Back in October, when Hillary Clinton looked like a lock to win the presidency, economist Paul Krugman was saying that, when elected, she should ignore the deficit scolds and embark on an ambitious program of national investment financed by deficit spending. Indeed, that's how we fought World War II, that's how Eisenhower built the interstate highway system and, more recently, that's what got us out of the Great Financial Crash, although in that case it was the automatic stabilizers that ballooned the deficit and supported the economy.
Now, it seems, with a little over a week until Donald Trump assumes the presidency, Krugman is saying deficits suddenly matter again and that Trump's plans will lead to crowding out of private investment.
This is the problem with economics. It's not a science. It's a social science at best and, more likely, it's really just a branch of politics. Krugman is clearly voicing a political opinion here, which has nothing to do with economics at all.
The idea that interest rates will go up and private investment will be crowded out if the government runs a deficit is patent nonsense and he knows it.
Look at the two charts below. The first is the federal deficit versus gross private domestic investment.
This is what Krugman says will be "crowded out" by a bigger deficit. There is no correlation here whatsoever. Actually, you could even argue that there is an inverse correlation. In the period from 2008-10, when the deficit went to unprecedented (nominal) levels, that is, to $1.5 trillion, gross private domestic investment zoomed higher like a rocket.
Next, look at interest rates and the deficit. Same thing. Zero correlation.
In fact, we could also say that here, too, there is an inverse correlation even stronger than the other chart. The bigger the deficit got, the lower interest rates went.
Of course we know that interest rates are set by the government's banker -- the Fed -- and not by the market. That is how a sovereign currency works.
This is why economics is garbage. You have ideology and dogma posing as science. It's not science. It's not even fake science. It's pure dogma, which means opinion stated as fact. Krugman is stating his opinion.
Modern Monetary Theory (MMT) understands and explains all this. I have been talking about this stuff for years. A sovereign, currency-issuing nation that spends in its own currency cannot run out of money. It is not dependent on tax revenues to make whatever reinvestment and spending it needs to make. It sets the interest rate on its own money and the natural rate of interest is zero. And the act of spending does not necessarily and automatically decrease the foreign exchange value of the currency, nor does it necessarily and automatically bring on inflation.
What I stated are facts, not the dogma that Krugman is spewing. It's not my "opinion." That's why I got it right along with other MMTers over the past eight years when the Fed engaged in all its extraordinary monetary measures and there was no hyperinflation. It's why I correctly said the dollar would not tank and why I said the economy would recover and interest rates would remain near zero. Yes, the deficit zoomed. Yes, the debt zoomed. America even got a first-ever debt downgrade, but guess what? There was no spike in interest rates and no, Paul Krugman, there was no crowding out.
If Krugman were talking about an economy on a gold standard or one where it was under a regime of fixed exchange rates, then he'd be correct. But clearly he must know that this does not apply to the U.S. What he's spouting is not economics. It's political dogma.