In this column, he attacks people who claim that there are "structural" (that is, institutional) issues of unemployment that are exacerbating the current situation, and certainly some of these would have some merit, even if the Princeton Sage disagrees. For example, the Bush administration pushed home ownership like never before, and now people "own" homes that they cannot sell, so even if jobs are available elsewhere, the families cannot easily move to them.
(I would not be surprised to see one "solution" being what men in the Third World have done: take jobs far away from their homes, and send the money back to their families. That is a fixture of life in Africa and Asia, and we mostly have avoided it here, but that might be changing.)
Krugman writes:
What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve.Hey, it's easy! Just "create" more "demand"! I had no idea!
But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act. (Emphasis mine)
How do we do that? Borrow and print lots and lots of money, there will be "demand" everywhere, the economy will "gain traction," and we are back into prosperity. All it takes is some "intellectual clarity and political will."
Of course, part of that "intellectual clarity" is to operate on the assumption that factors of production are homogeneous, and that there are no "structural" issues of production that will come into play when more "stimulus" is created. An economy? No problem! Y = C + I + G + (X-M), so all we need to do is to increase "G" to cover for a lack of "I" and "C" and the ship will right itself automatically.
From where does the "G" funding come? Why ask? ANY increase in "G" brings prosperity, whether it comes from new taxes or borrowing. (The U.S. Government does not directly "print" new money to pay its bills as we have seen in places like Latin America and Zimbabwe, as new money enters through the banking system. In other words, we are more "sophisticated" in the way we create money, as we use a roundabout way to "print.")
Lest anyone think that Krugman has NOT endorsed new taxes as a means to help bring economic recovery via new "demand," that person has not read this:
If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending.Moreover, he claims that Obama can build a recovery in part on the expansion of "green jobs" and "clean-energy." Now, if that were true, it would be the first time that an economy recovery came about via the expansion of huge subsidies, since the "green technologies" need massive government help just to stay afloat.
In the reality-based world of economics, assets have real values, and if we have to prop up a set of assets via subsidies, then those subsidies must be taken from those assets that are profitable and then transferred to those that are not. Krugman and company argue that over time, these "new" assets will ultimately become profitable on their own, provided government subsidizes them enough. This is like saying that Mao could have made the backyard steel furnaces created during the Great Leap Forward work if he just had subsidized them enough.
No, assets matter. The structures of production matter. This is news to those who operate in the imaginary C + I + G + (X-M) world, but we are not going to end this hell of unemployment until government stops trying to BLOCK the recovery by re-directing assets from higher-valued, profitable uses to lower-valued and unprofitable uses. It is that simple, but Krugman will ignore it in order to push his own Keynesian fantasies.
18 comments:
“Lest anyone think that Krugman has NOT endorsed new taxes “
Could you at least have the intellectual honesty to analyze the full quote? As you linked to: “I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending”
So, anyone honest enough to analyze the full quote by Krugman would recognize he would use the increased taxes to fund more spending. Net net, the deficit remains in place, or moves higher. And those that understand accounting and understand C + I + G +X know the deficit supports private surpluses, which are badly need right now.
http://www.creditwritedowns.com/wp-content/uploads/2010/07/Pimcos_double_entry_bookkeeping.gif
Is raising taxes to fund spending good policy? No. Is it what I would want to happen? No. But to claim Krugman believes that higher taxes will lead to prosperity is not only data mining, it’s dishonest. Even when you are correct in criticizing Krugman, your marriage to your narrow minded ideology clouds what could be a valid criticism.
Any progress on explaining to all of us why rates on government securities keep falling despite higher deficits and all this money printing you claim is occurring? Any thoughts on writing a blog explaining why every time the US government runs a surplus, a credit bubble and depression follows?
Gee, I had no idea we had federal surpluses during the mid-1990s. After all, we had a stock (read that, credit) bubble in the 90s.
As for the "surplus" at the end of the Clinton years, it was a "surplus" only in that it included the surplus of Social Security funds, which immediately went into government securities to fund the deficits of the rest of government.
From what I can tell, you are giving us the post hoc ergo propter hoc fallacy. For that matter, Bush was pushing housing (via the Federal Reserve's policies) at a time when the government was running large deficits. So, your causal chain does not follow.
When Krugman calls for marginal rates at ALL levels of income to go up, he is calling for a tax increase, and he holds that once government takes the extra money from everyone, it will spend the money and help fund a "recovery." I fail to see how making individuals poorer -- and that is what happens when government confiscate more money from them -- is going to translate into making our economy more prosperous.
why every time the US government runs a surplus, a credit bubble and depression follows
For someone who eschews "theory", you sure have a lot of bizarre theories.
When did a credit bubble occur without fiat money or fractional reserve banking (if we are truly looking for cause and effect)?
