Historian Niall Ferguson rightly gloats over the fact that when it came to arguing about the deficit, he was proven correct and Paul Krugman was proven wrong. Ferguson notes that over the past five months, long-term U.S. Treasury rates have increased 81%, or 167 basis points, and reminds readers that in a debate with Krugman in April, Ferguson tried to sound the alarm on this issue, only to get slapped down by Krugman:
A month ago Mr Krugman and I sat on a panel convened in New York to discuss the financial crisis. I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.
De haut en bas came the patronising response: I belonged to a “Dark Age” of economics. It was “really sad” that my knowledge of the dismal science had not even got up to 1937 (the year after Keynes’s General Theory was published), much less its zenith in 2005 (the year Mr Krugman’s macro-economics textbook appeared). Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates.”
In his writings, Krugman likes to go on, and on, and on, and on, and on regarding the supposed “Dark Age” of economics whose presence we are allegedly laboring under and suffering from. But quite clearly, he has been proven completely wrong regarding trendlines on interest rates. It was Dick Cheney who first was accused of arguing that “deficits don’t matter,” but Krugman has picked up the banner on that issue, and is waving it furiously for as many eyes to see as possible. In doing so, as Ferguson writes, Krugman continues to miss the dangers of running up massive deficits:
Credit for averting a second Great Depression should principally go to Fed chairman Ben Bernanke, whose knowledge of the early 1930s banking crisis is second to none, and whose double dose of near-zero short-term rates and quantitative easing – a doubling of the Fed’s balance sheet since September – has averted a pandemic of bank failures. No doubt, too, the $787bn stimulus package is also boosting US GDP this quarter.
But the stimulus package only accounts for a part of the massive deficit the US federal government is projected to run this year. Borrowing is forecast to be $1,8400bn – equivalent to around half of all federal outlays and 13 per cent of GDP. A deficit this size has not been seen in the US since the second world war. A further $10,000bn will need to be borrowed in the decade ahead, according to the Congressional Budget Office. Even if the White House’s over-optimistic growth forecasts are correct, that will still take the gross federal debt above 100 per cent of GDP by 2017. And this ignores the vast off-balance-sheet liabilities of the Medicare and Social Security systems.
It is hardly surprising, then, that the bond market is quailing. For only on Planet Econ-101 (the standard macroeconomics course drummed into every US undergraduate) could such a tidal wave of debt issuance exert “no upward pressure on interest rates”.
Read the whole thing. The economy appears to be close to bottom, if not bottomed-out already, which means that the stimulus package is likely not nearly as needed to restart economic growth as Ferguson–or Krugman–think it was. (More on the efficacy of the stimulus package here.) Instead of serving as a needed investment, the stimulus package pretty much represents nearly $800 billion down the drain.
As for Paul Krugman, all we need to do is to get him a secret, undisclosed location, and his impression of Dick Cheney will be complete. Or, at least, closer to being complete.
(Article link via Greg Mankiw.)