abuse

I like how so many commentators are missing JG point - there is no inflation right now and in fact signs point towards deflation therefore it would be a good time to pursue policies that might be dangerous in a time of high inflation. Not rocket science.

Posted by: ligedog | May 13, 2010 6:11 PM | Report abuse

Galbraith is forgetting Bastiat's Broken Window Fallacy.

That is, the Govt has to get the money from someone else so they can
spend it.

And the problem there, to paraphrase Margaret Thatcher, is eventually they will run out of other people's money.

The Greeks are learning this the hard way - and so will we.

Posted by: eric41 | May 13, 2010 6:22 PM | Report abuse

"In summary - that the U.S. probably doesn't get much benefit out of anti-discrimination laws where discrimination still exists, that the U.S. is fairly tolerant overall, the fact that people are free to work for those who doesn't discriminate against them, there being negative entitlement mentalities created by such laws and perhaps most important of all the historical example of government taking the wrong side of the issue all suggest to me that it is best for government to stay out of it."


shorter and clearer version of justin84:

"Yes, I am in favor of repealing the Civil Rights of 1964. I do not think that discrimination based upon race, gender, or religion should be illegal in the United States of America any longer."

Posted by: Patrick_M | May 13, 2010 6:33 PM | Report abuse

Ezra Klein wouldn't so blithely say, "Putting inflation aside..." if he was a bit older and had lived through the inflation of the 1970s.

Sure, deficits "don't matter" if you're OK with hyperinflation -- and everything else that comes with it.

Geez.

Posted by: glenalxndr | May 13, 2010 6:39 PM | Report abuse

Those who argue against BradG - and for Galbraith - utterly miss the point; they are talking about money, not wealth, and the two are most definitely not the same thing! That so few understand this is the really scary part.

Posted by: rdlynch1 | May 13, 2010 6:53 PM | Report abuse

The powers that be are testing a theory, that we can print massive amounts of money to offset a severe recession, without triggering inflation and badly damaging the dollar and Euro currencies.

One potential takeaway from the Depression is that not enough money was allowed to flood the system and austerity measures were implemented too soon. We seem to have learned that and then some.

The big risks here for the U.S. are sustained high unemployment at one end (which we have), and runaway inflation and interest rates that prohibit borrowing at the other end (which we might have in the future). The latter would arise because of three things: 1) Too much money in the system; 2) Too much demand for goods; and 3) No indication of future control over spending.

Since #2 is not an issue for the short-term and we'll see that coming, and were pushing #1 to the limit and taking significant risk there, let's at least get going on #3.

How about we deal with the long-term, cost curve bending issues we must eventually face with Medicare and Social Security (the true budget crisis) , which should allow us the flexibility to print a lot of money against this long-term backdrop of fiscal responsibility? Take steps now that cut future spending, but don't affect the present. This will reduce our risk as best we can while we focus on getting demand going again.

A perfect example is modifying (reducing) the annual cost of living adjustment formula for Social Security. No impact today, big impact in the future.

Another is attacking the supply shortage in healthcare, which is too few doctors, nurses, and scanners. We can start on this now so we are ready in ten years when the cost of 77 million Boomers starts to go through the roof.

So these may be long-term solutions, but they have a critical impact today on the perspective of the bond market. They are the electronic herd out there and they are restless right now. Let's take the basic steps necessary to keep them from stampeding as best we can.

Posted by: Factified | May 13, 2010 7:11 PM | Report abuse

in fact, the period of time when the US was running the biggest deficits in its history (WWII) was also a period of very rapid growth, and was followed by a long period of prosperity. The one time the US actually paid down the national debt to $0 (the mid 1830s) was immediately followed by a severe depression. The BradG's among your readers deserve to have facts like these in front of them; their minds may still recoil, but facts are stubborn things.

