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Home Publications Blogs Beat the Press Joe Scarborough Carries His Deficit Rope-a-Dope to the Next Level (see addendum)

Joe Scarborough Carries His Deficit Rope-a-Dope to the Next Level (see addendum)

Friday, 08 March 2013 05:30

Joe Scarborough is apparently feeling emboldened by his exchange with Paul Krugman on the Charlie Rose show and is doubling down on his confused anti-deficit tirades. He is back with an oped in the Post, co-authored with Jeffrey Sachs, who should know better.

The piece is a cornucopia of confusion, beginning with the first sentence:

"Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong."

I am not in the defense of Paul Krugman business, but surely Jeffrey Sachs knows that Paul Krugman does not argue that deficits do not matter as a general proposition. What Krugman has argued very vociferously is that deficits do not matter in an economy that is operating far below its potential, as is the case with the United States today. The Congressional Budget Office (CBO) projects that the economy's output will be more than 6 percent (@ $1 trillion) below potential this year. Projected 2013 output is almost 10 percent below the real level of output that CBO had projected in 2008 before it recognized the impact of the collapse of the housing bubble.

In a period of widespread unemployment and excess capacity, like the present, deficits cannot have the negative effect that they would if the economy were near full employment. In an economy near full employment, the argument would be that deficits push up interest rates. Higher interest rates will have the effect of reducing investment. They will also tend to put upward pressure on the dollar. A higher valued dollar will make imports cheaper, causing us to buy more from abroad. It will also make our exports more expensive, leading us to sell less to foreigners. The result is an increase in our trade deficit.

On the Charlie Rose show Scarborough seemed to think he had hit a treasure trove by discovering that Krugman had warned of this crowding out effect when the government was running budget deficits in periods where the economy was arguably close to full employment. Perhaps he can't recognize the difference, but is Jeffrey Sachs unable to distinguish the situation of the economy in 2005-2007 from the situation the economy faces today?

The piece then tells us that the stimulus did not do anything to boost the economy:

"Not so long ago, Keynesians guaranteed that Obama’s stimulus plan would move the U.S. economy more quickly toward growth by providing full employment and lowering deficits. We both were skeptical from the start, for good reason. In May 2009, the White House forecast 4.6 percent growth in 2012, an unemployment rate of 6 percent and a budget deficit of $557 billion. The actual outcomes were much worse: growth of 2.3 percent, unemployment at 8.1 percent and a budget deficit of nearly $1.1 trillion."

Again, it is hard to believe that Sachs does not know that Keynesians, like Krugman and me, yelled at the top of our lungs that the stimulus package was too small at the time it was being debated. And the promise to get the economy back to full employment was based on a serious underestimate of the severity of the downturn, not an overestimate of the impact of the stimulus. Surely Sachs knows this.

In fact estimates from the Congressional Budget Office and independent analysts show the stimulus did pretty much exactly what was expected, it created 2-3 million jobs. The problem was that we needed 10-12 million jobs. Is Sachs completely unfamiliar with this work?

We are then warned about the burden of the deficits and the debt:

"Sadly, our concerns have been borne out. Public debt was around 41 percent of the gross domestic product in 2008. Today it is around 76 percent and still rising. Yet the economy continues to languish.

Nevertheless, a few hardy Keynesians urge the president to raise deficits still further. We respectfully disagree. Doubling down on this dubious policy will move the United States only more quickly toward excessive indebtedness and a possible economic crisis."

Scarborough and Sachs (S&S) then tell us, "Keynes worried about the long-term buildup of public debt."

The last admonition seems especially inappropriate since the United Kindom's public debt was well over 100 percent of GDP when Keynes was advocating deficit spending in the 1920s and 1930s. As far as the burden of debt, it is worth noting that interest on the debt is near a post war low measured as a share of GDP. This is because the financial markets do not share the concerns of Scarborough and Sachs and are willing to lend large amounts of money to the United States at very low interest rates. This means that we are seeing very little burden from the debt.