Also, please please please stop with the "the deficit supports private surpluses" nonsense. We've smacked that one down so many times and you've just slinked away.
“As for the "surplus" at the end of the Clinton years, it was a "surplus" only in that it included the surplus of Social Security funds, which immediately went into government securities to fund the deficits of the rest of government.”
It was a surplus because taxes exceeded spending. The Social Security tax is a tax. A tax is tax. And under Clinton, taxes grew faster than spending. No denying this. I know the law of mathematics sometimes do not apply in Austria land, but until addition and subtraction is repealed, I’ll stick to believing the numbers.
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=86&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1995&LastYear=2001&3Place=N&Update=Update&JavaBox=no
There is no denying that the federal deficit shrunk under Clinton, then turned positive. And guess what happened to the savings rate during that time period? Hint: it fell.
http://www.bea.gov/national/nipaweb/Nipa-Frb.asp
Hmmm…so I guess there may be something to this little statistical fact. You know, accounting does hold.
http://www.creditwritedowns.com/wp-content/uploads/2010/07/Pimcos_double_entry_bookkeeping
“From what I can tell, you are giving us the post hoc ergo propter hoc fallacy”
No, I’m giving you historical facts supported by data. Statistics. Gee, you’re giving us Latin.
“When Krugman calls for marginal rates at ALL levels of income to go up, he is calling for a tax increase”
Yes, but you conveniently leave out the fact he wants to grow the deficit. To just claim he wants to raise taxes and declare prosperity for all is incomplete, and not an honest representation of his point of view. You leave out the part where he wants to increase/maintain the deficit. That’s a pretty big omission. I don’t know the Latin terminology for this, but I’ll just label it incomplete. Or data mining. Or ignoring the facts. Personally, I disagree with Krugman, and would prefer a pay roll tax holiday for all vs. increased spending. A real economist, Warren Mosler, has more intelligent things to say about this topic than you, Krugman, and 99% of the so called Economists in blogger land. And that’s because Mosler is an economist first who actually had to put his money where his mouth as, as opposed to a spokesperson for a narrow minded political ideology disguised as an economist.
And one more thing - how come rates on government securities are lower now, during record deficits and, according to you, massive money printing, than during the late 90's? That just does not make sense according to your logic.
@ AP Lerner:
You would think that the Bush administration's deficits would have stopped the housing bubble in it's tracks, no?
"I fail to see how making individuals poorer -- and that is what happens when government confiscate more money from them -- is going to translate into making our economy more prosperous. "
but, people cant save more unless the government takes more from them
just kidding.....
AP Lerner,
But to claim Krugman believes that higher taxes will lead to prosperity is not only data mining, it’s dishonest.
I think it is an accurate claim:
“Ronald Reagan said that his tax cuts would reduce deficits, then presided over a near-tripling of federal debt. When Bill Clinton raised taxes on top incomes, conservatives predicted economic disaster; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus. Then the Bush tax cuts came along, helping turn that surplus into a persistent deficit, even before the crash.”
http://www.nytimes.com/2010/07/16/opinion/16krugman.html
“We’ve now been through two two-term administrations, one of which raised taxes, the other of which cut them. Which looks like it presided over a more vibrant economy?”
http://krugman.blogs.nytimes.com/2010/07/13/invincible-ignorance/
“After all, while reports of Europe’s economic demise are greatly exaggerated, reports of its high taxes and generous benefits aren’t. Taxes in major European nations range from 36 to 44 percent of G.D.P., compared with 28 in the United States.”
http://www.nytimes.com/2010/01/11/opinion/11krugman.html
(column on European prosperity)
“But the next time a politician tries to scare you with the European bogeyman, bear this in mind: Europe’s economy is actually doing O.K. these days, despite a level of taxing and spending beyond the wildest ambitions of American progressives.”
http://www.nytimes.com/2008/01/11/opinion/11krugman.html
Also, the central thesis of The Conscience of a Liberal is that the Great Compression reduced income inequality, and kicked off an era of American prosperity.
@ AP Lerner:
"And one more thing - how come rates on government securities are lower now, during record deficits and, according to you, massive money printing, than during the late 90's? That just does not make sense according to your logic."
One obvious answer is that the Fed keeps buying bonds as fast as the US Gov't can issue them. It is using what I would call counterfeit money, i.e., money manufactured out of thin air rather than representing genuine savings (money earned but not consumed), but nevertheless the Fed is providing a huge demand for bonds.
