With the latest employment numbers looking bleak, the Usual Suspects are out in droves explaining why after spending trillions of dollars, the economy continues to sink. Leading the way is Paul Krugman, who insists that this continuing downturn exists because the government has been “concentrating” on the wrong thing: budget deficits.
Krugman writes:
I don’t mean to dismiss concerns about the long-run U.S. budget picture. If you look at fiscal prospects over, say, the next 20 years, they are indeed deeply worrying, largely because of rising health-care costs. But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all.
And by obsessing over a nonexistent threat, Washington has been making the real problem — mass unemployment, which is eating away at the foundations of our nation — much worse.
The Keynesian explanation of what is happening is pretty straightforward, and Krugman does it on a regular basis (along with Brad DeLong and, to a lesser extent, Robert Reich). Details include:
- The economy operates in a circular motion, with consumer spending propping up business activity, which in turn provides jobs for consumers so that they can continue to spend and give themselves jobs (so that they can continue to spend);
- If marginal taxes on the wealthiest people are not high enough to confiscate much, if not most, of their income, then the rich will “hoard” the money and not spend enough, which slows and ultimately breaks what Reich calls the “virtuous circle” of spending;
- When that happens, government must raise tax rates on the “rich” (Reich calls for a return of the 70 percent marginal rates that existed in 1981) in order to get money into the hands of the “middle class” (which apparently is a creation of the State) so that the spending circle can be revived;
- At the present time, interest rates are very low, which means that the economy is in a “liquidity trap” in which the only way that the spending circle can move is via more government spending, which should be financed by borrowing, and since interest rates are low, the borrowed money essentially is “free;”
- If a person makes a point of discussion that deviates from what has been presented, that person is motivated by hatred of the unemployed and wants people to lose their jobs and wants the economy to tank;
- Thus, in the end, the debate on Keynesian “solutions” ultimately is a debate on good and evil. Those who support Keynesianism are “good” and those who disagree are evil.
In the numerous columns and blog posts Krugman has written in the past few months, the theme is consistent: there can be no intellectual disagreement with Keynesian analysis because the truth of the Keynesian position is self-evident. Anything else is evil and delusional. For example, the “Regime Uncertainty” position that Robert Higgs and others have taken is nothing more than a figment of one’s imagination:
O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. (Emphasis mine) Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.
For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?
So short-run deficits aren’t a problem; lack of demand is, and spending cuts are making things much worse. Maybe it’s time to change course?
While all of this seems to be self-evident to Krugman, there are some important things that are left out. The first is the role of the economist, who is supposed to be able to look beyond the rhetoric and the “man on the street” view that ultimately leads to the “Broken Window Fallacy.” For example, the marginalist position on value is one that is not easily seen or understood by the typical layperson, who is more likely to believe that the value of a final product is determined by its cost of production.
The second is that the typical small business owner is not going to be able to relate how government “job-saving” programs like the subsidizing of corn-based ethanol or the bailout of General Motors has diverted resources from productive to unproductive uses. Instead, the business owner is going to see how people directly are purchasing products and what it costs to make them, and then make decisions from that vantage point.
As I said before, economists are supposed to be able to take in the whole picture, or to contemplate not only what is “seen,” but also what is “unseen,” to quote Frederic Bastiat. In other words, one should expect a journalist to concentrate on what is “seen,” and to miss the aspects of the larger picture. That is excusable, even if it is irritating.
However, it is unexcusable for an economist, and especially one who has the stature of a winner of the Nobel Prize, to concentrate only on what is seen and not only to ignore those important things not seen, but then to personally attack other economists who do their real duties to examine the entire picture and declare that their motivation for doing so is that they are evil and want Americans to lose their jobs.
The truth is that Krugman’s argument is a red herring; had the Obama administration and Congress done nothing but talk about jobs and launch one employment program after another, the rate of joblessness still would be high, and the fiscal picture of this government and this country would be as bad as it is now. The U.S. economy is not doing poorly because of lack of “concentration” by government officials, but because the government stands in the way of an economic recovery.
