For some inexplicable reason (for Keynesians, unfamiliar with being out of economic fashion), the recent G-20 meeting resulted in some consensus (at least outside the US) of controlling inflation and curbing deficits. Paul Krugman, dismayed at such at outcome, called the conference “deeply discouraging”. In his anguish at watching the world leaders contort themselves ever-so-slightly towards controlling their budget deficits and reigning in spending, he penned some his dire predictions in the NYT:
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
Krugman points the finger of blame for this nightmare scenario firmly at the “old school”:
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence.
Such behaviour by politicians, who for decades have been the willing zombies of Keynesian thought, is, for Krugman, the abandonment of Reason and a return to the dark magic of economic principles which have clouded their otherwise rational fiscal minds with the archaic ritual of austerity:
It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
You heard it here first, folks. Now sit back, eat your popcorn and watch the destruction of the world economy at the hands of the otherwise faithful statist, collectivist, Keynesian world leaders who decided to experiment a little with balanced budgets and slightly-less-insane monetary policies…
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Why keep bringing up Herbert Hoover. Hoover was for more government spending and against the “Liquidations” of the minor recession of the early 1920s. He even expressed this in his biography. Hell, it was Roosevelt who campaigned (Told little fibs) about curtailing the excesses of the Hoover regime and then took the Hoover stupidity up to a whole new level.
And then Krugman talks about the efforts of Roosevelt solving the Depression. The stock market never recovered to its 1929 prices until after 1950. That is over 20 years.
Basically, Krugman and his buddies are trying to turn the USA and EU into two big versions of Japan in the 1990s. So like Japan we too can lose a generation to sloth and government niceness and like Japan never recover asset prices to their highs at the peak of the bubbles.
Poor old Krugman – even when it looks like he is going to get one right, he is going to be right for the wrong reason.
Like Obama, Krugman believes that the almighty state, like God, can “create.” He believes it can create money, jobs, prosperity, free health care, et cetera, you name it, the state can do it, and Krugman would have it do so. He is a fanatical high priest of Statolatry. Since everything the state “creates” depends on the state’s use of force and/or coercion (extortion) to obtain revenues, Krugman’s unabashed and repeated calls for state violence to accomplish his every recommended government policy marks him as a charlatan. So too does the personal suffering of the millions of unemployed workers who lost their jobs due to the Krugman-orchestrated, Bush/Obama depression currently afflicting America and the world.
Is it not individuals who create? Is the State institution not made of up individuals?
The state has as much capacity to produce as any other organization does.
No, it does not. The “state” is a euphemism for a monopoly on acts of force, coercion, aggression, etc. that people are not otherwise allowed to commit.
These violent acts cannot create general prosperity any more than burglary and robbery can. Only the free exchange of goods and services in a regime of private property can improve the economy as a whole.
The ‘state’ is a method of effecting coordinated action– providing that it is democratic, and that citizens can engage in the coordination effort. That’s the kind of government we used to have.
Also, if you’re against communal efforts in principle, you must also be against corporate activity. They do things in much the same way a state would.
How would you propose we preserve private property rights in the absence of a state? Do you think we should each just stay up all night at our windows, trusty guns at our side? Wouldn’t it be easier to have a state to maintain a framework of law and order? And to pay an assessment (taxes) toward its maintenance?
Actually, it would be easier to have a common or customary court system, updated with modern credit and insurance standards. Why not pay directly for the services you require instead of going through taxation and the electoral process? It would be more reliable and flexible for changing environments and issues.
As it is, the current governmental system acts like a protection agency, providing levels of service you may or may not want, but giving you little choice but to accept it. The electoral process is a joke as far as changing governmental policy. Suppose we had to vote on which fast-food burger joint would get to operate for the next four years, McDonald’s or Burger King? Would that be fair and efficient to consumers, or smaller niche competitors who couldn’t possibly compete in a “winner takes all” system, but which clearly can operate profitably in a comparatively free market? The whole governmental process is skewed upside down as far as protecting rights and providing law goes. If they have to violate my rights in order to protect my rights, then something is fundamentally wrong with the system.
And that’s without going into the more fundamental question of what “law” is, and how it works.
Would this common or customary court be run on a subscription basis? Or would it be posited by some small elite and forced on the public undemocratically?
2. Why would anyone respect it? Suppose you just didn’t agree with this court’s decision? Or didn’t recognize it at all?
3. Enforcement? You’re going to need to hire a large police force to replace our current federal, state and local forces. Otherwise lawful behavior just becomes optional.
