Wednesday, July 7, 2010

Krugman, Business Spending, and "Regime Uncertainty"

Paul Krugman has laid down a challenge in his latest blog post, claiming that much of the current joblessness is the result of businesses "sitting on a lot of cash, but not spending it." Indeed, he likens this situation to the extreme cautiousness of Gen. McClellan during the Civil War, which brought about the ire of President Lincoln.

At one level, Krugman claims that the reluctance of businesses to spend is understandable, given what he calls "huge excess capacity." (More on the "capacity" argument later.) He declares:
(Reluctance to spend) then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly).

Which brings me to Lincoln and McClellan. General McClellan had raised a powerful army, but seemed disinclined to actually seek battle. So Lincoln sent him a letter: “My dear McClellan: If you don’t want to use the Army I should like to borrow it for a while.” (Yes, there are various versions of the quote).

So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out.
First, the government IS borrowing a lot of cash from businesses and especially from the banks. Second, Krugman is not advocating that businesses seek better deals; no, he is quietly but obviously demanding that government confiscate this "excess cash" if businesses don't increase their spending.

He then throws down the glove: "I have never seen a coherent objection to this line of argument."

My sense is that Krugman has seen "coherent" arguments against this line of thinking, but simply will not acknowledge that anyone else can fashion anything contrary to his own ex cathedra pronouncements. However, in the spirit of Krugman's challenge, I will fashion my own argument, and will lean heavily upon an economist that I really respect, Prof. Robert Higgs.

First, and most important, the "capacity" argument is a red herring that is based upon circular arguments (one of Krugman's favorite tactics). According to Krugman, businesses have large, unused productive capacity that will only become engaged after businesses start spending again. Thus, businesses are causing their own demise, so it is up to the government to break this circular pattern of job destruction and confiscate business cash and spend it wisely.

Once again, we see Krugman claiming that the CAUSE of a recession is less spending, which he also claims in a recent column. Yet, as I see it, this is a violation of what Carl Menger called "The Law of Cause and Effect." Krugman is confusing effect with cause and is missing the larger picture.

He is right that businesses (and many individuals) are putting money in relatively safe places (all of which Krugman would equate to stuffing money in one's mattress), but his circular argument as to why simply fails on its face. However, Robert Higgs has noted many times that "regime uncertainty" on behalf of the Obama administration's actions, which he equates to what happened during the Great Depression.

In 1997, Higgs published a paper in The Independent Review on the Great Depression in which he blamed the "regime uncertainty" promoted by the Roosevelt administration for the lack of long-term investment by businesses. Higgs writes:
Evidence from public opinion polls and corporate bond markets shows that FDR’s policies prevented a robust recovery of long-term private investment by significantly reducing investors’ confidence in the durability of private property rights. Not until the New Deal/war economy ended and resources became available for peacetime production did private investment—and the nation’s economic health—fully recover.
Higgs elaborates on the Great Depression theme in this piece, using a lengthy quote from a member of FDR's "brain trust," noting that FDR's anti-business rhetoric and his punitive policies toward business kept business owners from making longer-term decisions. Higgs in this column equates the current hostility to business by the Obama administration and the equally anti-business Congress to what happened with FDR and points out that we should not be surprised that the present "regime uncertainty" is not going to bring about recovery. He writes:
Speaking to CNBC in Las Vegas recently, Steve Wynn, the billionaire developer and operator of entertainment properties, said: “Washington is unpredictable these days. No one has any idea what’s next . . . the uncertainty of the business climate in America is frightening, frightening to everybody, and it’s delaying recovery.” Wynn complains of “wild, uncontrolled spending” and “unbelievable, unsustainable debt.”

Wynn also has operations in China, and he remarks that he “has no qualms about dealing with the Chinese government. Macau has been steady. The shocking, unexpected government is the one in Washington.” Not very long ago, such a statement would itself have been shocking.

The gambling and real estate magnate expresses concerns about inflation, FHA’s making the same mistakes Fannie and Freddie have made, and the business costs arising from the new health-care law. “We’re on our way to Greece,” he declares, “in the hands of a confused, foolish government.” Exasperated, he mutters, “It’s got to stop. It’s got to stop.”

