09 May 2016

It’s Up to Scott Sumner to Save My Reputation

Debt 33 Comments

(Before I jump into the blog post, here is the latest Contra Krugman episode.)

On a previous post I pointed out the irony that progressives are flipping out about Trump’s remarks on a Treasury default, when back in 2012 Krugman et al. were scratching their heads trying to even come up with a model in which an attack from the “invisible bond vigilantes” could possibly hurt the U.S. economy (e.g. here).

Now perhaps I should have clarified: Obviously Krugman and Matt Yglesias right now are NOT endorsing Trump’s ideas; they’re saying he’s a nutjob who would wreck the world economy (or at least Yglesias has explicitly said that).

My point is that these claims do not fit with their rosy assessment back in 2012 of an attack from investors who were worried about the huge debt Obama was piling up. Back then, they couldn’t even imagine a scenario in which that would hurt the U.S. economy.

Major Freedom found even better examples of what I’m talking about. Krugman back in 2012 endorsing this analysis from Yglesias (the following words are Yglesias):

Suppose investors do start dumping treasury bonds and interest rates rise. Where does the money go?

Well it could go into private domestic investments, which would boost the economy. Or it go into foreign financial assets, which would reduce the value of the dollar and boost the economy by bolstering exporting and import-competing firms. Higher interest rates have historically caused recessions because the Federal Reserve wasdeliberately using high interest rates as a tool for inducing recessions because they thought higher unemployment would quash worker demands for higher wages and keep inflation under control. An exogenous reduction in the global investment community’s inclination to hold treasury bonds could reduce American doctors’ ability to take that trip to Paris they’ve been dreaming of this spring, but couldn’t induce a recession.

Now in the comments from my recent post, Scott Sumner was incredulous. He said he couldn’t even see why I thought these two trains of thought had anything to do with each other.

Really? Scott, talk me down from the ledge and spare me public humiliation. I’m thinking someone who wrote the above paragraph can’t plausibly now claim that Trump’s careless talk about a Treasury default would wreck the economy, without at least a nod to the above forces that were so benign back in 2012 when the issue was Obama’s trillion-dollar deficits.

Absent a compelling explanation from Scott or someone else, I’m going to town with this.

33 Responses to “It’s Up to Scott Sumner to Save My Reputation”

  1. Andrew_FL says:

    “Well it could go into private domestic investments, which would boost the economy.”

    This line is great because it’s a frank admission that government borrowing is crowding out private investment. Let me just wait for someone to jump up and explain why the plainly obvious reading of that sentence is not so!

    • Bob Roddis says:

      I believe you are right.

      Unless money and investment can be in two or more places at the same time.


    • Capt. J Parker says:

      You underestimate Dr. Krugman. In 2012 we were in a liquidity trap (or So, Dr. Krugman tells us.) Interest rates were zero. As long as they stayed at zero government could borrow and spend with no crowding out of private investment. BUT, if the bond vigilantes did show up (at Trumps invitation or otherwise) and if and only if they are able to force interest rates above zero then there would be crowding out. One needn’t then despair over crowding out by fiscal policy because you would then be out of the liquidity trap and you would have room to do more expansionary monetary policy. So, yes, the line you point to is a frank admission that there is crowding out but only if you have exited the liquidity trap first.

      • Andrew_FL says:

        Yeah that’s just the sort of explanation that sounds like it makes sense, until you think about it.

        • Capt. J Parker says:

          Andrew, Please elaborate. I’m aware of the argument that debt financed fiscal stimulus, even with zero interest rates, could cause a decrease in private consumption spending because the private sector anticipates future tax increases. So, deficit spending might crowd out consumption in a liquidity trap. But Yglesias is only admitting that government deficit spending might crowd out private investment when interest rates are not zero.

          • Andrew_FL says:

            I guess I’m unclear how borrowing that was already being done during “the liquidity trap” is transformed instantly from not using up scarce resources that could be used for private investment, to suddenly crowding out that investment.

            What, the risk premium rises and suddenly all the allegedly idle resources in the economy are marshaled into service faster than you can say “war mobilization”?

            • Capt. J Parker says:

              If incremental government deficit spending has no effect on interest rates (because they are stuck near zero due to liquidity trap conditions) then that incremental spending should also have no effect on individual investment decisions at the margin. So, in that sense there is no crowding out. Increasing the risk premium on government debt, all else equal, ought to cause individuals to favor other investments.

      • Bob Murphy says:

        Again, just to be clear (which I wasn’t in my initial wording), that quotation is from Yglesias, though Krugman seemed to endorse the analysis.