Furthermore, even if we follow the deficit path projected by CBO, interest payments measured as a share of GDP will just be back to their Bush I era levels in a decade. That is not a trivial drain on the Treasury, but it is small compared to the loss of $1 trillion in output we are seeing each year, along with the lives devastated by the prospect of years of unemployment.

Also, if S&S are concerned about the measure of debt, then we can easily make them happy by simply buying back debt at a discount when higher interest rates cause bond prices to fall. Any bond calculator will show that the price of the long-term bonds issued today at record low interest rates will plummet when interest rates rise, as is generally projected. (Certainly as predicted by S&S.)

If we buy these bonds back at 50 to 80 cents on the dollar in three or four years, we can shave hundreds of billions, possibly trillions off of our debt. This would be a pointless exercise since it would leave our interest payments unchanged, but it should appease the gods of people who worship debt to GDP ratios (a group that apparently includes S&S).

If we want to limit the amount of interest that is paid out to our children (interest payments are redistributional within a generation, not between generations) then we can have the Fed continue to hold much of the debt. Currently half of what we pay out in interest is refunded by the Fed each year. Congress could instruct the Fed to continue to hold its bonds and tighten up monetary policy through raising reserve requirements. Jeffrey Sachs knows this. (Foreign debt is an issue, but that is the result of the trade deficit, which is in turn the result of an over-valued dollar. If the value of the dollar does not change, cutting the deficit will not affect the nation's indebtedness to foreigners, except insofar as it lower imports by reducing GDP.)

Finally, the piece contains arguments for cutting military spending and fixing the health care system. It is hard to believe that anyone who has read Krugman's columns would think that this is a point of disagreement. The projected increases in health care costs is of course the source of our projected long-term deficit problems. The Obama administration certainly can be faulted for not doing more in both areas, but even the harshest Obama critic on these points would have to acknowledge that he would face enormous opposition from Congress in going further than he already has.

In sum, we have a lot more rope-a-dope here but very little by the way of substantive argument. This might be the sort of thing that Scarborough does for a living, but what is Sachs' excuse?


Since some folks asked, I actually did not agree with Krugman at the time that the Bush era deficits were a problem. I was opposed to his tax cuts targeted to the wealthy and I was strongly opposed to both wars, but I did not feel the deficits that we were running at the time were excessive. In my view, they were needed to sustain demand. Remember the Fed may not have been at the zero bound, but at 1.0 percent it was pretty damn close. There is not much difference in the economic impact of a zero percent federal funds rate and 1.0 percent federal funds rate. In principle the Fed could have engaged in QE, but if there were serious discussions of this option at the time, I missed it.

That leaves net exports as an alternative route for boosting demand. This would have depended largely on the willingness of China and other developing countries to allow the dollar to fall against their currencies. I doubt that we would have seen a much greater decline in the dollar if we had been running smaller budget deficits in the Bush years. So unlike Krugman, I was not troubled by the size of the budget deficits in the Bush years, although I definitely would have liked to see them better directed.


Comments (24)Add Comment
Jerry Springer Economics
written by Last Mover, March 08, 2013 6:45
America the Beautiful has been reduced to America the Land of Mud Wrestling.
written by liberal, March 08, 2013 7:07
...Jeffrey Sachs, who should know better.

Why should JS, who assisted in the destruction of the Russian economy, "know better"?
written by Bart, March 08, 2013 7:25

I thought Sachs was one of the good guys.
Sachs Sold His Soul to Satan
written by Paul Mathis, March 08, 2013 8:10
Apparently Sachs realized that if a light weight like Morning Joe can become a multi-millionaire by mouthing conservative talking points about the economy, Sachs could cash in for twice as much by becoming an anti-Keynesian charlatan.