By bailing out the banks, by bailing out companies, by spending at record levels, and by holding down interest rates, the U.S. Government is preventing resources from moving from lower-valued to higher-valued uses. Furthermore, the government through political intimidation (see the recent raid on Gibson Guitars) and hostile rhetoric against firms that are legitimately profitable is sending the message that private enterprise is the enemy that ultimately must be replaced by state-sponsored enterprise.
There is another problem to this “oversight” issue, and that is the promotion of the wrong view of a “job” itself. As I read the Progressives on jobs, I have come to realize that they (and that includes “economists” such as Krugman) see the “job” solely as a transmission mechanism for income and, therefore, spending.
In other words, the actual services that one provides are irrelevant in and of themselves, or at best are secondary to the income that those providing them receive for their work. In that view, an economy is just one big circle of spending, with “spending” itself taking on a meaning that is quite removed from the actions and desires of consumers.
Spending, according to the Keynesians, is rather impersonal, and it cannot be tied to purposeful behavior by individuals. The value of “spending” is not that individuals are able to purchase goods and services in order to meet their needs, but instead is a mechanism that keeps that “virtuous circle” known as an “economy” moving in the “right” direction.
This is not economics; it is a mechanistic view of the world that ignores individual preferences and the actual movement of resources and factors of production. Unfortunately, people like Krugman add to the tragedy by claiming that those who look to actual economic explanations of this continuing saga by employing the tools of economic analysis do so because they are both stupid and evil. When the “leading lights” of modern academic economics claim that the employment of historically-accepted intellectual instruments is in itself “evil,” then one must wonder about the very future of this discipline.
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Actually Krugman is both right and wrong. A focus on budget deficits is the wrong solution and on this Krugman is right, but the Keynesian solution of greater deficits is also wrong and on this Krugman is wrong.
What we need it growth and that will come when the private sector is allowed to produce without the restraints of the government. Government intervention is the problem and stability is the solution: stability in the value of money, in tax policy, in regulation, in mandates, you name it.
You are missing something. The ongoing destruction caused by the govt needs to be reversed, not stabilized.
“The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business. He is an expert in the field of economic legislation, which today invariably aims at hindering the operation of the market economy.” – Ludwig von Mises, Human Action
I’m starting to be convinced that Krugman cannot possibly be as ignorant of economics as he seems to be. This leaves only one possibility: he’s evil and he truly wants people to suffer. Calling others evil is merely a distraction to hide his own dark thoughts.
Bingo. While it is probably true that Krugman has a sub 110 IQ, he is definitely motivated by evil intentions.
As a slight aside, it is time to Alinsky Krugman by replying to anything he says with “Krugman? Isn’t he the guy who wants to fight space aliens?”
But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits Greece are running right now — deficits Greece should be running, because deficit spending helps support a depressed economy — are no threat at all.
And by obsessing over a nonexistent threat, Athens has been making the real problem — mass unemployment, which is eating away at the foundations of their nation — much worse.
Well yes, if the government spends more money it doesn’t really have, there are no problems in the world…
Could it be that Krugman here makes mistake even from keynesian perspective? Greece certainly runs deficits, so does us, but they borrow money from outside of country, and thus can only expend those money outside of the country. Thus, from keynesian p.o.v. they are stimulating the economy of lenders, e.g. china and the rest. Therefore, reducing deficits IS TOO a keynesian solution. Therefore Krugman is doubly dikhead.
Is he seriously claiming some survey proves that small business owners are not worried about regulation?
This seems to be a recurring opinion among “progressive” academics: if the government isn’t “concentrating” on something, it doesn’t stand a chance of happening. Because, you know, what’s society without a government to give it a Purpose?
Say the remaining unionized manufacturing jobs were shipped off shore and unemployment jumped to 25%. The stock market continued to rise because the majority of profits were generated off shore. Is there a Libertarian objection to this economic model?
What is stopping 25% of the population from working?
Is it minimum wage laws? Taxes or regulations that make doing business in North America too expensive? A lack of capital and investment due to insufficient savings?
Maybe you should take a wider look at the causes of unemployment… you have been here long enough to know better.
Charlie the Tuna and the Minimum Wage
http://www.eyeotw.org/2010/06/charlie-tuna-and-minimum-wage.html
A lot of people equate Higher Spending with Faster Economic Recovery.