        • Capt. J Parker says:

          You were clear Dr. Murphy, I was lazy in switching from Yglesias to Krugman. I did this because I had a clear recollection of Krugman explaining how liquidity trap conditions lead to no crowding out.

  2. Transformer says:

    Isn’t their a big difference between

    Krugman: If we run big deficits in a recession and cause a run on govt bonds that would be good thing


    Trump: We should consider defaulting on govt bonds. That worked for some of my casinos in the past.

    BTW: When Krugman says ‘Suppose investors do start dumping treasury bonds and interest rates rise. Where does the money go?’, isn’t he committing a basic economic fallacy ? Dumping treasury bonds doesn’t free up any money , just causes bond prices to change – so there is no additional money to “go” anywhere. If anything a run on bonds would represent increased liquidity preference and be a bad thing.

    • Capt. J Parker says:

      Krugman has often stated the one way out of a liquidity trap is for a central bank to credibly promise to be irresponsible and allow inflation to be higher. Trump has apparently “credibly promised to be irresponsible” and increase government bond rates. Keep in mind that Krugman has also pointed out that is very very hard for a central bank to change inflation expectations to exit a liquidity trap. So, if Trump can make an offhand remark and get govt. bond rates off zero (which is expansionary) then, Trump is a genius at least according to Krugman – though Krugman may think otherwise.

      • guest says:

        Liquidity trap: When people save for their own desired future rather than that of cronies.

        Paradox of Thrift: When individuals benefit from saving, but cronies don’t.

        It seems laissez faire is the cause of a lack of aggregate demand for crony goods.


  3. Tel says:

    Trump’s position is shifting a bit (shocking!!):

    “People said I want to go and buy debt and default on debt, and I mean, these people are crazy. This is the United States government,” Trump told CNN’s Chris Cuomo on “New Day.” “First of all, you never have to default because you print the money, I hate to tell you, OK?”

    Good that Trump checks out my comments on this blog. Clearly he knows quality when he sees it.

    • guest says:

      Nobody gets to blame laissez faire when the economy CORRECTS (“crashes” is a misnomer) on Trumps watch.

      (Lefties, of course, will completely ignore what Trump says here, which is complete Keynesian, mercantilist nonsense.

      (LK, you should read Trump’s desire to print money as protecting businesses from consumer demand for *other* businesses’ goods – cronyism.

      Anyway, apparently Trump’s people read Robert Wenzel’s blog (EPJ), because shortly after he posted how he could expose the Bush family for cronyism through Eminent Domain, he tweeted “hey, I just found this 5 minutes ago” (paraphrase), linking to that kind of information (not EPJ)

      So, maybe Trump will find your comments after finding his way over here from EPJ.


    • Tel says:

      Well worth listening to Peter Schiff’s response (Ep 166).

      Schiff tries to follow the two Trump steps forward one Trump step backwards dance. The policy promises are drifting around the place, as one might expect. Trump has started borrowing from Sanders’ material, presumably hoping that when Sanders drops out of the primaries, some of his supporters will reject Hillary.

  4. Adrian Gabriel says:

    I knew it all along, Trump is a Keynesian. He should be touted as a person Sumner and Krugman both like. Add a little bit of NGDP targeting talk and he’ll have all the MMT guys on his side.

    Safe to say the Libertarian-lites that supported Trump all along were only slapping Ron Paul in the face and were doing anti-Austrian things. See for yourself, he is advocating exactly what Tel is suggesting, he wants to print money:


    • guest says:

      “Safe to say the Libertarian-lites that supported Trump all along were only slapping Ron Paul in the face and were doing anti-Austrian things.”

      Well, for some reason a lot of the Ron Paul crowd turned out to have come from the Left, or were Greenbackers who liked Ellen Brown, and such.

      This is what really turned conservatives away from Ron Paul – they recognized Lefties in the group and falsely concluded that Ron Paul was a lefty.

      And the arguments against America’s foreign policy seemed to us to be Left-oriented (America bullies the world, seeks to steal oil or other resources, etc.), when, at least to us, personally, we had no intention of bullying or otherwise staying longer than necessary in other countries.

      That’s why we don’t see ourselves as occupiers: In our minds, we’re just there to make sure other countries don’t bring their commie or Sharia ways here.

      But since everyone around the world seems to blame the free market for their problems and wants to end us, we feel it’s necessary to maintain a strong military.