A second answer is that we are in the midst of an unwinding bubble, one that wouldn't have existed to unwind without a combination of the Fed's years of artificially low interest rates, plus numerous government incentives, pushed by both political parties, that favored financing asset purchases with debt rather than equity, and pushed people into speculating on real estate. In a collapsing bubble, many investors such as myself buy government paper no matter how low the interest rate, because the government owns the printing press. As you have pointed out, they WILL pay me back by printing up some dollars when the debt is due. You don't point out that the dollars that they print may be fairly worthless by then, but at least I'll get them; if I tried to earn a higher rate than the near zero that government bonds pay, the borrower may go under in the collapse and I wouldn't get my principal back at all. The fact that I lend to the government for almost no interest return reflects my LACK of confidence in the economy's ability to recuperate from the effects of the bubble collapse anytime soon, so I am willing to lose some money, in terms of ultimate purchasing power, to retain something later, rather than try to get a higher return now and get wiped out.
My buying government bonds is a sign of my lack of faith in the government's ability to do the right thing. If there were ever solid signs that the economy were going to grow significantly again, I, and nearly anyone else with any sense, would sell government bonds and buy equity or corporate debt that would bring an adequate return. Then you would see the soaring interest rates on the government's huge debt, the lack of which so far evidently is what reassures you that the government can counterfeit money forever and it is fine. It isn't fine, it is just that given the situation that decades of bad government policies have created, I would rather lend to the counterfeiter than to honest people who may fail to pay me back.
Perhaps you can explain to us why gold, the only thing generally considered throughout the world to be money that CAN'T be counterfeited, keeps going up in value versus the cheesy paper kind. That is the true sign of whether people have confidence in the various governments' money printing schemes.
Remember what McCulley said:
Rather, fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset!
But, you retort, the private sector is ultimately on the hook for the government’s liabilities, so how can those liabilities be considered the private sector’s asset? Simple: They can be sold for hard cold cash. To be sure, someday the government’s debt must be rolled over, or retired. But in real time, government securities are assets of the private sector (or the foreign sector). And for a fiat currency country, there is no reason to think that the debt cannot be rolled over, as such countries have a technology called a money printing press.
I thought the disappearing comment problem was solved, then a recent comment seemed to disappear. Here's a second try:
Robert Wenzel hints that maybe even the CFR is getting sick of the antics of Krugman and DeLong. Wenzel also links to this blog. Make sure you click on “Here’s a good summary”.
@ AP Learner:
"And one more thing - how come rates on government securities are lower now, during record deficits and, according to you, massive money printing, than during the late 90's?"
Answer: Because the Federal Reserve is artificially holding down the interest rate and buying government securities.
AP,
You wrote
“Any thoughts on writing a blog explaining why every time the US government runs a surplus, a credit bubble and depression follows?”
and also;
“There is no denying that the federal deficit shrunk under Clinton, then turned positive. And guess what happened to the savings rate during that time period? Hint: it fell.”
If you believe these observations serve to refute the Austrian Theory of the Business Cycle, I am not sure how they do so.
The Austrian Theory says the business cycle is brought on by artificial expansion and contraction of credit or fiduciary media. Today, the FED directly controls this contraction and expansion (or tries to) through the monetary base.
The chart shows the monetary base over the last 25 years along with the federal deficit. Preceding recessions (grey bars) I see the year over year percentage increase to the monetary base trending downward, suggesting a "cooling off” of credit and fiduciary media. During and after recessions I see the percentage changes increase (the “pump priming”). I only see a federal surplus in ~2000.
http://screencast.com/t/ZjFjOWI2Nz
When the adjusted monetary base is serving to produce a “boom” it is not that surprising to see a fall in the deficit or even a surplus as the government collects more revenue (or see deficits increase during recessions as the gov't collects less taxes). As for savings, during a “boom” we would expect savings to fall, as people feel wealthier (though they really aren’t – hence, among other reasons, the Austrian hostility to artificial credit expansion).
I don’t see how, given the above, a government surplus or fall in savings throws a wrench in the Austrian theory.
“Answer: Because the Federal Reserve is artificially holding down the interest rate and buying government securities. “
But Prof. Anderson says ‘printing’ to buy ‘debt’ is highly inflationary and we are two steps from becoming Zimbambwe. So how can this logic hold? Why isn’t inflation through the roof as all the so called Austrian economists claim it should be?
“If you believe these observations serve to refute the Austrian Theory of the Business Cycle, I am not sure how they do so.”
I have little interest in criticizing ATBC. My criticisms have 100% been focused on Prof. Anderson, Higgs, Murphy, and Austrians in general fundamental misunderstanding of how the monetary system of the US works. FYI – the US is no longer on the gold standard, and is not revenue constrained. Bond issuance is a monetary operation, not a fiscal operation. Any notion of the US government representing a credit risk and is heading for bankruptcy or a Zimbabwe like ending (and Prof. Anderson and his dreamers routinely make this claim) are flat out wrong.
“When the adjusted monetary base is serving to produce a “boom””
So I guess a boom is about to take place since the base is currently high and heading higher? Don’t hold your breath. The monetary base is a function of reserves in the banking system, but the banking system is never reserve constrained, so the monetary base does not influence credit creation. This is counter to everything so called Austrians believe in, which is yet another reason why their comments on the monetary system of a country like the US are just flat out wrong.