Sketch in a little detail for us, please. I’m having a hard time imagining how anything like this could ever work.
michael, this has been thought about quite a bit; Bruce Benson’s The Enterprise of Law: Justice without the State discusses theory and a few case studies. I highly recommend it.
http://mises.org/store/product.aspx?ProductID=297
I know I would go around looting, killing, and raping if the State didn’t exist. I have no interest in mutually beneficial cooperation, good will, or friendship. And I imagine most everyone feels the same.
We all have fortuitous circumstances in our lives when we could at a given moment kill, rape, or loot with minimal fear of discovery and consequences–yet we do not act. My conscience and lack of an urge to kill, rape, or loot stays my hand.
I do agree that abscence of some sort of governmental police would nonetheless enable far too many predatory types to do heinous acts. I consider the atrocities in countries where government is paralyzed due to civil or regular war to be inevitable, and a good indicator of what would happen in any area where the threat of police is eliminated.
I am a minarchist, not an anarchist.
Yeah. My post was in jest. Sarcasm doesn’t translate well on the internets sometimes.
I am being increasingly nudged toward anarchy. How are the conditions of a country plagued by civil war (two states fighting for dominance) a good indicator of the conditions that would appear in the absense of a state?
I really think that charlatan is the wrong word. The connotation is not sinister enough. I don’t believe for a minute that he naively believes his own rhetoric. He is more like a demon disguised as an angel, trying to tempt people into sin, or the pedophile murderer, using candy to lure the innocent children in.
I think he’s just bitter because Obama hasnt offered him a nice, cushy, well paying job at the White House….
“So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.”
This is why man created /facepalm.
If governments do cut their budgets, economies will experience painful healing process, so Krugman will be able to claim he was right during that time. When economies rebound, he’ll be able to claim they would have rebounded without the cuts. Krugman is in a no-lose position. He can always blame every economic problem on not spending enough.
And obviously they would have recovered sooner/better if only they had spent more.
Are any of the European nations actually proposing that radical? I mean from what I’v read the proposed cuts in spending are really pretty mild(certainly much milder than anything I would do if it were me) and I dont see any major movement to put Europe(or any indvidual country therein) to a gold standard. The proposed budget cuts will certainly help, but I honestly dont see anything worth getting worked up about.
Or am I missing something?
I haven’t seen any serious cuts being proposed, but even minor cuts will cause the healing process to begin. Businesses dependent on those government jobs will lose money, some will go bankrupt, and some will lay off workers. There will be some healing.
I dont dispute that. I agree 100% that the proposed cuts are a step(however small) in the right direction.
However, at the end of the day most of what is being proposed(just proposed nevermind how much of it will actually occur) is really pretty trivial. I dont see what Krugman(and others) are getting so worked up about.
That’s fair, but our opponents would claim the same about us. Even if governments try to control their spending, the crisis will go on for some while longer because of the size of the boom and the following interventions.
Krugman will say the budget controls cause the depression to last, while Austrians will say the boom and the interventions caused it…
Which goes back to the whole point that theory and praxeology are a better method for understanding such economic dynamics than looking at historical data.
Public sector deficits equal private sector savings, in the form of bonds/etc. Therefore, for the private sector to save, the government must spend. This is simple accounting. How do you propose big spending cuts and debt reduction without destroying private sector wealth and causing the private sector to massively deflate? How do big spending cuts not cause deflation under such a scenario?
Deflation is part of the correction.
If you have deflation on that scale, you’re going to end up with riots and economic disruption on such a scale that what you’ll end up with won’t be liberty, but tribal warfare and totalitarianism. Such an end does NOT justify a massive deflationary bust.
“Public sector deficits equal private sector savings”
This premise is incorrect, and therefore your conclusion (“for the private sector to save, the government must spend.) is invalid.
Public deficits may require private savings, but private savers do not require a public deficit. Private individuals can save by loaning their savings to other, productive private individuals. They can also stockpile. Neither situation requires a public deficit.
And where do you suppose they get the dollars for these savings? Sure, private individuals can save, but the private sector cannot save as a whole unless government funds it through deficits. It’s simple accounting, not a theory.
If deficits go down, private sector money that would have gone towards the deficit will instead go towards private sector investing. Which may even help the economy to improve as private sector investing will go towards increasing the production of goods and services that consumers actually want to spend money on, instead of public sector projects of dubious value. Keynesians are wrong to think that government spending is as good as or better than private spending.
And where will the private sector as a whole get their dollars? If the government doesn’t spend it into existence, then they will have to borrow. Yes, individuals can save, but can the sector as a whole save if the government is in surplus? Simple accounting tells us that they cannot.
In reply to Derek, private savers have many options other than lending to the government. Government borrowing can divert savings away from the investment in business capital necessary for the increased productivity that allows economic growth. If the government did no borrowing, all savings would be invested in private projects leading to increased productivity.