These observations remind me of similar statements made by investor Lammot du Pont in 1937: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate.” Even members of Franklin D. Roosevelt’s cabinet eventually appealed to him to clear the air in which private investors were finding it difficult to breathe, but he refused to do so, preferring to plunge ahead with the New Deal and to publicly blame “economic royalists” for his policies’ failures.
Now, I am sure that Krugman would claim that the above arguments are nonsense and don't provide a "coherent" argument, but nonetheless I believe Higgs has the much stronger argument than Krugman's claim, which is based upon circular logic.

27 comments:

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jwpegler said...

Krugman is a blithering idiot who is incapable of seeing past his simpleton Keynesian theories and learning from evidence, facts, and history.

Unfortunately for us, the Obama administration is filled with people just like Krugman -- academics who have never run a business or met a payroll. This is problem.

Anonymous said...

You said, "According to Krugman, businesses have large, unused productive capacity that will only become engaged after businesses start spending again."

As I understand PK, he would say that the capacity will be used when *consumers* start spending again. (An economy without consumers is sterile: the businesses just keep passing money around in a big circle.)

You said, "He is right that businesses (and many individuals) are putting money in relatively safe places..., but his circular argument as to why simply fails on its face."

I don't see what is circular about noticing that in the absence of demand (caused in large part by unemployed consumers) businesses are unlikely to spend their cash.

Calling a misrepresented position circular does not make it so.

Anonymous said...

When businesses hold "cash," it's not like they're hoarding dollar bills in a vault somewhere. Quite possibly, the "cash" is actually in the form of short-term Treasury bills, representing money the government has already spent.

Anonymous said...

^ For clarity, that should have been "representing borrowed money the government has already spent."

Nancy said...

I get so tired of Keyensian folks and the Socialist Regime thinking that government has all the answers. They never have and it's not just a matter of finding the "right" people to run a socialist regime. The problem is that people are running it and are fallible and biased and power greedy. Anyone who thinks that any sort of government is not run by greed are simpletons. We are all motivated by meeting our own needs first and it makes sense. Just as if the oxygen masks on the plane pop out you're supposed to see to yourself first, then help others. It's obvious. If you die trying to affix the mask to your child or other seatmate, you both die. Logic should rule the day, not stupidity but that's what we have with the Obaman Regime. Only 7% of his cabinet, Czars and advisors have EVER held a job in the private sector. Dark times my friends, dark times.

Per said...

The post has one serious weakness. It doesn't deal with Krugman's question

But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.

Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs?


The discussion of "regime uncertainty" is irrelevant to that question given the stated premise.

jason h said...

Hey anon is back, too bad he hasn't been paying attention!

Krugman believes decreases in consumer spending leads to decreases in business spending leads to recessions leads to decreases in consumer spending. Quite circular actually.

According to PK the only way to stop this death spiral is for the government to confiscate the private capital through taxation and inflation and spend.

PK flip flops the cause and effect. Blaming decreases in consumer spending for the recession. In fact the recession causes the decrease in spending. But the recession itself is the result of mis-allocations of capital brought on artificial interest rates (aka housing bubble).

Anti Vigilante said...

Please, God. Make. It. Stop.

People don't want to get stuff. Newspapers are imploding. Hollywood is now a department of the ministry of information. People are fed up enough that they are skipping over revolution and going straight to ghetto competition with the big boys. Think of the tenacity of the Free Kevin movement combined with an infectious millennial optimism. People are hungry. They want to be positive actors in their own neighborhoods.

They don't save to hoard. They save so they can have bargaining chips when businesses get cocky.

The great unified dream is dead. Good riddance. We want a vibrant reality not a ride around Disney World staring from an allegedly safe distance.

Businesses will not spend when they have no idea what consumers will purchase.

When will the Chicago austerity elite and the Corporate stimulus elite get off each other's high horses?

By the way, if anyone's keeping score, Barrack Obama is a slick corporate right winger with left cover.

Krugman is a toy to him.

Barking Cat said...

Per,

I think this helps answer the PK question:

"Interestingly, some observers lament that corporations and some individuals are holding their assets in "cash" rather than spending and investing those balances, apparently believing that this money is being "held back" from the economy. What is preposterous about this is that the "cash" that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.

In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be "sideline cash" is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is "not very well.""

Source:
http://www.hussman.net/wmc/wmc100706.htm

Anonymous said...