      That’s *our* perspective. We don’t realize the extent to which Lefties have infiltrated our government, and how long they’ve been at it, and so we still mistakenly see America as basically following the Constitution and our Founders in its foreign policy.

  5. Ryan Murphy says:

    Yglesias/Krugman were talking about the case of groups attacking the US government’s position, a position they see (or saw) as fundamentally sound. What they were describing would be subsequent macroeconomic effects of shifting one set of assets for another that would take place as they attacked the position. The effects were neutral to benign.

    Giving a haircut to the debt would raise the risk-free rate, which would then only be the “risk-free” rate. It would probably have a big ripple effect across markets. I might be getting some detail here wrong, but doesn’t the rate at which the US government borrow simply set the floor on other interest rates?

    In any case, yes, these appear to be entirely different conceptually, at least on their own terms.

    • Major.Freedom says:

      Well since any rise in Treasury rates is tantamount to a rise in “the” risk free rate, the “attack of the bond vigilantes” PK was talking about in 2012 would also have increased Treasury bill rates. “Dumping Treasuries” is a euphemism for rates increasing (since every “dump” has a buyer).

      • Capt. J Parker says:

        What if the buyer is the Fed?

  6. Major.Freedom says:

    Murphy’s point is obvious. If it is benign, or per PK even a good thing, when there is an “attack” on the Treasury, the. It should not matter whether the impetus for the attack is a Republican or a Democrat in the White House.

    When the scenario is Obama in the White House, PK and thus his lack Yglesias thumbed their noses and almost bragged that anti-Obama bond vigilantes would help the US economy.

    But when the scenario is Trump in the White House, it would hurt the economy for there to be an “attack” on the Treasury. Now the focus shifts away from the bond vigilantes helping the economy, to the evildoer who causes the bond vigilantes to attack.

    It is really an inconsistent position. It is a pattern too. When a Democratic power brings about X, it is benign or good. When a Republican power brings about X, it is evil and insane. I exaggerate, but there should still be posts from PK saying how Trump’s idiocy will only help the economy. Of course we won’t see that, be sure he’s a partisan shill.

  7. Scott H says:

    The difference is that Krugman is denying a default could be forced upon us. Whereas Trump claimed he’d make it happen anyway. You should know that Krugman loves technicalities. This is the same guy that loved Bernie Sanders until somebody exaggerated the estimated growth numbers for Bernie’s policies /sarcasm.

  8. Bob Murphy says:

    Two things folks:

    1) I’ll amend the post for clarity, but I was quoting Yglesias, not Krugman. I meant Krugman in 2012 at the link was endorsing the quote from Yglesias that I proceeded to give.

    2) My GOSH you guys, why are you making this so difficult? Did you actually READ the arguments from Krugman and Yglesias back then? How would they not apply today?

    Or, going in reverse: Back in 2012, if for some reason investors around the world suddenly thought a Treasury default were imminent and so started dumping Treasuries–why wouldn’t that raise the “risk free” rate as well? If you say, “Because the Fed would knock it back down,” then OK, why can’t the Fed do that today if President Trump defaults?

    I could understand if you guys got hip deep in the weeds and explained how there was a subtle difference 18 meters into the two arguments, but you’re acting like I’m nuts. These are incredibly similar analyses, leading to opposite conclusions based on whether it’s Obama’s deficits or Trump’s machismo at fault.

    • Ryan Murphy says:

      Assume EMH. Rhetorically.

      It takes very specialized human capital to attack this type of a position successfully. In Austrian terms you need to be the one brazen Kirznerian entrepreneur in a market where several thousand smart people are staring at computer screens trying to find inefficiencies. And you need to have a lot of capital behind you.

      If you’re not right or you don’t have Sorosian capital to really push your position, then market rates aren’t going up. If we REALLY want to push the EMH point, then they will not go up at all. Period. Because if you walk around dropping $20 bills on the ground, people are still going to more or less pick them all up. The extent to which they don’t pick up the $20 bills is the extent to which the “risk free” rate will rise.

      Contrast to this:

      If the Treasury does something small that indicates that the risk of default is elevated, but nothing crazy happens, then that can create room for monetary policy to be easier to implement if you assume central bankers are silly Keynesians. You’re throwing the economy weirdly out of whack in a very specific way that allows AD policy to be implemented more easily.

      If the Treasury defaults or does something that indicates that it is much more likely that a default happens, the effects of the jump in the risk free rate completely overwhelm the effects of moving around Keynesian deckchairs. You’re just crashing the economy.

      Or, when Z is small, it means we are moving around Keynesian deck chairs, and the effects maybe even make AD management easier.