This essay by a ‘real’ economist that understands how monetary operations work and understands the relationship between the public and private sectors would be a worthwhile read for Prof. Anderson and everyone else on this blog.
http://bilbo.economicoutlook.net/blog/?p=10384
"would not be surprised to see one "solution" being what men in the Third World have done: take jobs far away from their homes, and send the money back to their families."
The trouble with that "solution" is that the US job markets have been so dysfunctional for so long, and employers so resistant to any kind of relocation assistance, that it would be difficult to get a job far away from home.
And yet, some firms are sitting on large cash holdings, because of the volatility created by the Keynesian tinkering.
There's a lot more going on than skill mis-matches; if it were only that, you'd see employers investing massively in training/education for retained and new employees... if they thought there were a market for the better/additional product expected.
Instead, we see job ads that do not have human contact names, e-mail addresses read by human beings, telephone numbers answered by humans, or street addresses. Since 1983, the amount of bodyshopping and its proportion of the job market has been rising. Instead of savvy humans reading resumes, software parses it and throws the scraps into a data-base, never to be seen by human eyes or conscientiously evaluated by a human mind.
And we see employment and immigration lawyers scamming:
2000-04-24: Joel Stewart _Immigration Daily_
http://www.ilw.com/articles/2000,0424-Stewart.shtm
Legal Rejection of US Workers
"even in a depressed economy, employers who favor aliens have an arsenal of legal means to reject all U.S. workers who apply."
Cohen & Grigsby 7th annual seminar on employment and immigration law:
Larry Lebowitz: "And our goal is clearly NOT to find a qualified and interested U.S. worker... certainly we are not going to try to find a place [at which to advertise the job] where the applicants are going to be the most numerous... we're complying with the law, and hoping, and likely, not to find qualified and interested worker applicants."
Jan (Jen?) Barton: "...those are ways we can disqualify them and get them out of the market... If it gets to the point where they're, somebody's looking like they're very qualified, we ask them to have the manager of that specific position step in and go over the qualifications with them. If necessary schedule an interview, go through the whole process to find a legal basis to disqualify them..."
Alex C: "That... is another incentive... 30 days of recruiting, 30 days of waiting... to get the thing final... The longer you leave it out there waiting, the more you are exposed to people possibly seeing something from the paper 6 weeks ago and saying, "Wait a minute, I qualify"."
(These are not rare, rogue firms. C&G is a large, prominent, award-winning firm, as is Fragomen et al. which has engaged in similar gimmicks, and all are backed by the spokespeople of the immigration lawyers association who called recruiting US citizens a charade they'd like to dispense with.)
"AP Lerner" wrote: "And one more thing - how come rates on government securities are lower now, during record deficits and, according to you, massive money printing, than during the late 90's? That just does not make sense according to your logic."
Rick T. wrote: "One obvious answer is that the Fed keeps buying bonds as fast as the US Gov't can issue them."
I'd like to learn more about this. I've tried looking at the St. Louis Fed (FRED) money supply figures M1 and M2 (and it looks like they stopped publishing M3 solely because it was too embarrassing). And I've tried looking at the 10-year bond rates. It's been a while since I could stand to watch federal debt and deficits.
I'd like to see some graphs that made clear those deficits "leaking" into the money supply, and balancing with the various bond rates and the dollar index, and gold/silver/platinum and retail prices.
I posted some of what I could find, and graphs I made, but that's certainly not the whole story.
@ jgo - at the heart of the matter is neo liberal economists such as Prof. Anderson and other so called Austrian economists still think governments such as the US are on the gold standard, and are actually revenue constrained. They also fail to recognize the relationship between private sector savings, public deficits and the external balance. Prof. Anderson and others continue to buy into neo liberal myths such as the money multiplier and Ricardian equivalence, neither of which exists. Try this
http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf
And this.
http://bilbo.economicoutlook.net/blog/?p=11627
once you recognize the above, it becomes clear rates on US treasury bonds are influenced by one thing, and one thing only, and that’s inflation expecatations.
When did a credit bubble occur without fiat money or fractional reserve banking (if we are truly looking for cause and effect)?
That's the history of the US in the 19th century. When there was a war, the government deficit-spent and inflated. During peacetime, the government usually ran surpluses and deflated. And so there was a panic every seven years or so during peacetime. Surpluses take base money out of the economy, if economic activity is maintained, it can only be through private credit and debt increasing. Neither surpluses nor credit bubbles are not sustainable. And that's how the century ended with the same price levels, by a roller-coaster ride, far less stable and prosperous than the golden age of Keynesianism from 1945-1980.
It is good to read some positive action plan that can lessen the unemployment rate.
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