----------

Well here's another fact - this is 2010 and not 1945. At the end of 1945 we did not confront entitlement costs going to the moon and we were far and away the dominant economic power when every other major economy had either been shattered or was spent. This recital of our post-war debt gets dredged up all the time, yet it's an inane, "so what?", data point. It has nothing to do with this country's fiscal situation 65 years later. And the other "fact" pointed out up there regarding our rarely paying down our debt has zilch to do with our fiscal future. God help us if this is the level of thinking that will lead the way forward.

Posted by: JamesSCameron | May 13, 2010 7:41 PM | Report abuse

The only reason interest rates on bonds are so low is because the bond market has been propped up by central bank-created money, available at artificially low interest rates. If the market was allowed to set these rates, -- instead of a few elitist, know-it-all bankers in secretive meetings -- interest rates would be much higher.

The whole core of the problem is that the entire planet is saturated with debt. You can't solve the problem of too much debt by moving it around and creating more of it.

The only thing that really stood out here as making sense is when he says, "So there are two possibilities here. One is the theory is wrong. The other is that the market isn't rational. And if the market isn't rational, there's no point in designing policy to accommodate the markets because you can't accommodate an irrational entity."

That's right, the market isn't rational, it's rigged. The policy is being designed to bolster the rigging. The fake recovery and the fake numbers send out bad information to people, causing them to make bad economic decisions.

Governments do not create wealth, they consume it.


Posted by: MrTracker | May 13, 2010 8:31 PM | Report abuse

Incidentally, here's Galbraith confidentally predicting in March of 2009 that TARP would fail (it didn't):

http://www.thedailybeast.com/blogs-and-stories/2009-03-24/the-geithner-plan-wont-work/full/

and here:

http://www.itulip.com/forums/showthread.php?654-Dr.-James-K.-Galbraith-Interview-Janszen

we discover him grossly underestimating the impact of the housing bubble.

So by all means, Ezra, let's run with this hand and rely on his predictive powers regarding the long-term deficit.

Posted by: JamesSCameron | May 13, 2010 8:54 PM | Report abuse

I guess JG didn't hear the bond agencies are going to decrease the US bond rating if the debt to GDP ration gets too big. CBO says we are on the way to get to 90% of GDP by 2020. But JG knows all except he has never worked in the investment industry. Our bond rating goes, the cost of all our debt increases. I guess he must think a 23% VAT like Greece is going to have is OK.

Posted by: jschmidt2 | May 13, 2010 10:35 PM | Report abuse

Galbraith makes his lack of real insight abundantly clear. A professorship and a lot of awards don't make you legitimately smart, do they? Been covered in great detail here, read above. One thing to note: the fervor with which the feckless Ezra laps up JKG's errors. Ezra, partisan and lame, as per usual....

Posted by: subframer | May 13, 2010 11:19 PM | Report abuse

Sadly, facts get in the way of wonderful theories. Rather than supporting or refuting other posters arguments, I suggest Mr. Klein check back with Dr. Galbraith on this Economist article:
http://www.economist.com/world/asia/displaystory.cfm?story_id=16112050&fsrc=rss

If deficits and debt are as ruinous as he describes, then Australia must be a Third World hell hole of despair and wretchedness.

Bottom line, the value of the Dollar as a reserve currency cannot be understated. Big deficits and eventual debt lead directly to loss of confidence in the currency, and hence loss of sovereignty on a national level, and freedom on a personal level. Yes, Greece is not like the U.S., but more like California. But that's precisely the point: neither Greece nor California are in a position to help themselves outside of default. While Greece willingly gave up sovereignty for the Euro, profligate spending will do the same, even if the government controls the printing of money. Proof? Mexico controls its money, anyone want to trade Dollars for Pesos?

Posted by: vinylslider | May 13, 2010 11:30 PM | Report abuse

Patrick,
"shorter and clearer version of justin84:

"Yes, I am in favor of repealing the Civil Rights of 1964. I do not think that discrimination based upon race, gender, or religion should be illegal in the United States of America any longer.""