Deflation would only be a problem at present because of the huge debt balances that would increase in real dollars. However, the wages and profits used to pay private debts are highly resistant to deflation, and the Fed could easily keep prices stable until significant economic and employment growth are renewed.
If government did no spending, where would the private sector get the dollars it needs to save, invest, and pay its taxes?
“However, the wages and profits used to pay private debts are highly resistant to deflation, ”
Which is why allowing a deflationary bust to happen will just lead to another great depression and significantly worse outcomes than the actions taken so far.
There are other (far more productive) ways to save than government bonds.
Krugman is being wily here. He knows the current economic order is on the verge of insolvent collapse, so he’s trying to position himself in a favorable light by allegedly “predicting” the obvious. When the inevitable crash does occur, he can yell at the top of his voice “I told you so” and try to make everyone feel his economic policy recommendations are still relevant. It’s the only way he can “save” himself from being exposed as a worthless quack.
The house is burning and he proposes throwing gas on the fire to douse the flames. He claims water will only fuel the fire. Regardless of whether his advice is followed, and to what degree, he can later looks at the pile of ashes and say, “Yup… not enough gas.”
The cause of the fire? The kids hiding in the bushes with empty gas cans? Nah.
It seems to me that if the Krugmanites are so sure that the current level of government spending is insufficient, they must have some idea of what level of spending would be enough. Has Krugman or any of his groupies favored us with a number?
It looks to me like the authors here are recommending that we take the Japanese Cure, allowing all the juice to fizzle out of the economy while we shrink the money supply, balance the budget, trim spending and watch the years go by.
It’s been nearly twenty years now, and Japan is still flat on its back, completely deflated. How long will we have to wait for prosperity to arrive if we follow their path? Thirty years? Forty?
This is a summary of the Japanese prescription for permanent stagnation:
http://en.wikipedia.org/wiki/Deflation#Deflation_in_Japan
The Japanese have hardly been models of austurity. After their real estate and stock bubbles in the 1980s burst, they had exceptionally loose monetary policies and multiple ‘stimulus’ programs. More here:
http://mises.org/daily/4059
Even Krugman recognizes the measures Japan took, and, true believer he is, claimed that they actually kept the Japanese economy from entering an all-out depression.
GUILT asks two rhetorical questions, and then answers them incorrectly:”Is it not individuals who create? Is the State institution not made of up individuals? The state has as much capacity to produce as any other organization does.”
No, my guilty friend, individuals cannot and do not create. Only God can do that. What individuals do is produce wealth by mixing their talents and labor with existing resources. Of course individuals working for the government are capable of “producing,” but in order for government to exist in the first place and employ and pay individuals to “produce,” the state must first take–by force as taxes–the product (capital or wealth ) of private individuals who have previously produced something. Whatever individuals working for government may “produce” can add nothing on balance to the wealth of society and indeed subtracts therefrom, for in order for government-employed individuals to do anything there must previously have been deducted–viz., extorted by force–an even greater volume of production from the private sector. The amount forcibly extracted in taxes for government to hire individuals to “produce” exceeds anything those government individuals can possibly produce because of all of the expenses related to anything government “produces.” You see, in addition to a government producer there is and must be a government tax collector, a government politician, a government administrator called a bureaucrat, a government accountant, a government pay clerk, a government soldier, sailor, cop, spy, etc., etc., etc., etc., etc., etc. So, in fact, for a government-employee “individual” to produce anything of value, far greater value of produced wealth is and must be first extorted from real producers. A “productive” government individuals is actually a huge drain upon the net wealth and resources of society. Government “production” is pseudo. Government wastes production, it adds nothing. So you see, my guilty friend, government on balance can “produce” nothing; it can only on balance subtract from the society’s “gross product.
“The marvelous, Keynesian/Krugman theorytale (theorytale because it is close kin to a fairytale) that government can “create” wealth or anything of value without first consuming much greater wealth and value was irrefutably demolished in advance by Says’ Law even before Marx and Keynes concocted their silly theorytale.
MICHAEL, made some statements and asked some questions of me early on. He stated:
“The ‘state’ is a method of effecting coordinated action– providing that it is democratic, and that citizens can engage in the coordination effort. That’s the kind of government we used to have.
Also, if you’re against communal efforts in principle, you must also be against corporate activity. They do things in much the same way a state would.”
MICHEAL, the state is a violent organization at its inception because it can only come into existence through the forcible extraction of its revenues from others, and this use of force is rather inappropriate to the establishment of community or of coordinating human activity, for community and coordination by individuals is best effected voluntarily rather than by force–or force of law.
