Paul Krugman and I agree on little politically (I have at times agreed with him when he was arguing that TARP was a bad idea – although we disagreed on the reasons why) and despite the fact that my assumptions about the nature of sound economics differ from his most of the time I recognize that he has a lot of expertise in the field that I can learn from. For example, I have not known enough about economics to be aware of the Setser point that he is looking at. For those like me who are new to the term, the idea is this:
high government borrowing is more than offset by net negative borrowing from the private sector
As far as I can tell, Krugman is among those who believe that the flow of money defines the health of the economy – the more the money moves (borrowing, spending, and creating) the healthier the economy. Krugman and those who believe like him will doubtless argue that when the private sector borrowing declines governments must borrow more to keep the economy healthy. In other words, lower private sector borrowing causes (or rather necessitates) higher government borrowing. Unfortunately for them the numbers appear to paint a different story. If the cause and effect relationship is not simply the reverse of that assertion then the relationship is at least symbiotic with governments trying to manage or compensate for the actions of the private sector causing an opposite, but more than equal, reaction as the private sector tries to outguess the government.
On the other hand, I believe that people in the aggregate (meaning many individuals over a sustained period of time) make economically beneficial decisions (not always the best decisions necessarily, but better than rolling government loaded dice).
What the Setser point tells me is that government borrowing drags the economy down because of the opposite but more than equal principle noted by Sester and Krugman and it prolongs the agony when those in the private sector – for whatever reason – determine that we need to slow the borrowing to set the economy back on a fundamentally sound foundation.