This actually isn't correct. I'm okay with Titles I, III, IV (although I prefer vouchers to public schools, but same principle applies), VI and IX. Government has to be neutral - a lot of the damage from discrimination is when it gets legal backing. It is also fair for government to put requirements on its suppliers. Note that government enforced discrimination against gay marriage and gays in the military exists.

I don't think Title II is necessary anymore. People by and large aren't chomping at the bit to segregate their businesses. Other than a token news story, nothing would change it if were gone tomorrow.

Commissions are pointless. No need for Title V.

Title VII is far less beneficial now than in 1964, and the costs probably outweigh the benefits. In any case, no one is owed anything other than what he freely agrees on with his employer.

VIII and X seem pointless as well.

Posted by: justin84 | May 14, 2010 12:37 AM | Report abuse

BillE,
"This is precisely what Paul Krugaman has been saying. As well as another Nobel Prize winning economist, Joseph Stieglitz.

But two Nobel recipients and this reknowned economist must be wrong, because commenters "who do financial analysis for a living" say so. Not just that they're wrong, but that they're completely crazy and have never learned economics."

This is correct. Arguments from authority are not to be trusted only because they are from authority.

JG says the danger from deficits is zero. This is unambiguously false. Once debt reaches a certain point, the government resorts to printing money to pay its bills, causing hyperinflation, massive economic distortion and then collapse. The man cites Japan as an example, and yet while Japan hasn't hit the point of no return, GDP growth has only average 0.7%/yr over the 1991-2009 period. The Neo-Keynesians keep demanding deficits and are shocked, SHOCKED, that the expected growth doesn't appear - and then demand even bigger deficits. They cherry pick historical examples when other historical examples show the opposite of what they intend to prove.

If authority matters though, consider the words of Ken Rogoff, an economist who worked at the IMF which was unfairly maligned by Stiglitz:

http://www.imf.org/external/np/vc/2002/070202.HTM

This is the most relevant part, but read the whole thing.

"We certainly believe in the lessons of Keynes, but in a modern, nuanced way. For example, the post-1975 macroeconomics literature—which you say we are tone deaf to—emphasizes the importance of budget constraints across time. It does no good to pile on IMF debt as a very short-run fix if it makes the not-so-distant future drastically worse."

Posted by: justin84 | May 14, 2010 12:54 AM | Report abuse

Ezra, you should interview Professor Galbraith on a weekly basis. The simple truth that counter-cyclical deficit spending by the government has positive effects in the economy by reducing unemployment and increasing demand causes all of the right wing trolls and randroids to come running down the hillsides with their hair on fire. The comic relief is priceless.

Posted by: Patrick_M | May 14, 2010 1:13 AM | Report abuse

shorter and clearer version of justin84:

"Yes, I am in favor of gutting the Civil Rights of 1964. I do not think that employment discrimination based upon race, gender, or religion should be illegal in the United States of America any longer."

Posted by: Patrick_M | May 14, 2010 1:17 AM | Report abuse

God, these comments are hilarious. Reading them reminded me of the British Army's custom of putting very high IQ officers in staff jobs and away from commanding troops in the field-- if there's too big a gap in IQ, the troops won't know what the hell their Lieutenant is talking about most of the time. Likewise, Galbraith is so damned sharp that its hard to follow his argument if you hadn't read it before. Galbraith is a Post-Keynesian (different from New Keynesian, incidentally). The best introduction to this branch of economics is the website of Galbraith's sometime co-author Warren Mosler. Warren's posted there a draft of his book 7 Deadly Innocent Frauds that expands on and explains the points that Galbraith made only in shorthand in this interview.
http://moslereconomics.com/

Oh and the chucklehead who said Jamie Galbraith was unfamiliar with economic history ("Does he really think the deficit spending during WW2, which fueled an economy depressed by the Great Depression supports his premise on deficit spending?") ought to pick up a history book or two. During the war, the civilian economy was run for all practical purposes out of the Office of Price Administration. The Deputy Director and senior economist there was a young Canadian-American economist by the name of... Galbraith (and by all accounts Ken Galbraith did a first rate job). I'm quite certain Jamie and his father talked shop many times about the wartime economy and the effects of deficit spending.