If you obtained your grasp of economics only from CNN Money then this is all you might think you need to, or want to, know.
People like Ali Velshi seem to think that “creating higher spending” is how recoveries are made to happen. I saw him just today on a video with Ken Rogoff. Apparently the reason for our problems is that we all, people and companies, are not “confident” enough to let go of our cash — oh, oh, the Dreaded Paradox of Thrift. We all want to pay back our debts, all at the same time. Oh-oh.
Or so says Christine Romans at least about our current lack of confidence. At least now the journalists seem to understand that “there is no quick fix”. “If there were silver bullets someone would have fired them by now.” (That I consider to be an immense improvement in journalists’ thinking as compared to the early days of this crisis. But I doubt that Krugman would agree with THAT statement by Velshi.)
Of course the government and The FED did fire a lot of bullets, but none of them were “silver” (or gold). The economist from Harvard (Ken Rogoff) to his credit, does understand that the Debt Overhang will last a long time, and will take a long time to get out from under.
http://money.cnn.com/video/news/2011/09/02/n_rogoff_economy_jobs.cnnmoney/
Over at Krugman and his Crew’s site (his crew are his acolytes on each blog he posts) at the New York Times you can read ad nauseam about the Zero Bound and the Liquidity Trap. This is overdone IMHO.
The so-called “Liquidity Trap” is a result of past Keynesian spending that was artificially induced by FED-set low interest rates and Easy Money. As a result, there are now no easily-identifiable worthwhile private-sector-initiated projects. They’ve all already been done (with phony-baloney “created from thin air” FED credit). And now, to fix this inadequacy in the system that our past has created, we must intervene in the private sector, because that sector refuses to spend “adequately” — here’s an idea: “Why don’t we fix the Money System, so that this can never happen again — that is, this “overspending” and “malinvestments” brought on by past malpractice of The FED?
So, as a result, the Keynesians propose to just spend, even if it is on digging holes and filling them in again… shades of “what is abnormal in normal times is normal in abnormal times” or words to that effect from Krugman.
Krugman has been pleading for much more stimulus for a long time — please see “Failure to Rise” from February 2009 at http://www.nytimes.com/2009/02/13/opinion/13krugman.html
He seems to believe that a really big, really adequate, Spending Jump Start is all we need.
The Zero Bound only makes sense (and even then, barely, in my opinion) when the inflation rate is negative. In that case, since the central bank cannot lower nominal interest rates below zero, it is possible for real interest rates to be too high and to be considered to be acting against the ‘stimulation’ of the economy. The real cost of servicing debts goes up as price deflation takes hold. Debtors often get wiped out. So do their creditors. The economy slows down. More people lose their jobs. The process only starts to turn around when the price deflation stops, and it usually does not continue for long.
But we do NOT have price deflation today. The fact that there is a so-called Zero Bound is just a statement that The FED cannot lower rates below that ZERO interest rate (even if stupidly, needlessly, and harmfully The FED might wish to do so).
That much is true. But it is not true that real rates are too high. Real rates are negative. A saver today cannot save and expect their money to go up in value or quantity. No one is making any return on their bank savings.
It is not true that the prevailing “fixed” interest rate in America is not providing enough liquidity. There is virtually endless “liquidity”.
But it is true, that there may be no investments that are worth making, or enough investors who are “credit-worthy” but those reasons have nothing to do with the rates not being low enough. In fact in Canada the central bank head, Governor Mark Carney, has decided to leave his rate at around 1 percent. Why go to zero, if it serves no purpose? Is there no “Zero Bound” in Canada, but there is one in America?
If you cannot make a return in America with a new factory (given the competition from China whereto we have exported so many jobs) then why would you go ahead, borrow the money, and build the factory? And who would be stupid enough to lend you the money in the first place, regardless of the interest rates, even if they were ZERO? (The jobs going to China is also a result of FED-malpractice and its Broken Money System.)
I think my problem with statements like “Plus, when the government spends money, it’s not like it disappears. Somebody gets paid, and in turn that gets spent. In other words, spend it right and it goes into the GDP, so to speak, and spins round and round” is this:
This mentality suggests that there is merit in simply “spending” (and it suggests that there is no risk, and no harm, at least when “there is so much slack in the economy”).
