BoxersFeuds in academia are so vicious, the old saw goes, because the stakes are so small. But the current brawl playing out among academic camps advocating for either more or less government spending as the global economy teeters in the balance raises the ante to levels seldom seen before.

Some partisans, like Princeton University economist Paul Krugman, argue that governments need to increase their stimulus spending to shore up demand. Others, like Harvard University historian Niall Ferguson, counter that additional deficit spending would spell disaster by spooking creditors already skittish about government finances.

The American public, though, seems to see the tussle over stimulus spending for what it really is: a sign that the Establishment has run out of ideas about how to turn around a limping economy. More than offering anything constructive, the stimulus debate seems to be sucking all the energy away from efforts to develop an effective policy response.

No Help From the Ivory Towers

A mere 6% of Americans surveyed believe that the $787 billion stimulus program Congress passed with such at the start of 2009 has created any jobs, a recent poll found. But that isn't stopping a fiery debate between mainly academics knocking down straw-man arguments -- a battle raging in the ivory towers that are supposed to inform much of the country's policymaking.

Those who advocate more stimulus spending, like Krugman, argue that the stimulus was never big enough to begin with. Conveniently sidestepped, though, is the thorny question of how to deploy sums that large in "shovel ready" projects that can meaningfully boost demand.

Indeed, even Krugman identified a lack of such projects as a reason to steer parts of the original stimulus spending into items like tax cuts, which he argued were less beneficial. And only half of the funds earmarked have been put to work so far, according to most estimates.

What Do Rock-Bottom Treasury Rates Signal?


But rather than address those details, Krugman seems to find it more convenient to accuse stimulus opponents of naïve hallucinations. He argues that a fear of "invisible bond market vigilantes" -- his term for those hypothetical investors who might punish the U.S. government for its spendthrift ways by dumping its debt -- is an irrational worry preventing everyone from getting on board with more stimulus spending.

The rock-bottom borrowing costs the U.S. is enjoying amid plentiful demand for U.S. Treasuries has Krugman convinced that any opposition to more stimulus spending is merely delusional and paranoid. But it's much more complicated.

For starters, the robust demand for U.S. government bonds is more than a simple referendum on America's creditworthiness. It's a sign of the massive risk aversion plaguing markets as investors crowd into this seemingly risk-free asset despite very low rates of return. It's more of an indicator of investor anxiety than evidence of a calm about U.S. finances.

Moreover, the benefits from stimulus spending have been very dubious. Using the government's ability to borrow cheaply and apply those funds judiciously for clearly defined goals -- like using unemployment benefits to ease the pain of those hit by the recession or in the form of productive, long-term investment -- is key.

The U.S. Is Not the Next Greece

Making it easy for Krugman to skip over these details are the alarmists on the other side of the table. Ferguson, for example, has been howling that countries with high government debt like Japan and the U.S. are about to face the same wrath of creditors that recently plagued Greece.

But that ignores the immense safety that advanced major economies like the U.S. and Japan offer to creditors, who in the end have a limited number of choices. For example, in the wake of Europe's own jitters, Chinese investors have been flocking to Japanese government bonds despite that nation's high level of public sector debt.

The hyperbolic crossfire comes at a time when real ideas for righting the ship in the U.S. are desperately needed. And to the millions of jobless Americans who are suffering as pundits and lawmakers score points, the debate is anything but academic.

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seayakbill

The Congress has been under Democratic control for 4 years and in that time the USA has sunk to Government controlled socialist country.

July 08 2010 at 8:44 AM Report abuse rate up rate down Reply
kdocjjk123

If the "free market" is supposed to be perfect why do people criticize the Government for not preventing the oil disaster, mine explosions, Bernie Madoffs, and free market creations called derivatives? The collapse of the economy was created by the market but the federal government has the responsibility to try and save the economy. The Republicans allowed the Great Depresion and are trying to create another one. If businesses do not have customers now what happens when unemployment checks end? Without the demand from unemployment checks the economy would be in a depression already.

July 08 2010 at 8:40 AM Report abuse rate up rate down Reply
Dismayed

Obama is an inveterate liar, a feckless leader, and a socialist or worse who will turn America into a second or third rate power unable to defend itself against its enemies. The stock market and the economy are running on smoke and mirrors--very low loans to big banks/financials which lead the market by making money on our tax dollars. He is transferring wealth via Obamacare, Cap & Trade (to come), higher taxes (to come), and stimulus/giveaways from those who actually work hard and pay taxes to those who don't and want to suck on the Big Government teat forever. This is fairyland and will come down like a shattered mirror. Keep your eyes on the prize: Vote the bums out! Reduce you tax footprint and buy less. Starve the tax and spend politicians back to their rat holes!

July 08 2010 at 8:34 AM Report abuse +1 rate up rate down Reply
Denise

We need to get rid of this thin skinned President and replace everyone in the house, senate and congress and start over. They are not working and they are making things worse. "Legal" Americans are resilient and this is the best country in the world. We can make it work and get back to center. What we don't need is poeple, like Obama, trying to change our country to his liking.

July 08 2010 at 8:32 AM Report abuse +3 rate up rate down Reply
krazzicraig

Some 235 years ago there was a revolt in this land over taxs. The people understood they were being taxed into servitude.We are fast approaching the same set of circumstances. We are living under the heavy-hand of a goverment that cares little for its people. The folks in Washington manipulate the system for their own benefit. If you are tired of being manipulated ,then do somethings. Washington is broken . They are doing more harm then good .

July 08 2010 at 8:25 AM Report abuse +5 rate up rate down Reply
bhawkes328

the only right thing to do is let it settle on its own... the more they do the worst it gets....show me one company that operates like the federal gov. and still in business. you cant because no company or family can survive living that way...

July 08 2010 at 8:25 AM Report abuse +6 rate up rate down Reply
shalebrook

Not a tea party member per se here, but I think the press' attacks on the tea Party are misplaced. The real culprit here is lack of government oversight of the banking system, run away government spending, lack of influence/failure to take action on our oil refining oligopoly, the irresponsible and unjustified (as we know now) invasion of Iraq that caused a huge increase in national debt and the repeal of Glass Steagall by Bill Clinton back in 1997.

If you go to the root cause of our economic malaise, it falls largely and primarily on the shoulders of congress and the executive branch and BOTH parties share in the blame.

this economy is not a cornucopea of unending wealth. the federal governemn has finally overspent to the point where we are out of options to fix it. The "Golden Goose" that was once a dynamic economy is dying---and no one in big government gives a damn.

July 08 2010 at 8:24 AM Report abuse +3 rate up rate down Reply
gearoidr

test comment

July 08 2010 at 8:13 AM Report abuse rate up rate down Reply
kdocjjk123

JMKeynes pointed out that if private sector and state and local demand is not sufficient to provide full employment the Federal government that can run a deficit can increase demand to achieve full employment. His advice is not followed by Republican politicians just as people ignore the advice of doctors and die from obesity issues. The analysis is correct but not followed.

July 08 2010 at 8:13 AM Report abuse -5 rate up rate down Reply
ebreit19

sorry, but this very poorly written article is unreadable.

July 08 2010 at 8:11 AM Report abuse +5 rate up rate down Reply