Sorry, but the Higgs piece and Prof. Anderson's comments on regime uncertainty are total nonsense, ignore basic reserve accounting, and frankly are an embarrassment to the economics profession. Right on time, Yves Smith, someone who understands the monetary system and macro economics, posted an op-ed showing the corporate savings glut began in 2002.

http://www.nytimes.com/2010/07/06/opinion/06smith.html?ref=opinion

Ok, so maybe you don't believe anything in the NYT's since, you know, the evil PK works there. Let's try this in graphical form.

http://www.creditwritedowns.com/wp-content/uploads/2010/07/corporate-profits.png

Ok, so maybe corporations back in 2002 knew the socialist, anti business Obama was going to be elected in 2008, and started hoarding cash. And maybe cows are also jumping over the moon. Why is it you consistently ignore data and facts, especially when they go against your simpleminded ideology? I believe this is called being a hack.

Sorry, but blaming the government for everything that goes wrong in the economy is not economic analysis. It's called whining.

Anonymous said...

Did Krugman just essentially say that he wanted the US government to be a great debt powered engine? If the US government doesn't confiscate the money, wouldn't it have to borrow the money it gave from money it borrowed? That's insane.

jason h said...

Yves Smith is clueless.

To "create incentives for corporations to reinvest their profits in business operations...impose an aggressive tax on retained earnings that are not reinvested within two years."

Sounds like another great way of driving even more capital out of the U.S. All the anti-capitalist and anti-corporate profits talk coming from the Keynesian shills, sounds alot like the FDR comments referenced above. Can we say, regime uncertainty?

abellia said...

What a misinterpretation of Krugman! When he said "I have never seen a coherent objection to this line of argument," he is referring to the idea that government spending creates jobs just as private spending does -- that spending by ANYONE creates jobs.

The idea of monetary "confiscation" is ridiculous. A government taxes to pay for the desires of its citizens. By definition, some of the spending may not be to the liking of any particular citizen. You can petition your representatives to cut spending or to tax less - that is your right.

Inquisitor said...

"Sorry, but the Higgs piece and Prof. Anderson's comments on regime uncertainty are total nonsense, ignore basic reserve accounting, and frankly are an embarrassment to the economics profession. "

Was there meant to be an argument somewhere here?

Inquisitor said...

"Ok, so maybe corporations back in 2002 knew the socialist, anti business Obama was going to be elected in 2008, and started hoarding cash. And maybe cows are also jumping over the moon. Why is it you consistently ignore data and facts, especially when they go against your simpleminded ideology? I believe this is called being a hack."

Who says Obama is the only threat to business out there?!

"Sorry, but blaming the government for everything that goes wrong in the economy is not economic analysis. It's called whining."

Just as trying to defend the government from the consequences of its actions is called being a statist shill. ;D

"What a misinterpretation of Krugman! When he said "I have never seen a coherent objection to this line of argument," he is referring to the idea that government spending creates jobs just as private spending does -- that spending by ANYONE creates jobs."

There was no misrepresentation. Spending by itself doesn't create jobs. There are many coherent arguments against the view that it does, -especially- in govt's case, so Krugman is either an idiot or a liar. Sorry.

"The idea of monetary "confiscation" is ridiculous. A government taxes to pay for the desires of its citizens."

How does it measure and weigh the utility of sating these so-called "desires" (whose in particular) vs opportunity costs incurred in sating them, hm? Sorry but what you posted above isn't economics, it's sheer garbage.

" By definition, some of the spending may not be to the liking of any particular citizen. You can petition your representatives to cut spending or to tax less - that is your right. "

yes, voting, oh so efficient... and if you don't want the government's product? Too bad, you will pay anyway!

Anonymous said...

@ jason h

Explain this chart?

http://www.creditwritedowns.com/wp-content/uploads/2010/07/corporate-profits.png

So regime uncertainty started in 2002? Is that your position? Nonsense

Or maybe Prof. Anderson can explain this data? Or, once again, maybe he'll remain silent when presented with data that contradicts his ideology.

burkll13 said...

Hmmmm......

im trying to think of something that could have happened maybe late 01 that could have led to a dramatic shift in regime direction..... there has to be something........

jason h said...

The chart merely shows profits not distributed as dividends. Where did the cash go? It obviously wasn't saved for a rainy day, or the U.S. wouldn't be in a recession and in late 2008 the corporations wouldn't be sitting on all the freshly printed dollars.