Posted by: beowulf_ | May 14, 2010 2:05 AM | Report abuse

It may be too simple but it sounds to me that this guy is just defending the current path to bankruptcy we are on.

If what he says is true, then why stop at a trillion $$ lets go for some real excessive growth! Foolish foolish foolish people.......

Posted by: az_guy37 | May 14, 2010 2:13 AM | Report abuse

HELLOOOO PEOPLE!!!!!! You each owe $200,000 to creditors, and you don't actually do anything productive in your country anymore!!!!

I don't care if you can print your own money, no amount of incoherent economic gobblygook will change that above stated fact. I'm an ecologist and engineer trying to learn more about economics and it's frightening how eagerly economists hide themselves from the basic laws of nature in their theoretical charts and figures that have no basis in reality. It would make an interesting study in psychology, how so many economists can be so blind to the elephant in the closet.

The only reason your insolvent country has been allowed to limp along as long as it has is because the international community is letting you. Once they finally wean themselves off you as the central currency, say good-bye to the good ol' US of A, my friends.

Sorry, y'all lost my respect, except for Justin84. We are all in deep trouble with people like Galbraith and his buddies in charge. I don't need to be an economist to see that, I am an scientist.

Unarguable facts of nature:
1) economic growth is not sustainable, no matter what any delusional economist tells you.
2) you will never be able to pay off your debt, and will never be able to grow your way out of it. With it getting larger every day, your only option will be default. Or hyperinflate away to chaos.

Do as I do people, expand your horizons to other fields of study beyond your economics textbook centerfolds.

Posted by: Mark_BC | May 14, 2010 3:39 AM | Report abuse

What's the difference between a scientist and an economist?

A scientist makes the chart fit the data. An economist makes the data fit the chart.

Posted by: Mark_BC | May 14, 2010 3:48 AM | Report abuse

BTW, my above stated support for justin84 was for his earlier economics posts, not the race discrimination posts.

Posted by: Mark_BC | May 14, 2010 4:10 AM | Report abuse

After WW II economics & policy were dominated by keynesianism, monetarism and neo-liberalism. I'm not sure if you can call that progress, but thinking in a particular science (social or not) does move on. Why so adverse to anything contrary to the present neo-liberalism? It's not as if it's set in stone.
There are three sectors in the economy: government, private & foreign. Their relationship is represented as: (G-T)+(I-S)=(X-M)=0. In words: (governmentspending minus taxes) + (investment minus savings) + (export minus import) should add up to zero. It means that if the government for example is in deficit, either the private or the foreign sector must run a surplus. Note that exports are a cost (you save the goods you produced in order to sell) and imports a benefit. Also note that with fiat money (not convertible into gold) demand for that money is driven by taxes. If the government cannot tax/collect taxes, it ceases to be a government.
Last but not least: where in the FED rulebook does it say "thou shalt borrow from China in order to spend"? I don't know if any such rulebook exists, but perhaps mssrs. Klein & Gailbraith should have asked you, reader(s) to keep an open mind to a different view.

Posted by: Revalk | May 14, 2010 10:03 AM | Report abuse

Patrick,

The effects of stimulus cannot be precisely calculated. There are too many variables and your results depends on your prior bias.

Keynesians will tell you that there is a free lunch, and the government can create jobs at no cost other than a little debt. They often point to WWII, while ignoring counterexamples such as 1920-1921.

Austrian/Classical economists will say that you are focusing too much on applying math to aggregate numbers, ignoring what would have been done in absence of the stimulus, and place too much faith on government to achieve better results than the private sector.