      When Z is large, it really screws with the structure of financial intermediation.

      • Bob Murphy says:

        Ryan, OK, you’re trying to come up with a way to make the two positions consistent. I applaud you. I’m not sure it works, but OK, you’re at least trying.

        But note that you have done a lot more than Krugman/Yglesias, do you agree? They didn’t back in 2012 says, “Yes there are pros and cons of investors fearing a default, but the pros outweigh the cons because XYZ…” while now they are saying, “Yes there are pros and cons of Trump making everyone fear a default, but the cons outweigh the pros because ZYX…”

        No, back then they said, “This would weaken the currency which helps us, and I can’t even see what the possible problem could be?” and now they are saying, “Holy cow this guy is insane! He’d wreck the world economy!!”

        • Transformer says:

          “Back in 2012, if for some reason investors around the world suddenly thought a Treasury default were imminent and so started dumping Treasuries–why wouldn’t that raise the “risk free” rate as well? ”

          It would – but that doesn’t mean that a default is something that should be seriously proposed since its consequences would be much more far reaching than just an increase in rates.

          Its a bit like saying that someone who thinks “recycling should be encouraged by increasing the CRV” must also support the statement “”recycling should be encouraged by shooting people who fail to recycle.”. There is a difference in degree between the 2 statement.

          • Bob Murphy says:

            Great Transformer, I agree that that’s the route to take. Now, tell me what are the awful consequences of a Treasury default that Yglesias/Krugman spelled out today, that would not also attend a bond vigilante attack?

            • Transformer says:

              I’m not not endorsing Yglesias/Krugman’s views here but I’m guessing that they would see a qualitative difference between :

              1. Higher deficits leading to fears of future inflation, which would drive interest rates higher , which they claim may actually have beneficial side-effects. This could not lead to a recession.


              2. A default, which would have a major impact on all government funding, and might trigger a general financial crisis , both of which could lead to a recession.

              • Bob Murphy says:

                Transformer, Krugman in 2012 explicitly says in his post (at least one of the ones I have linked to) that if the fear is due to default risk, his argument also works. It’s not just fear of inflation.

              • Transformer says:

                OK, he does say “Some loss of faith in those Japanese bonds, whether default risk or fear of higher inflation, would be a blessing.” – so if Krugman was to attack Trump for increasing fears of a default it would be a Kontadiction.
                I’m not sure if he has done though has he ?

              • Bob Murphy says:

                Stay tuned for this week’s Contra Krugman!

  9. Bob Roddis says:

    Rarely will David Stockman write something without emphatically mentioning how funny money dilution actual dilutes purchasing power which is functionally stolen and results in distorted economic calculation. He also points out the idiocy and dishonesty of the Keynesians who insist that it all must be done to give “the economy” “momentum” while ignoring or denying the underlying fraud, theft and general immorality of it all. Regarding treasury “haircuts”:

    What the Post was all lathered up about is the official policy of the United States—–and one that is actually pursued with a punctilious vengeance. According to Janet Yellen and her entire posse of camp followers in the Eccles Building and on Wall Street, the Fed must move heaven and earth to boost the inflation rate to 2% annually.
    Not only that, it must use the shortest measuring stick possible (the PCE deflator less food and energy) to track its progress and keep the printing presses running white hot to insure it stays there. That is, it must deliver 2% inflation at all hazards, world without end.

    Then again, isn’t that the very skunk in the woodpile? After all, under a scenario of 2% inflation year-in-and-year-out, a 30-year US treasury bond will be worth exactly 54.5 cents on the dollar at maturity. The Donald could only imagine a discount of that depth.

    Yes, the savvy insiders argue its 2% uber alles. That is, everything goes along for the inflationary ride—–prices, wages, profits, rents, indexed social benefits and the works. Except it doesn’t work that way in the slightest. Just like the Donald says, debtors get relieved and savers get creamed.

    The deliberate national policy of 2% inflation is the most capricious form of economic injustice imaginable. Not even its perpetrators have a clue as to the utterly random incidence by which it impacts economic agents over time and the resulting windfall gains and losses in wealth which flow therefrom.

    And that’s not the half of it. The Fed’s deliberate 2% inflation policy not only results in the arbitrary seizure of deep discounts on the public debt by the government, but also an immense dissipation of economic resources by the private sector. That is, all kinds of racketeers are enabled to make a handsome living peddling information and services which would never be needed under a regime of sound money.


  10. Tim says:

    I think Sumner is not going to come to your rescue 🙁

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