Hy w Krugman Oprah M2000 If you're a normal human being considering reading this past fair warning: although it's not super technical, it's almed at a very wenky audience, and parts of it won't exactly be in English. Also, it's of limited policy relevance: the Trump administration would never consider the policy I suggest, and even a Biden administration would probably balk at going where I suggest. The only reason I'm writing about it is to get the idea out there. Oh, and I don't think it's very different from what Larry Summers has been saying, but I thought it might be helpful to put some stylized numbers to what I believe, and believe he believes Get more analysis by Paul Kruger week by email OK, if you're still with me: I hereby propose that the next US president and Congress move to permanently spend an additional 2 percent of GDP on public investment, broadly defined (Infrastructure, for sure, but also things like R&D and child development) - and not pay for it. 1 The starting point for my argument is the astonishing drop in interest rates over the past few weeks. They were historically very loweven a year ago, but at the time of writing the 10-year rate was only 0.76 percent. That's below the rates an Japanese debt during the Lost Decade: FRED FRED Uw bedung Low Decade What this tells us is that the bond market isn't just pricing in a obal recession driven by the cravirus, but that is expect the Fed funds ratu be near me a lot of the time looking forward. That is the market ses a future of secular stagnation, in which the screamy is a liquidity trap, that is a situation in which monetary policy lose most of its traction, much if not most of the time. We were aliquity trup for of the past 17 years, the market now appears to believe that something like this is the new normal Conventional monetary policy doesn't work in a liquidity trap, but fiscal policy is highly effective. The problem is that the kind of fiscal policy you may want - public investment that takes advantage of very low interest rates and strengthens the eccent in the long run- is hard to get going on short notice. That's why current proposals for fiscal stimulus, like the be advanced by Jason Forman, bancally involve handing out cash a poodides given the constraints, but a shame given the missed opportunity to invest in the future, Hence my son. Why not put investment-centered stimulos in place the time it would cushion the county when adverte shall it wouldn't be necessary to achieve Pill employment in better times, but it wouldn't hurt either ven low interest rates and the need for public investment 3/12/2020 Opinion | The Case for Permanent Stimulus (Wonkish) - The New York Times But, you say, what about debt? Well, that's where the arithmetic of debt in an era of low interest rates becomes crucial to understand. Let's consider a stylized, round-number economy that I'll call "America." This economy currently has public debt equal to 100 percent of GDP. It can expect, on average, to experience nominal GDP growth of 4 percent a year, half real, half inflation. It can also expect, on average, to pay an interest rate of 2 percent on its debt. The actual numbers don't match my example exactly - right now, growth prospects may be a bit worse than that, but interest rates are even lower. But I think this is close enough to make my point. In the long run, fiscal policy is sustainable if it stabilizes the ratio of debt to GDP. Because interest rates are below the growth rate, our hypothetical economy can in fact stabilize the debt ratio while running persistent primary deficits (deficits not including interest payments.) Let d be the ratio of debt to GDP, b be the primary balance as a share of GDP, r and g be the interest and growth rates, respectively. Then the equation for debt dynamics (I warned you, normal human beings) is Change in d=-b + (r-g)*d So in my hypothetical case, where d = 1 (debt is 100 percent of GDP), the debt ratio can be stabilized while running a primary deficit of 2 I percent of GDP. Put the interest payments back in, and this translates to a headline deficit of 4 percent of GDP. Our actual deficit is a bit bigger than that, but we could get back into that range by repealing Trump's giveaways to corporations, which don't seem to be doing anything for investment anyway. OK, now let's introduce a public investment program of 2 percent of GDP, with no pay-fors. The debt ratio will now begin to rise, but not without limit. If nothing else changes, d will eventually stabilize at 2-debt at 200 percent of GDP. That's terrible, right? Um, why? Don't tell me about the burden of paying interest on the debt - that's already taken into account by the calculation. Maybe we'd have a debt crisis, but Japan has debt exceeding 200 percent of GDP, with no crisis in sight. Also, "eventually" would be a long time. That little debt-dynamics equation has a convergence rate of .02, hence a half-life of 35 years. In other words, my permanent-stimulus plan would raise the debt/GDP ratio to only 150 percent by the year 2055. That's a level the UK has Also, "eventually would be a long time. That little debt-dynamics equation has a convergence rate of .02, hence a half-life of 35 years. In other words, my permanent-stimulus plan would raise the debt/GDP ratio to only 150 percent by the year 2055. That's a level the UK has exceeded for much of its modern history: DEBT (6 of GOP) IMF DataMapper 250 200 www. 150 100 50 1 1860 1845 1890 1875 1905 1920 1965 1935 1950 1995 1980 2015 1800 1815 1830 United Kingdom all indicators 7. De High debt isn't new IMF OK, there is a valid objection to my argument: I've just implicitly assumed that permanent