Sounds like a great gig for easy money!
written by Chris, March 08, 2013 8:31
Sachs seems determined to trash his reputation with this and other things along the way for some odd reason.
written by David Gerstein, March 08, 2013 8:40
Sachs thinks that the way to save the third world is to wreck the first. Reduce the distnction and raise the spirits.
sachs overrated
written by Peter K., March 08, 2013 9:22
Sachs has always been overrated.


Debt in a Time of Zero by Krugman

"But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no.

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now. Sorry."
written by liberal, March 08, 2013 9:40
Chris wrote,
Sachs seems determined to trash his reputation with this and other things along the way for some odd reason.

What reputation?

How is "helping destroy Russia's economy" a mere "other thing"?
Dean...you point out sometimes that deficits don't matter, absolutely...
written by pete, March 08, 2013 10:01
I know you have said this..but it is like a switch on and off. Spending matters, not deficits, ever. Merely a monetary/debt phenomenon. Taxing workers to pay for unemployment benefits is not different than borrowing from workers to pay unemployment, SSI, social security, other transfers. This is far different than taking steel and gunpowder and gasoline and electronic components and shipping them to Afghanistan, taking them out of our economy, no matter how it is financed.
written by fuller schmidt, March 08, 2013 10:09
Scarborough came across as an ego-maniacal buffoon on the Rose show. It's hard to believe a scholar would team up with him.
written by Arne, March 08, 2013 10:37
The op-ed does not sound like the Joe S that was on Charlie Rose. There he agreed that short term needs were different from long term, but advocated trying to pay attention to both long and short. PK did not say Joe was wrong about the long run; he just said he did not believe Congress was capable of paying attention to both. Had Charlie Rose gotten them to talk about where they agree, there would have been quite a bit.

Some points go to Joe as a speaker, but he failed miserably in his writing.
written by Fred Brack, March 08, 2013 10:46
When did JoScar, heretofore a television personality, become an economic analyst? Did I miss a step in his personal narrative? His council of economic advisers previously consisted of a military man, a foreign-policy analyst, a financier, and the co-host of his TV(show-- a term of art meaning entertainment. Now at least he's added an economist, though the economist now appears to be more of an "economist."

(I don't recall: Did Soupy Sales and John Kenneth Galbraith ever co-write an op-ed about U.S. economic policy?)

As for Sachs, when is he going to act like an economist and argue from data and models instead of from a religious-like zeal?
Not suprised
written by Eclectic Observer, March 08, 2013 11:12
Why should anyone be surprised that Joe S is a dishonest egomaniac. For Sachs it's more suggesting that he can't stand not being noticed, but this would be hardly surprising. The thing is that there is a cottage industry mischaracterizing Krugman. All you have to do is look at the context and the content of what he actually says to realize that he's on solid economic reasoning grounds. Certainly, I don't always agree with him or with you(Dean Baker) but it's not like I can't see your argument.
I think the deficit is really a few issues firstly, we need to promote an economy that provides good paying jobs and boosts the labor participation rate that holds those kinds of jobs. That will provide tax income and reduce social safety net expenditures. Secondly, we need to fix the domestic health care costs while this would be good for medicare and medicaid budgets it would also help fix the problems that the rest of health care has wrt to paying for essential benefits and maintaining a workforce capable of both labor mobility, businesses not squeezed by employer contributions and a healthy enough and secure enough work environment to encourage productivity. Lastly, we need to examine missions and functions against our Defense expenditures because we can't afford that sized commitment of budgets without squeezing our other investments in domestic priorities such as infrastructure.
What Krugman Said...
written by Jesse, March 08, 2013 11:18
I listened to that 'debate' and cringed at some of the unqualified endorsements of deficits that Paul Krugman put forward.

Despite his occasional nod, Mr. Krugman never really stands for reform of the financial system and draws the circle of culpability around the corrupting power of Big Money on the markets and the political process.

And now he cites the same type of 'evidence' of policy effectiveness that was used from 1996 to 2001, and from 2004 to 2007. The stock market is going up, so we must be right.