But “Spending” per se is not an indicator of anything worthwhile AT ALL. The ‘stimulus’ (deficit) spending by government is very poorly directed. The idea is to increase ‘aggregate spending’ even if what it is spend on is totally useless to anyone — just spend, spend, spend even more. No one worries about the resulting debt down the road, which will become an albatross around the necks of future taxpayers — hey, isn’t that the problem we have TODAY? Whodunit?
Why would anyone think we can make the problem go away by making it worse? (I know, I know, supposedly “what is normal in abnormal times is different than what is normal in normal times”.)
Sure the Free Spenders are spending someone else’s dime. They try to make their spending proposals “worthwhile” by suggesting that via planning to ‘carefully’ spend on ‘infrastructure’ is where we ought to do this proposed spending. But as someone wrote, if those spending proposals were worthwhile, they would have been recommended when times were better.
And this is why I think the ‘mindless’ focus by the general business media on getting consumers just to spend more is also often self-defeating. Spending on importing more ‘junk’ from China usually employs relatively few people here and can in the long run even make our society poorer. There is no investment in anything on our shores.
The old Soviet Union used to “spend” a lot, but it was easily misdirected into so-called malinvestments. That helped destroy the Soviet economically and socially.
And also “spending money” still comes with incurring a Debt of some kind, somewhere. It can often be the case that this Debt is far more serious and hard to pay back than was the spending that initially caused it to be incurred.
If the Debt is not based on something that will generate a return (say a movie theatre or a bridge) for the period over which that the Debt must be serviced and paid back, then it is virtually certain that a “drag” will be created in that future period. If that money is used just for consumption (which much of ‘consumer spending’ tends to go for) then there is most certainly a danger that there will be nothing being “paid back” from the spending that was generated from that Debt.
“Malinvestments” in the Austrian sense are caused by having interest rates set by central banks below what the free market would set —— the free market on its own would balance availability, that is, Supply of Real Savings against the Demand for Credit, that is, credit that those savings make available for others to use.
But central banks in their zeal to ‘stimulate’ the Economy, force rates down, and create more credit, essentially from thin air, than is In Reality available from savings. This gives false ‘informational’ signals to people who are looking to borrow money to add to their own, with which to undertake business initiatives. This leads to artificial booms (the ‘good times’ caused by this Easy Money) and the inevitable busts (the corresponding ‘bad times’) when these malinvestments are liquidated —- please note that it is not even always the same, specific investments that were originally made which are the ones hat get liquidated, but sometimes a preexisting competitor’s undertakings, who maybe did not receive this cheap money, and who had maybe been in business much longer, and who was unfortunately not the recipient of this ‘government agency’ largesse.
In the case of the Soviet Union there is a similar mechanism —— but these ‘Command Economy Malinvestments’ are made not by businesspersons but by bureaucrats in central planning who similarly have access to much cheaper credit than would the average business person —— in those cases where those ‘business persons’ were even allowed entry into any given marketplace, service or goods creation.
In any case the mechanism is similar. Even though the bureaucrats can more easily create roads, dams, railroads, public housing, and so on, they do not in their ‘wisdom’ (and with their central planning tools, computers, and 5-year plans) really KNOW what should come next in the economic development of a nation, so as to maximize the utility of the resources put into use by their interventions.
The free market has always done a better job —- please note I did not say a perfect job, just better, in correspondence to what the market is communicating through the price system.
So (in my opinion) the big problem with “spinning money around and around” is that when that money comes out of the government’s bank account, the resources put into use, are not usually going where they should. As a central planner, a government bureaucrat’s worldview could never really incorporate that belief, let alone understand that concept.
The other thing is that when central planners get on their “Aggregate Spending” stimulation plank, they have no idea where to direct their spending. Bridges? Roads? Public Housing? Food Stamps? Temporary Aid to help individual States or Counties meet their budget deficits?
Are tax breaks better than providing education and retraining funds to out-of-work construction workers?
Where exactly?
This is important because very scarce resources will be allocated by their decisions and they will not lose anything if they are wrong, but all the rest of us sure will.