fiscal stimulus wouldn't raise the interest rate, and that's not a safe assumption. For one thing, zero-lower-bound episodes would probably be fewer and shorter than otherwise. Also, the Fed would probably raise rates a bit further than it would have otherwise during those period when the economy isn't in a liquidity trap. But there would also be offsetting factors. But there would also be offsetting factors. First, when the economy is in a liquidity trap, which now seems likely to be a large fraction of the time, the extra public investment will have a multiplier effect, raising GDP relative to what it would otherwise be. Based on the experience of the past decade, the multiplier would probably be around 1.5, meaning 3 percent higher GDP in bad times and considerable additional revenue from that higher level of GDP. Permanent fiscal stimulus wouldn't pay for itself, but it would pay for part of itself. 2/3 https://www.nytimes.com/2020/03/07/opinion/the-case-for-permanent-stimulus-wonkish.html 3/12/2020 Opinion | The Case for Permanent Stimulus (Wonkish) - The New York Times Second, if the investment is productive, it will expand the economy's productive capacity in the long run. This is obviously true for physical infrastructure and R&D, but there is also strong evidence that safety-net programs for children make them healthier, more productive adults, which also helps offset their direct fiscal cost. Finally, there's fairly strong evidence of hysteresis - temporary downturns permanently or semi-permanently depress future output. Again, by avoiding these effects a sustained fiscal stimulus would partially pay for itself. Put these things together and they probably outweigh any fiscal effect due to stimulus raising interest rates. And here's the thing: because a debt crisis doesn't seem at all imminent, there will be plenty of time to reconsider if the arithmetic of infrastructure spending doesn't turn out as favorable as I expect it will. If secular stagnation looks like less of a problem at some future date - say, during AOC's second term in the White House - we can rethink permanent stimulus then. Meanwhile, however, there's a very good case for putting a sustained, productive program of stimulus in place as soon as possible, instead of scrambling to come up with short-term measures every time bad things happen. Because everything we see now says that bad times will be a very frequent occurrence. chlichin distrof letters to the editor. We'd like to hear what you think about this or any of our articles. Here are some tips. And here's our Read the linked article from NY Times and explain the rational of Krugman's proposal to "permanently spend an additional 2 percent of GDP on public investment, broadly defined (infrastructure, for sure, but also things like R&D and child development) and not pay for it?" Hy w Krugman Oprah M2000 If you're a normal human being considering reading this past fair warning: although it's not super technical, it's almed at a very wenky audience, and parts of it won't exactly be in English. Also, it's of limited policy relevance: the Trump administration would never consider the policy I suggest, and even a Biden administration would probably balk at going where I suggest. The only reason I'm writing about it is to get the idea out there. Oh, and I don't think it's very different from what Larry Summers has been saying, but I thought it might be helpful to put some stylized numbers to what I believe, and believe he believes Get more analysis by Paul Kruger week by email OK, if you're still with me: I hereby propose that the next US president and Congress move to permanently spend an additional 2 percent of GDP on public investment, broadly defined (Infrastructure, for sure, but also things like R&D and child development) - and not pay for it. 1 The starting point for my argument is the astonishing drop in interest rates over the past few weeks. They were historically very loweven a year ago, but at the time of writing the 10-year rate was only 0.76 percent. That's below the rates an Japanese debt during the Lost Decade: FRED FRED Uw bedung Low Decade What this tells us is that the bond market isn't just pricing in a obal recession driven by the cravirus, but that is expect the Fed funds ratu be near me a lot of the time looking forward. That is the market ses a future of secular stagnation, in which the screamy is a liquidity trap, that is a situation in which monetary policy lose most of its traction, much if not most of the time. We were aliquity trup for of the past 17 years, the market now appears to believe that something like this is the new normal Conventional monetary policy doesn't work in a liquidity trap, but fiscal policy is highly effective. The problem is that the kind of fiscal policy you may want - public investment that takes advantage of very low interest rates and strengthens the eccent in the long run- is hard to get going on short notice. That's why current proposals for fiscal stimulus, like the be advanced by Jason Forman, bancally involve handing out cash a poodides given the constraints, but a shame given the missed opportunity to invest in the future, Hence my son. Why not put investment-centered stimulos in place the time it would cushion the county when adverte shall it wouldn't be necessary to achieve Pill employment in better times, but it wouldn't hurt either ven low interest rates and the need for public investment 3/12/2020 Opinion | The Case for Permanent Stimulus (Wonkish) - The New York Times But, you say, what about debt? Well, that's where the arithmetic of debt in an era of low interest rates becomes crucial to understand. Let's consider