The Market Speaks, by Paul Krugman, Commentary, NY Times: Four years ago, as a newly elected president began his efforts to rescue the economy and strengthen the social safety net, conservative economic pundits — people who claimed to understand markets and know how to satisfy them — warned of imminent financial disaster. Stocks, they declared, would plunge, while interest rates would soar. Even a casual trawl through the headlines of the time turns up one dire pronouncement after another. ...

Sure enough, this week the Dow Jones industrial average has been hitting all-time highs, while the current yield on 10-year U.S. government bonds is roughly half what it was...
written by Union Member, March 08, 2013 11:45
Your point - the belief that Sachs is one of the good-guys -speaks to the heart of this darkness. The public will much more willingly put the fate of their children, their parents, their jobs with a messenger they can trust, when they don't know the message.
Every kid graduating High School should be completely familiar with and tested in the role of aggregate demand in its relationship to unemployment, Keynesian Economics and all the ideas Dean discusses here everyday. Then The Charlie Rose can be canceled like the bad reality show it is.
BTW: does Sachs have tenure?
what krugman said ...
written by David, March 08, 2013 11:54

Romney made the claim that if he got elected that the stock market would recover; and even the quote shows Krugman is just showing that the people who claimed dire straights for the market were wrong, which is the main point, that business people are often very very wrong about the economy. But why do you think Krugman is dumb enough to use the stock market as economic indicator? He's not as dumb as you'd like to imply. He does know that many other people DO think of the stock market as a prime economic indicator ...
written by Michael, March 08, 2013 1:09
To claim that the stimulus failed is like claiming that heat has nothing to do with boiling water. We raise the temperature to 150 degrees and the water didn't boil.
Why Failed
written by James, March 08, 2013 2:47
A wise man once told a dying man from a fight, "You brought a pocket knife to a gun fight, what were you thinking?"

Dean once said the level of stimulus and its critcis are like "Use a bucket of water to put out a blazing fire" so using water was dumb, you should have simply done nothing.
written by urban legend, March 08, 2013 3:10
Maybe Sachs is campaigning for the position abandoned out of professional embarrassment and incompetence by Niall Ferguson -- the go-to guy for the VSPs. Why else would he use pure strawmen -- deliberately -- merely in order to trash Krugman. Of course, the VSPs hate Krugman because he is not afraid to point out correctly what economic idiots they are.
written by bakho, March 09, 2013 6:59
If Sachs becomes a regular talking head, we can know that we are hearing money talking through its mouthpieces.

Arguing facts against JoeScar and his flock of Know-Nothing True Believers is like arguing evolution to fundamentalist short earth True Believers. Faith and Belief are not based on logical reasoning. Adherents require Conversion or Deprogramming, not Convincing.
written by Dan Kervick, March 09, 2013 8:30
In a period of widespread unemployment and excess capacity, like the present, deficits cannot have the negative effect that they would if the economy were near full employment. In an economy near full employment, the argument would be that deficits push up interest rates. Higher interest rates will have the effect of reducing investment. They will also tend to put upward pressure on the dollar. A higher valued dollar will make imports cheaper, causing us to buy more from abroad. It will also make our exports more expensive, leading us to sell less to foreigners. The result is an increase in our trade deficit.

If the economy were really at full employment and maximum capacity, wouldn't most of those effects actually be good ones?
written by NWsteve, March 09, 2013 10:27
spot-on...to wit, "faith": firm belief in something for which there is no proof...
written by PeonInChief, March 09, 2013 11:03
Jeffrey Sachs one of the good guys? Oh, how soon we forget the trashing of the economy of Chile and the gangster capitalism of the Soviet Union! Sachs started to change his position when the IMF went after some of the Asian economies after the 1998 debacle.
written by Steve Bannister, March 09, 2013 4:08
Sachs is a "Chicago Boy," and thus not to be trusted. He is being used by a very slimy lawyer with a platform.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.