The Austrians have a solid point in their favor given the projected unemployment path with and without stimulus that the administration put out back in January 2009. Unemployment stands at 9.9%, vs. 9% in the chart 'without' stimulus and ~7.3% with the stimulus. I find it hard to believe the claim 'we didn't think things would be as bad as they were' makes sense given how dire things looked in Jan2009. No one had rose colored glasses then.
http://www.coordinationproblem.org/2010/03/the-graph-that-keeps-on-giving.html

Robert Barro of Harvard has estimated that that the stimulus will reduce GDP by $300 billion over the 2009-2013 period, while allowing for a small boost in '09 and '10.

http://online.wsj.com/article/SB10001424052748704751304575079260144504040.html

Given that GDP falls by $300 billion and GDP per worker is about $100,000, that approximates to about 3 million jobs destroyed over that time period, on net.

As for historical examples, the 1920-1921 depression saw severe deflation and unemployment hitting 11.7%, but the government cut spending nearly in half and within in 2 years the unemployment rate moved back below 3%. In the 1930s the government tried deficit spending and lots of intervention, and unemployment remained high the whole decade.

Posted by: justin84 | May 14, 2010 11:33 AM | Report abuse

G is wrong. He does not account for the fact since the 1980's the US corporation has taken its means of production outside the United States. Therefore, this growth is anticipates on debt and money creation ends up finding it's way to emerging economy labor and int'l capital gain. This new loop essentially bypasses the majority of the U.S. This would account for the CPI being low no matter how much debt has been created. I would like to see JG address this issue which 95% of economists ignore. It's as if the trade treaties allowing flight of capital didn't happen.

Posted by: Markovich2 | May 14, 2010 11:50 AM | Report abuse

Revalk,

I'll grant you that money demand is based in part on the need to pay taxes. That said, that isn't the whole part of the equation. People demand money as a store of value and unit of exchange. If too much fiat money is created, high inflation ruins the ability of fiat money to provide these benefits and people will broadly stop using the fiat money and use a foreign currency/barter - after all, they can always exchange hard currency/goods for a few wheelbarrows of the omnipresent fiat currency when April 15th rolls around.

It isn't that the U.S. needs to borrow from someone in order to spend, but it does need real resources in order to spend. It can tax citizens directly, borrow from citizens, borrow from foreigners, or print the money, which takes purchasing power away from citizens as a tax does. When states get into huge debt problems, the last option is often taken (and the only one left), and it is economically ruinious.

By the way, the equation doesn't necessarily mean government spending is effective. Say that foreign trade is balanced, taxes are $100, spending is $100, and private savings and private investment are $100 as well. Government then spends $50, creating a deficit. In order to balance, you say I-S has to move into a $50 surplus. If the private sector is facing uncertainty, isn't it possible that investment could fall, say to $75, with private savings falling to $25 to create the needed $50 surplus? Just curious.

Posted by: justin84 | May 14, 2010 12:00 PM | Report abuse

Brad G

You've got it backwards when you say wealth is not a zero sum game but money is. Money is unlimited but real wealth is limited by the resources on the planet. Thats why unlimited money printing causes rise in prices. You can print as much as you want but the price will rise so you will not get anymore real wealth.


Those of you contradicting Mr Galbraith fail to account for the fact that government is the source of currency for the bond markets. It is never the other way (in the US). It is a travesty that the EU set their currency union up so that in effect they were on a gold standard. Putting hard limits on money in a body as vast and changing as the EU is suicide. Forcing govts to come hat in hand to bond traders just so they can pay workers is INSANE beyond belief. What the hell interest do bond traders have in the welfare of people thousands of miles form their cushy homes? None. But the governments of those people do (or should) so why tie your hands that way? Giving up currency sovereignty is stupid and every country in Europe that did will not like the results.

Posted by: gpbgasser | May 14, 2010 3:20 PM | Report abuse

"Wrong. The economy went into recession during Bush's first term. The housing bubble helped pull us out of that recession, and then we fell back in after it burst."