a stylized, round-number economy that I'll call "America." This economy currently has public debt equal to 100 percent of GDP. It can expect, on average, to experience nominal GDP growth of 4 percent a year, half real, half inflation. It can also expect, on average, to pay an interest rate of 2 percent on its debt. The actual numbers don't match my example exactly - right now, growth prospects may be a bit worse than that, but interest rates are even lower. But I think this is close enough to make my point. In the long run, fiscal policy is sustainable if it stabilizes the ratio of debt to GDP. Because interest rates are below the growth rate, our hypothetical economy can in fact stabilize the debt ratio while running persistent primary deficits (deficits not including interest payments.) Let d be the ratio of debt to GDP, b be the primary balance as a share of GDP, r and g be the interest and growth rates, respectively. Then the equation for debt dynamics (I warned you, normal human beings) is Change in d=-b + (r-g)*d So in my hypothetical case, where d = 1 (debt is 100 percent of GDP), the debt ratio can be stabilized while running a primary deficit of 2 I percent of GDP. Put the interest payments back in, and this translates to a headline deficit of 4 percent of GDP. Our actual deficit is a bit bigger than that, but we could get back into that range by repealing Trump's giveaways to corporations, which don't seem to be doing anything for investment anyway. OK, now let's introduce a public investment program of 2 percent of GDP, with no pay-fors. The debt ratio will now begin to rise, but not without limit. If nothing else changes, d will eventually stabilize at 2-debt at 200 percent of GDP. That's terrible, right? Um, why? Don't tell me about the burden of paying interest on the debt - that's already taken into account by the calculation. Maybe we'd have a debt crisis, but Japan has debt exceeding 200 percent of GDP, with no crisis in sight. Also, "eventually" would be a long time. That little debt-dynamics equation has a convergence rate of .02, hence a half-life of 35 years. In other words, my permanent-stimulus plan would raise the debt/GDP ratio to only 150 percent by the year 2055. That's a level the UK has Also, "eventually would be a long time. That little debt-dynamics equation has a convergence rate of .02, hence a half-life of 35 years. In other words, my permanent-stimulus plan would raise the debt/GDP ratio to only 150 percent by the year 2055. That's a level the UK has exceeded for much of its modern history: DEBT (6 of GOP) IMF DataMapper 250 200 www. 150 100 50 1 1860 1845 1890 1875 1905 1920 1965 1935 1950 1995 1980 2015 1800 1815 1830 United Kingdom all indicators 7. De High debt isn't new IMF OK, there is a valid objection to my argument: I've just implicitly assumed that permanent fiscal stimulus wouldn't raise the interest rate, and that's not a safe assumption. For one thing, zero-lower-bound episodes would probably be fewer and shorter than otherwise. Also, the Fed would probably raise rates a bit further than it would have otherwise during those period when the economy isn't in a liquidity trap. But there would also be offsetting factors. But there would also be offsetting factors. First, when the economy is in a liquidity trap, which now seems likely to be a large fraction of the time, the extra public investment will have a multiplier effect, raising GDP relative to what it would otherwise be. Based on the experience of the past decade, the multiplier would probably be around 1.5, meaning 3 percent higher GDP in bad times and considerable additional revenue from that higher level of GDP. Permanent fiscal stimulus wouldn't pay for itself, but it would pay for part of itself. 2/3 https://www.nytimes.com/2020/03/07/opinion/the-case-for-permanent-stimulus-wonkish.html 3/12/2020 Opinion | The Case for Permanent Stimulus (Wonkish) - The New York Times Second, if the investment is productive, it will expand the economy's productive capacity in the long run. This is obviously true for physical infrastructure and R&D, but there is also strong evidence that safety-net programs for children make them healthier, more productive adults, which also helps offset their direct fiscal cost. Finally, there's fairly strong evidence of hysteresis - temporary downturns permanently or semi-permanently depress future output. Again, by avoiding these effects a sustained fiscal stimulus would partially pay for itself. Put these things together and they probably outweigh any fiscal effect due to stimulus raising interest rates. And here's the thing: because a debt crisis doesn't seem at all imminent, there will be plenty of time to reconsider if the arithmetic of infrastructure spending doesn't turn out as favorable as I expect it will. If secular stagnation looks like less of a problem at some future date - say, during AOC's second term in the White House - we can rethink permanent stimulus then. Meanwhile, however, there's a very good case for putting a sustained, productive program of stimulus in place as soon as possible, instead of scrambling to come up with short-term measures every time bad things happen. Because everything we see now says that bad times will be a very frequent occurrence. chlichin distrof letters to the editor. We'd like to hear what you think about this or any of our articles. Here are some tips. And here's our Read the linked article from NY Times and explain the rational of Krugman's proposal to "permanently spend an additional 2 percent of GDP on public investment, broadly defined (infrastructure, for sure, but also things like R&D and child development) and not pay for it