In his latest salvo in his back-and-forth with Paul Krugman over the significance of the national debt, Joe Scarborough, writing in POLITICO today, displayed such a foul misunderstanding about economics, Krugman must have choked on his oatmeal laughing as he read it.
In “Paul Krugman is wrong - but don’t take my word for it,” the MSNBC host made the following point:
Investors may be growing skittish about U.S. government debt levels and the disordered state of U.S. fiscal policymaking.
From the beginning of 2002, when U.S. government debt was at its most recent minimum as a share of GDP, to the end of 2012, the dollar lost 25 percent of its value, in price-adjusted terms, against a basket of the currencies of major trading partners. This may have been because investors fear that the only way out of the current debt problems will be future inflation.
It also may have been because space aliens raided the Treasury in the dead of night because Nicholas Cage and Chuck Norris were off duty, having been contracted by the Navy to fight a flotilla of krakens in the Caribbean the week before. Scarborough may as well have argued that, because it would have displayed a better understanding of how foreign exchange markets actually work. The value of the dollar is determined by foreign countries’ demand for it and our supply of foreign exchange. And while foreign investors in 2002 may have begun to fear widening debt that was eventually caused by a recession in 2008 — despite the fact that the housing bubble was far from inflated in 2002 and that these investors eventually failed to foresee the crash itself — it’s more likely that the value of the dollar fell because our current account deficit essentially doubled between 2002 and 2006 (but don’t take my word for it).
Scarborough continued to make arguments that could be debunked by a remedial high school economics teacher shortly after:
More troubling for the future is that private domestic investment—the fuel for future economic growth—shows a strong negative correlation with government debt levels over several business cycles dating back to the late 1950s. Continuing high debt does not bode well in this regard.
While it’s true that government borrowing can “crowd out” private investment by bidding up interest rates, it isn’t currently happening — interest rates remain low. Furthermore, investors seem to have more confidence in U.S. Treasuries than they do in the market (but don’t take my word for it, “investors continue to buy U.S. government debt as a refuge against a renewal of turmoil in global financial markets and concern the U.S. recovery may falter”). The real reason that private investment and government debt appear to have an inverse relationship, both now and during any recession, is that economic contraction causes both tax revenue and private investment to fall.
So whose word should we take?
If you believe that I am wrong and Paul Krugman is right…then take it up with the RAND Corporation whose senior economist wrote everything you have read here other than this concluding paragraph. The debt crisis is real and waiting another decade to fix it is not an option. Anyone who suggests it is operates well outside the mainstream of where serious economists reside.
If the recent financial crash has taught us anything, it’s that “the mainstream of where serious economists reside” is less credible than a bootleg DVD salesman convention. But what’s even more troubling about Scarborough’s column — and POLITICO’s decision to publish it — is that he doesn’t even say whose words we should take or what those words actually are. Scarborough names neither the “senior economist” nor the study or studies that he is citing. Nor does the RAND Corporation even have a single “senior economist” — a search for “senior economist” on RAND’s website indicates that the think tank has at least a dozen “senior economists” on staff. So we can’t even debunk the man inspiring Scarborough to spew such noxious filth. At least we can debunk him.
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