Actually, Patrick_M, the recession started the last year of the Clinton administration when the stock market bubble burst, and then got complicated by 9/11. So Bush doubled down on the Clinton-era policy (inflating housing prices to encourage consumers to roll over credit card debt into mortgage debt and then spending anew) as a means of getting out of the recession. The bursting of the housing bubble has led to the worst of the recent recessions, and it was preceded by deficits unknown outside wartime. I wonder why Galbraith decided that those deficits weren't responsible for the current problems?

Posted by: ehmunro | May 14, 2010 5:40 PM | Report abuse

"Those of you contradicting Mr Galbraith fail to account for the fact that government is the source of currency for the bond markets. It is never the other way (in the US)."

This is true historically, but bond market participants don't need to use the dollar or for that matter lend their resources to the government. Outside of a few bad years in the 1970s and wars, the U.S. has managed inflation fairly well - recently it is positive but low and predictable, and so investors can be fairly confident about a real return within one or two percent of their expectations.

If the U.S. let inflation rise too high, people are not going to want to hold dollar denominated financial assets, including dollars. Even if it is made illegal, people will start using gold, foreign currencies and barter. In addtion to soaring money supply, you'll see crashing money demand.

Also remember that about half of the investors in treasuries are foreign, and this proportion is likely to increase as a debt crisis becomes imminent.
http://www.ustreas.gov/tic/mfh.txt

They will be quicker to demand foreign-denominated debt than Americans. Once that occurs, the game is up. While the U.S. can keep printing dollars and confiscate the wealth of its citizens, it will be all the more difficult for the U.S. government to trade its paper for hard currency needed to pay its bills and it just makes the ultimate conclusion to the whole mess all the more painful.

Posted by: justin84 | May 14, 2010 5:48 PM | Report abuse

A financial planner writes:

Regardless of how you get the money for Government spending it came from the Private Sector in the form of taxes or bonds.

180 degrees wrong. The dollar, a fiat currency, is created by the State, under Article I, section 8 ("to coin Money") for public purposes ("provide for the general welfare"). The state also creates the demand for money by demanding that taxes be paid in it.

Posted by: lambert_strether | May 14, 2010 9:39 PM | Report abuse

"If the U.S. let inflation rise too high, people are not going to want to hold dollar denominated financial assets, including dollars"

So If I have a dollar denominated financial asset how do I get rid of it? How do I get rid of dollars? Someone needs to take them dont they?

"Even if it is made illegal, people will start using gold, foreign currencies and barter"

OK but as long as there is still a tax enforcement body and jails to put you in you will still need enough dollars to pay taxes. Again to acquire those foreign currencies you will need to find someone to take your $US. Its not as easy as many make this sound. Everything is tied together now.


"In addtion to soaring money supply, you'll see crashing money demand."

Dont see it. Money demand crashing?? There is not enough gold around and not enough people have the means to barter for everything

"Also remember that about half of the investors in treasuries are foreign, and this proportion is likely to increase as a debt crisis becomes imminent"

Less than 35% are foreign but you make the mistaken assumption that buyers are needed for the debt before spending occurs. The spending happens first then the debt gets sold


"They will be quicker to demand foreign-denominated debt than Americans. Once that occurs, the game is up."

Alright now which is it? Will our treasuries be more sought by foreigners as you stated above or will they want foreign denominated debt.? They cannot come to us for foreign denominated debt we only issue $US


" While the U.S. can keep printing dollars and confiscate the wealth of its citizens, it will be all the more difficult for the U.S. government to trade its paper for hard currency needed to pay its bills"

The US doesnt trade its paper for hard currency! It only spends in $US. If people dont want $US they dont sell to us. We can always pay a bill denominated in $US.


You're really stuck on gold standard thinking and its messing you up. This floating exchange rate world is so intertwined its very hard for the scenarios you present to actually happen for the reasons you list. The thing is you cant get rid of something unless there is someone who wants it.