Micheal, I am not at all opposed to voluntary community action. Corporations, my friend, are state-created entities. Their owners are given limited liability by force of government laws. Other than that impediment to corporations operating in a communitarian fashion, I do not see them acting violently in the way that states do. But that single impediment removes corporations from the realm of strictly voluntary. If we could get rid of the state, their would be no corporations as we now know them. However, there might be very well be corporate-like entities engaged in business, but without their state-granted liability limit the owners would be more responsible for the actions of their corporate agents.
MICHAEL also asked some questions, to wit:
“How would you propose we preserve private property rights in the absence of a state? Do you think we should each just stay up all night at our windows, trusty guns at our side? Wouldn’t it be easier to have a state to maintain a framework of law and order? And to pay an assessment (taxes) toward its maintenance?”
MICHEAL, why does one need the state to accomplish the preservation of property rights? What magical or superhuman quality do state operatives have–and how do they acquire those divine qualities–that makes them the only ones who can protect your rights? I know its not always fair to answer questions with questions, but can you not imagine peaceful, voluntary alternatives to the violent methodologies of the state, whether democratic or dictatorial?
DEREK wrote:
“Public sector deficits equal private sector savings, in the form of bonds/etc. Therefore, for the private sector to save, the government must spend. This is simple accounting. How do you propose big spending cuts and debt reduction without destroying private sector wealth and causing the private sector to massively deflate? How do big spending cuts not cause deflation under such a scenario?”
DEREK, my Keynesian friend, that is not accounting. Pseudo accounting, maybe, but you are putting the horse before the cart. You have been led astray by the likes of Krugman or Keynes. Keynes was neither an economist nor an accountant, and Krugman is merely an epigone or parrot of Keynes. Ask yourself, back when the federal government eliminated the deficit during the Clinton presidency, did all private savings disappear? Of course not. Government deficit spending does indeed consume–not account for–private savings, which would otherwise be invested in the productive private sector. Government spending, deficit or otherwise, consumes productive resources–capital–when it is forcibly taken from the private sector, so it always impoverishes society and because of the element of force, it always sows disharmony and discord. You would probably be wise to throw away your Keynesian “accounting” math formulas and try using careful reasoning.
MICHAEL opined: “It looks to me like the authors here are recommending that we take the Japanese Cure, allowing all the juice to fizzle out of the economy while we shrink the money supply, balance the budget, trim spending and watch the years go by. It’s been nearly twenty years now, and Japan is still flat on its back, completely deflated. How long will we have to wait for prosperity to arrive if we follow their path? Thirty years? Forty?”
MICHAEL, wikipedia is a very poor place to go for an understanding of economics. Many of the entries on wiki have been put their by Keynesians, who really are not conversant with the science of human action–economics. As you can see, what wiki is talking about is price deflation as opposed to monetary deflation. Do you know the difference? And can you explain why price deflation is bad? When prices fall, people’s can buy more with the same amount of money. Doesn’t that seem like a good thing to you? If a decline in the money supply brings about a decline in wages and prices, as even Keynesians I suppose believe will happen, what’s wrong with that? It seems self evident to me that a smaller supply of money can support the same amount of economic activity as long as wages and prices are free to decline proportionately without government intervention. Right? However, did you notice that the wiki article points out that “historically not all episodes of deflation correspond with periods of poor economic growth.” That is true, so how do does Krugman account for that?
Oh, and btw, your view of Japan as being flat on its back is hyperbole. If you want to witness an economy flat on its back look at what the government’s monetary inflation brought about in Germany during the 1920s and 1930s and Zimbabwe over the last decade. Better yet, look what happened to the United States when Keynesian policies were pursued by the federal government during the adminstrations of Hoover, Roosevelt and Truman. What would otherwise have been a short recession in 1929 was extended by Keynesian monetary and fiscal policies into the Great Depression and WWII–a period of well over 20 years. During all of that time the economy of the United States was a basket case compared to Japan’s economy of the past 30 years.
I think hoover/roosevelt provide a surprisingly strong analogue to bush/obama.
As to krugman, he is conflicted between giving his marxist advice and not wanting to appear to be wrong in his prognostications. He sees things aren’t going well, and tries to get not only ahead of the curve, but spin it as proof of his correctness. Ambitious, but the big lie is the constant tool of the statist.
i think the economics are scaring the public to much let the market flow !!! to many maybes
I think it is the politics, not the economics, that is scaring the business sector. After all, there is no telling what Obama and Congress are going to try next. I heard on talk radio this week that Newt Gingrich went on a tour (10 states in 14 days) and talked to businessmen who told him that they have no intention of making any new investments until the business environment stabilizes.
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