Friday, May 14, 2010

We're Not Greece, But We're Closer Than Krugman Thinks

In his latest column, Paul Krugman pronounces the obvious: the political and economic situation in the USA is not what it is in Greece. Glad that he could pontificate on the obvious. The question that is relevant, however, is this: Are we headed in that direction? I believe we are.

Furthermore, Krugman seems to contradict his own Keynesianism in the following statement:
We’d be better positioned to deal with the current emergency if so much money hadn’t been squandered on tax cuts for the rich and an unfunded war. But we still entered the crisis in much better shape than the Greeks.
According to Keynesian doctrine, however, it would seem that both the tax cuts (actually, rates at all levels were cut, not just the top rates) and U.S. wars abroad would have "stimulated" the economy, especially since the economy was sluggish when both things were put into place. Furthermore, if budget deficits and government spending were bad then, how are they good now? (Yes, the Democrats are in charge, so whatever they do is good, and while I am non-partisan in my economic approach, Krugman's partisanship is not exactly appealing.)

So, why is Krugman so optimistic now, even though the lower tax rates remain (through this year) and the wars continue? In his own words:
...we have a clear path to economic recovery, while Greece doesn’t.

The U.S. economy has been growing since last summer, thanks to fiscal stimulus and expansionary policies by the Federal Reserve. I wish that growth were faster; still, it’s finally producing job gains — and it’s also showing up in revenues. Right now we’re on track to match Congressional Budget Office projections of a substantial rise in tax receipts. Put those projections together with the Obama administration’s policies, and they imply a sharp fall in the budget deficit over the next few years.
This does not compute if the Bush policies of, well, "fiscal stimulus and expansionary policies by the Federal Reserve," led us into recession. In other words, Krugman has no real causality theory as to why we got into recession in the first place.

Now, Krugman will tell you that the reason things got this was that the government did not effectively regulate the financial markets, which jumped into the housing bubble feet-first. Yet, he ignores the fact that the Fed was pumping money into the system, directing it to housing, and that whole issue of home ownership itself has been pushed by the federal government for more than 70 years, which has meant all sorts of programs aimed at putting people into home ownership that, to be frank, should not be buying houses.

In fact, he has claimed elsewhere that the Fed should be holding down interest rates while the government, at the same time, should make sure that it effectively determines the "safe" havens for the new money. Furthermore, Krugman forever confuses cause with effect by claiming that the recession occurred because people stopped spending, as opposed to the Austrian view that people slowed down their spending precisely because the economy moved into recession.

As for the current "recovery," Krugman still sticks to the false belief that the Fed can print us out of the downturn, and as for claiming our future will not mirror that of Greece simply because this government "controls" its own currency, he needs to get an education. Why? Much of the reason that Greece is not able to make the necessary adjustments is that government spending accounts for a much larger percentage of GDP than our own.

Moreover, the public employee unions in Greece are extremely militant, and they will fight any cuts in government spending. And what does Krugman recommend here? He believes that we need more unionization to push for higher wages (which, in his view, "stimulate" spending) and an expansion of the reach of government.

So, let me get this straight. Greece is worse off than the USA, but the way that we can improve our economy is to be more like Greece -- except for one thing. Greece cannot inflate its currency, given it is on the euro, but the United States Government can print unlimited amounts of dollars, which the ancients once called inflation.

There we have it. Inflation is our economic security. Amazing.


charliemax said...

Krugman will never admit that there is no money. Reality is about to smack him in the face when no one want's to buy our worthless bonds.

joe_z101 said...

"Furthermore, if budget deficits and government spending were bad then, how are they good now?"

Because Bush continued to run deficits and spend despite a growing economy. Please refer us to anything by Keynes that says deficits should maintained during a growing ecnomomy.

dontodd said...

"It’s an ill wind that blows nobody good, and the crisis in Greece is making some people — people who opposed health care reform and are itching for an excuse to dismantle Social Security — very, very happy. Everywhere you look there are editorials and commentaries, some posing as objective reporting, asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need."

Hold a grudge, Krugman? What a political hack.

William L. Anderson said...

Well, Krugman first was running his criticism of the deficits while the economy was pretty slack. Furthermore, Krugman tried to claim that the recession occurred because of tax rate cuts, even though the recession was in March and the tax cuts were not passed until that summer.

In other words, Bush was doing some things that Obama is doing now, but then Krugman was not in favor of them. I think it is called partisanship.

joe_z101 said...

but Bush promised tax cuts before he was even elected. That's what Krugman was critical of. Bush used the recession as cover for his fiscal irresponsibility.

also, if the housing bubble was created by government policies to put people in homes they could not afford as you imply, then why did an equally large commcercial real estate bubble form as well? was that due to government policies to get companies in leases they could not afford?

srf said...

Interesting. We all know Krugman is nothing but a shill for the administration and not really an economist (a nobel prize for transfer pricing does not make one an economist). This is the third time (that I recall) where he has basically advocated solving our debt problem through inflation. Simple. Massive inflation = less debt (except for the fact that much of it is floating rate). He also has no regard for the fact that inflation destroys the wealth of (mostly) the middle class who have financial assets - but not so much the super rich who own physical assets (real assets = cash flow). So since he speaks for the administration, maybe this is how Obama really plans to solve the debt problem and, as an added benefit, wipe out the savings of the vast majority of the population and force them to take government handouts (control).

Brent said...

"also, if the housing bubble was created by government policies to put people in homes they could not afford as you imply, then why did an equally large commcercial real estate bubble form as well? was that due to government policies to get companies in leases they could not afford?"

