Friday, January 11, 2013

California-Like Reagan-Proves Deficits Don't Matter

    With all the Krugman baiting Bob Murphy does, Krugman's answer in this post was quite a kick to the gut. Of course, he doesn't mention Murphy by name-and may not have particularly had him in mind which would only further frustrate Murphy; what's great about Krugman baiting is he further antagonizes them by never rising to the bait-but I'm sure Murphy hated this column:

    "Guess whose state budget crisis seems to be over?

     "As best I understand it, what’s going on in CA is a microcosm (a pretty big microcosm, actually — maybe more of a mesocosm or something?) of what’s going on at the national level. A severely depressed economy led to big deficits, because tax receipts are strongly affected by the state of the economy — indeed, are almost certainly much more cyclical than they used to be."

    "In response to those deficits, there was a lot of spending reduction plus some more modest efforts to increase revenue. And now that we have the beginnings of real recovery, it’s turning out that those efforts were enough to remove much if not all of the “structural”, as opposed to recession-driven, deficit."

    "As this reality becomes more obvious, the deficit scolds will of course go wild. They have staked their careers on crusading against supposedly intractable deficits, and they have their hearts (and more important, their wallets) set on exploiting the alleged fiscal crisis to dismantle social insurance programs. Good news will be a blow to everything they want, and will be furiously and vigorously denied."

   "But once again: deficits are receding as an issue before our eyes."

     This post is perfect on many levels with the news that California's huge deficit is over as like Krugman says, it can be read as a microcosm for the country who people like Murphy keep telling us is going to become Greece any day now. Indeed, in Murphy's recent piece over at Econlib while claiming that austerity can be stimulative-though he also argued at the same time for tax cuts which would alleviate austerity-the only reason he could come up with for why austerity could be stimulative is that it would please the bond vigilantes:

     "One not need believe in real-business-cycle theory to welcome the possible benefits of fiscal austerity. For example, if a government has run up so much debt that investors begin to question the government's solvency, interest rates may rise in anticipation, leading to a vicious circle. By adopting politically difficult policy changes to rein in the deficit, the government could send a signal to bond markets and achieve much lower interest rates, which would lower the servicing costs of the government debt and stimulate private investment. "

     What makes California perfect is that it's a blue state with a liberal Governor who Republicans have been holding up as a post child for the evils of liberal fiscal policy. We'll see how they try to explain this one away. Looking forward to Murphy's answer.




  1. Mike, you should visit Cullen Roche's blog at sometimes. I think you would have something to contribute there.

  2. Yes, I have read it. I will take your advice and try to drop in more often!