I think burkll13 is on to something...the money printing after the dot com crash and 9-11 (that eventually blew the housing bubble) explains the trend.

I'd say regime uncertainty is an ongoing concern in the USA. The laws change every year, driving productivity and capital overseas, even more so, with a "never waste a crisis" administration. In fact, the only thing that is certain is that the Fed will print money to bail out its friends.

Richard said...

Anon,

Explain a chart that (looks to me) started going parabolic since the early 70's, when the U.S. went off the gold standard for good? To the points made directly above, maybe the coincidental rise in the Adjusted Monetary Base (without gold as a restraint on money printing) played a part. (Of course since 2008 the AMB has gone completely nuts. But look, so has your chart. Hmmm...).

Also, a chart that shows a rising trend through several different administrations does not necessarily refute any effects that might have arisen due to recent regime uncertainty. To me, the chart shows 'undistributed profits' falling off during periods of recession, and expanding again during periods of expansion, when the private economy was adding jobs. Now its showing expansion without private jobs being added. Why the difference? How does this refute regime uncertainty? (Not saying regime uncertainty is the explanation here, but I don't think it merits the label of being an embarrassment to economic analysis).

Richard said...

Correction, wrt to the chart, undistributed profits did not fall off during periods of recession, but fell off prior to recessions (in 1980, 1991, 2000).

Anonymous said...

"The chart merely shows profits not distributed as dividends. Where did the cash go"

Glad you asked. Share repurchases and bonuses, not investment.

"Also, a chart that shows a rising trend through several different administrations"

Exactly, thus refuting Prof. Anderson, who very clearly, and very incorrectly stated above: "However, Robert Higgs has noted many times that "regime uncertainty" on behalf of the Obama administration's actions"

So, to blame Obama for regime uncertainty on a trend that started more than a decade ago is utter nonsense and completely ignores facts, data, and reality.

My overriding point is Prof. Anderson is guilty of the very same things he accuses Krugman of.

Richard said...

Anon,

"My overriding point is Prof. Anderson is guilty of the very same things he accuses Krugman of."

Ok, but please read my post again (not just the first twelve words of the 2nd paragraph). I am saying that, as I see it, your post of the 'Undistributed Profits' chart does not necessarily refute a 'regime uncertainty' thesis and in no way shows Higgs and Andersen to be spewing 'utter nonsense.'

burkll13 said...

"Exactly, thus refuting Prof. Anderson, who very clearly, and very incorrectly stated above: "However, Robert Higgs has noted many times that "regime uncertainty" on behalf of the Obama administration's actions" "

so let me get this straight, Prof. Anderson isnt allowed to criticize the Obama administrations actions that cause "regime uncertainty", because Bush was guilty of it too?? Really, thats a load of crap.

but i suppose you could also be saying that its nonsense because the data would have changed in 10/08. but thats another load of crap. Why should it change? BO didnt really alter Bushs approach, just added on things like nationalized healthcare, the threat of Cap and Trade, the threat of higher taxes, etc. those actions dont and shouldnt inspire confidence.

Anonymous said...

@ Richard and burkll13

Prof. Anderson wrote: "Higgs in this column equates the current hostility to business by the Obama administration and the equally anti-business Congress " and in another post he said: "not to mention Obama's own anti-entrepreneurial rhetoric"

He is blaming the Obama administration for the lack of investing. Instead, if his post stated regime uncertainty caused business to slow investing starting more than 10 years ago, then maybe he has a point. But no, he very clearly is putting this on the Obama administration. Prof. Anderson can criticize Obama all he wants. Obama deserves to be criticized. Except, in this post, the data clearly points in another direction. But since the data does not fit into his narrative, Prof. Anderson chooses to ignore it. He does this often (like equating SS to a Ponzi scheme so he can link Krugman to Maddoff...nonsense).

Many of the posts on this blog lack economic thought and reason, and ignore data. This blog is not an economics blog, it's a blog promoting an ideology. He's a spokesperson, not an economist.

jason h said...

A chart of undistributed profits says nothing about whether or not a corporation is "hoarding" cash. So the data you present does not support your claim about investment slowing 10 years ago.

Inquisitor said...

Tossing around uninterpreted data, then trying to backpeddle when it turns out to work against your favour, is to me the height of ideology... you do realise even if other administrations were characterised by regime uncertainty that this does -not- preclude Obama from exacerbating it?