Posted by: gpbgasser | May 14, 2010 10:21 PM | Report abuse

So according to Galbraith, debt and deficits apparently don't matter at all, since the government just puts the money back into the economy.

So why not eliminate taxes and other federal revenues, and run the federal government entirely by borrowing? In that case, the government could only pay debt and interest owed by borrowing more from others, ie it would be obvious to all that this would simply be a Ponzi scheme, and no one would lend to the government in the first place.

And that's exactly the danger of debt, and the need to issue more debt just to service the old debt. Once lenders lose confidence in the government's ability to repay, they start demanding higher rates of interest - further exacerbating the debt problem - and it blows up.

That's what happened in Greece. And I wouldn't take much comfort in the fact that the government can borrow at low rates - Greece could too, up to the end of last year. Once confidence is lost, it spirals very quickly out of control.

I would guess that America - at the rate Obama is growing the debt - has about 10 more years before this happens.

Wake up, America. Obama loves to promise you something for nothing, but you (or your kids) will eventually pay, one way (taxes) or another (inflation, economic chaos).


Posted by: calvin9 | May 15, 2010 12:30 AM | Report abuse

Upon further review, JG is a most disturbing man. This interview will be read with mocking incredulity in the future. They will ask, did people listen to this man? Like the British upper class before him, they attempted to extend their personal empire of ill gotten wealth on the backs of their poor countrymen. They all used their economists (frontmen, confidence men) like JG.

A windbag on an academic perch. This interview is abusive to facts and reality.

The true abuse of his mind is he uses a fiction to defeat a fact and support a fraud. The fiction is that the treasury rates are low, thus making argument against excessive debt wrong. It's comments like this that make people believe that we're buying our own debt with the money we gift-lend to banks without interest.

He escorts you right into the big question. Either we're doing what we can to make other people's debt more dangerous, or we're buying our own. Any nonsense theory like G's ends badly for all. If England didn't have the U.S. monetary system to lean on, they would have been crushed to dust long ago following G's theories.

Posted by: Markovich2 | May 15, 2010 2:11 AM | Report abuse

Erza, how could YOU not ask the obvious follow-up question when you're handed a beauty like that?

This man just asked the world to use the last two years (the most sub rosa and direct intervention in the markets ever) as a fixed point of reality to define a market. Then, he asked you to extrapolate from this illusion. He asked his country to risk itself on an extrapolation from an illusion and a lie.

This is what's wrong with the MSM. They're talking to a son of a famous guy just like the last son of a president. We're inbred, just like England and we'll suffer a worse fate unless we IGNORE men like these at all times of crisis (which they all created).

Posted by: Markovich2 | May 15, 2010 2:15 AM | Report abuse

"The US doesnt trade its paper for hard currency! It only spends in $US. If people dont want $US they dont sell to us. We can always pay a bill denominated in $US."

Zimbabwe. Pretending it's not a problem if the dollar becomes worthless is silly.

Posted by: Careless | May 15, 2010 2:29 PM | Report abuse

I say that he needs to be interviewed a year from now & see if he has the same opinion.

Does he know about the Zimbabwe economy? Their currency is worthless from the continual printing of money.

He must be an Obama supporter.

Posted by: ctcb05 | May 15, 2010 10:44 PM | Report abuse

Bravo for this article. I totally got the bowling alley metaphor. Now, if only state governments would realize they need to be spending more, not tightening their belts. There are so many infrastructure projects we need in this crumbling country that it's not even funny. Build, build build! Now please.

Posted by: deejoshy | May 15, 2010 11:19 PM | Report abuse

So I finally got this part down:
War is Peace
Freedom is Slavery
Ignorance is Strength
but: Debt is Wealth? Really?

Get a clue.