Joe, you do know that Dr. Anderson, as an Austrian economist, does not lay primary blame on housing policies for the crash like know-nothing republican partisans do, right? Right?

(Hint: he explains the crash using the Monetary Theory of the Trade Cycle, sometimes called Austrian Business Cycle Theory.)

joe_z101 said...

Hi Brent - you sure about that last post? No mention of ABCT here. Just blame the government rhetoric, as usual.

joe_z101 said...

and if you are interested in a non-partisan analysis of the housing bubble and subsequent recession based off reality and actual data, I suggest Barry Ritholz's Bailout Nation.

William L. Anderson said...

Joe, are you claiming that Bush's SPEAKING of tax cuts brought the recession of 2001?

And, no, I don't have to give the ATBC every time I make a post. But I hold to it and you can read about the ATBC elsewhere on my blog and on the Austrian Economics pages.

Brent said...

"Hi Brent - you sure about that last post?"

Yes, I'm sure, Joe. Dr. Anderson has written numerous times on the subject of the ATBC. I'm certain he holds to it as the primary explanation of the crash, thus explaining why it wasn't just subprime residential housing that was hurt.

When someone writes a blog post, they are specializing... focusing on usually just one topic and usually just one angle of one topic. Dr. Anderson is not championing Bush's policies anymore than he is championing Clinton's, even though he does not focus criticism on either Bush or Clinton in this short post. You are committing a logical error when you come to a conclusion based on an omission.

joe_z101 said...

How did you jump to the conclusion that I was claiming the Bush tax cuts had anything to do with the 2001 recession? That, very clearly, is a logical error.

And Brent, sorry, the good Dr. blames government policies for the housing bubble frequently in his writings. But I greatly appreciate the explanation of a blog post.

Maybe someone could address my original question regarding Keynes?

burkll13 said...

"also, if the housing bubble was created by government policies to put people in homes they could not afford as you imply, then why did an equally large commcercial real estate bubble form as well? was that due to government policies to get companies in leases they could not afford?"

it was "equal" in the sense that property values followed a similar pricing pattern, but thats where the similarities end. it is my understanding that aggregate commercial property purchases didnt jump like the residential market did, and new commercial construction actually declined. the price increases were a result in ALL property values increasing from the boost in demand, at the same time construction labor costs were increasing, and commercial properties were being converted into residential properties. and yes, those 3 things are a result of government pushing home ownership.

as for your Keynes question, this is how i see it. you cant acknowledge that increased government spending is harmful in a "good" economy without understanding that there are negatives associated with that policy, and you cant assume that that policy would work in a "bad" economy without assuming there arent any significant negatives. you cant have it both ways. the actions by the government are the same, the process is the same. if you believe that the government can create prosperity in a "bad" economy, then there is no reason to believe that it wouldnt create even more prosperity in a "good" economy. but it doesnt create prosperity, regardless of the condition of the economy.

joe_z101 said...

"and yes, those 3 things are a result of government pushing home ownership."

What you, and the professor seem to fail to realize, is this is a credit bubble that burst. Housing was the largest and caused the most personal pain, but a credit bubble existed everywhere, beyond residential and non residential investment. Did the governments policies to encourage home ownership create a credit bubble in the high yield loan market that exploded? did government policies to encourage home ownership create a bubble in investment grade debt that later exploded? what about the credit bubble in the municipal market? auction rate securities? credit default swaps? So all this was a result of government policies to encourage housing? Nonsense. The data clearly suggests otherwise.

and regarding my question on Keynes. The good professor repeatedly implies Keynesians theory suggests deficit spending is always good for the economy, however, I never recall Keynes ever implying deficit spending in a growing economy is positive. You can debate the merits of deficit spending during deep recessions/depressions, but to imply that Keynesians believe you can create prosperity via government spending during periods the private market is creating positive growth is a misinterpretation or Mr. Keynes.

jason h said...

ALL Austrian economists realize "that this is a credit bubble that burst" caused primarily by artificially low interest rates. Low interest rates in their savings accounts led people to seek higher yields in high yield loans, investment grade debt, the municipal market, auction rate securities, etc.

Austrians do not misinterpret Keynes We know Keynes does not advocate deficit spending in a growing economy, but we also know the laws of economics do not change. How can Keynes correctly say deficits help in a recession but not in a boom? Nonsense, Mr. Keynes is wrong.

joe_z101 said...

Thank you, Jason, for supporting my point by saying ""that this is a credit bubble that burst" caused primarily by artificially low interest rates" and not government policies to promote housing.

SirThinkALot said...

joe, you do realize that the Austrian view is that credit rates reach those artfically low rates because of government intervention in the credit markets(primarly through the Fed's injection of 'funny money' into the banks).

No, it wasnt exclusively the result of government promotion of housing ownership, but it still drives home the point that government is the cause of the business cycle.

jason h said...

The FED prints money and the gov't policies determine were the bubbles grow. College tuition, and housing prices have gone through the roof because of gov't policies. Not only do bankers get cheap money from the FED, the gov't steps in and guarantees loans.

burkll13 said...

[sarcasm] Credit crisis?? This is the first im hearing about this??? you mean to tell me people that shouldn't be getting loans in the first place aren't anymore?? OMG!!!!! [/sarcasm]

in all seriousness, the government helped, with a heavy hand, direct the feds cheap money into the housing market. your assumption that we believe thats the only action that caused this recession, well, i'll call that a logical error. we were talking about it because you were talking about it.