So especially when folks talk about the constraints put on the Economy by the Liquidity Trap I get concerned.
“Repeat after me: all market evidence shows that there is no crowding out of private investment by government borrowing during a deep recession in a liquidity trap.”
The problem is that when resources are used, they will have been used up, and those resources will NEVER, EVER, again be available to use somewhere else. There is no way that public spending does not at some point hurt us. It may be in the future, when the credit they incurred to do their spending-stimulation comes due, we still have to pay back. So at least this one mechanism of time-shifting of the “crowding-out” can occur. It simply does not happen at the SAME time as the spending is done —— it falls to future generations to suffer the corresponding “crowding-out”. One cannot be so sanguine to assume that this never happens.
And if the methodology of the proverbial “Free Lunch” or “Lifting Oneself Up By One’s Bootstraps” or “Economic Jump-Start” really worked, we would know by now. Yes, in the past, various forms of ‘stimulation’ (Easy Money from The FED, and tax breaks from the government) have APPEARED to work, but they have made their mark by resulting in increasingly more and more serious recessions, each one less responsive to the FED’s medicine (or even to the Good Doctor Krugman’s medicine). That is why we are where we are today. The “medicine” is not having the effects it used to, regardless of how big we make this particular “pill”.
What is happening in America today is very hard to endure. Yes, countless counties and cities are laying off their countless teachers and firemen and policemen, and shutting down their daycare centers and their libraries. And laying off even garbage-collection personnel. By the way, why do garbage men have to be government employees? I never understood that.
I believe that these (evil but necessary) cutbacks WILL lead to future growth, as those entities no longer are adding to their debt levels. They are coming to their senses. I agree this never had to happen, but it did. In the past, decision-makers made very stupid decisions and made stupid financial commitments they could never hope to meet in the future. They were just “kicking the can down the road”. Now the road has run out. There is nowhere else to kick that can. The piper must be paid. That day of reckoning is here. So suffer? Yes of course many will suffer, but that is inevitable and cannot be avoided, being that there is no Free Lunch.
I am actually optimistic.
I have faith that America and the world will solve their problems. But one thing I believe is that this will get much worse before it gets better. China has been following exactly the same non-Real-Saving-backed Credit Creation that we did, only their system has not yet started to implode. For one thing they actually had a lot of Real Savings along with the phony Credit.
This means that their Road for Kicking The Can Down is much longer than ours was. But make no mistake —— their road too will run out.
When it comes to who can lead us out of this mess, there is only one possibility — the private sector. If there is a need for something, and if there is way for the private sector to afford it, it will happen, provided there is a return to be made. That is not the way government works.
Let’s say a road is “needed” from Chicago to the city of Whitehorse in the Yukon. If it is politicians or bureaucrats making that assessment of “need” then the government can just extend a highway up to Whitehorse to ensure that this highway thus becomes probably forever the longest road in the world. But if someone in the private sector made this assessment of “need” then the private sector would first have to raise the funds, which could only be done if enough people were convinced that a return could be made from their invested (hard-earned) money.
There will always be people who cannot afford things. That does not mean society (that is, All the People in their collective) actually owes them those things. But as good people, we owe it to others to help. Certainly if people go hungry, many people help. And so we should. It could just as easily be us who are in trouble.
This is true of medical assistance. In the past, prior to the days of a medical welfare system, doctors and hospitals provided free assistance. Often there were special hospitals for the indigent, operated by say The Catholic Order of the Good Samaritan. Same went for people who could not afford to pay their medical bills. Today, many countries have decided to “socialize” the provision of such services (medical care in this example) so that many national governments now compel taxpayers to pay to ensure that everyone (theoretically) has access to “free” medical care. That’s OK if the people have voted for such a policy.
Not not everyone in Texas, or America, can afford medical insurance. But that is not a failure of the market. No one has ever argued that a “market” will offer every good and service to every person who wants such a good and service.
But most certainly, if you destroy the private sector, you will ensure that there is no one to pay the taxes that would support any kind of social assistance. That is the danger and the choice we face today, in choosing between the solutions offered by Keynesian and those offered by Austrian Economics.
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