Posted by: wigginz | May 16, 2010 8:01 AM | Report abuse

To Rodger Malcolm Mitchell - you wrote:

"The U.S. is a monetarily sovereign nation; Greece is not. We can create money. They cannot. There is no comparison between the two. (Actually, Greece is like California and Illinois.)"

To follow your metaphor: So you are implying that Greece going essentially bankrupt will have no adverse consequences for the EU, and California going essentially bankrupt (soon?) won't affect the U.S. negatively?

Please 'splain that one to me...

Posted by: davidwatching | May 16, 2010 9:13 PM | Report abuse

"...a bowling alley can never run out of points...." ???

Of course it can. A theoretical Bowling Alley in a theoretical vacuum might be able to give away "points" indefinitely (I assume the author means free bowling time given away as promotion). But a real bowling alley that has to pay a building lease, employees, utilities, plus stock shoes and balls etc etc. - every free "lane hour" it gives away as free promotion is an hour it can't sell to paying customers, while still having to pay the same fixed costs.

Promotion budgets must be kept to a calculated limit, or they will swallow profits. Taken to the logical conclusion - if the bowling alley gave away all its lane hours, then what would happen?

Posted by: davidwatching | May 16, 2010 9:50 PM | Report abuse

The larger issue is the relationship of the money supply and deficits to inflation. Modern monetary theory has yet to be revised to account for a world of floating exchange rates and massive amounts of consumer credit that, in the real world, increase purchasing power and inflationary pressure. We are experiencing radical deflation and a radical reduction in purchasing power and using classical theory, it is time to print money. Lots of it -- the goal being to monetize current and future promises which in turn would reduce structural deficits.

Posted by: mshulman1 | May 17, 2010 8:59 AM | Report abuse

Well I guess Galbraith's theory is in the process of being tested (to a degree), so I suppose we'll see. When it proves and abject failure, Keynsians (neo or otherwise) always have a convenient out..."it wasn't enough." If only governments had committed another couple trillion, all would have been fine.

Full commitment to his hyper-Keynsian theory is an amusing exercise in the academic vacuum of the university, but application in the real world would result in a global reset of monumental proportions.

The mere hint that the US planned to default on outstanding debt and focus on money creation to achieve economic growth and full employment would wreak economic chaos on the world.

The alternative, that the US will create sufficient dollars to pay-off its $13 trillion debt to make its creditors whole before embarking on the Galbraith fantasy would have the same net result. Chaos.

There has been sufficient discussion in the previous posts -- as to why the Keynsian approach is ultimately a dead end -- that it's not worth my reiterating and expounding.

I especially liked davidwatching's debunking of the 'bowling alley points' analogy. If the bowling alley gives away too many points (free bowling), obviously they go broke.

However, it is worth noting the following: In his response to EK's last question, Galbraith advocates for a reversal of the tax burden on working people, stating that he favors a tax holiday.

In the very next breath he espouses his support of the estate tax, saying that rich people need to be encouraged to recycle their money.

Why are rich people's moneys any different than working people's moneys in Galbraith's world? In fact, why tax at all?

If that had been the first Q&A rather than the last, I wouldn't have read another word.

Posted by: petergrant1 | May 17, 2010 5:49 PM | Report abuse

"Of course it can. A theoretical Bowling Alley in a theoretical vacuum might be able to give away "points" indefinitely (I assume the author means free bowling time given away as promotion)."

You assume wrong. By points, he's using pointy headed liberal talk for what real Americans call... points. Shall we review the rules of bowling?

"A strike earns you ten points plus the points for the next two balls thrown. A spare earns you ten points plus the points for the next ball thrown. Open frames are added normally. "
http://en.wikipedia.org/wiki/Ten-pin_bowling

If a bowling alley manager wants to give everyone 30 points right off the top or make a strike worth 20 points plus the next two balls, I promise you he won't go broke doing that. Do you see now? He owns the "printing press" for points.

Posted by: beowulf_ | May 19, 2010 3:39 AM | Report abuse

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