Wednesday, October 6, 2010

Daniel Gross: Channeling His Inner Krugman

The New York Times has been a fount of Keynesian revivalism, with not only Paul Krugman's frequent columns and blogs preaching the Gospel of Spending but also other writers as well. Today, I look at a column by Yahoo's economics editor Daniel Gross, in which he claims that the nation's economic recovery depends upon individuals using debt to purchase consumer goods.

Gross claims that the real secret of the past success of the U.S. economy has been the fact that U.S. consumers spend a lot of money. I'm serious. He writes: the economy slowly recovers, there are signs that Americans are rediscovering their free-spending ways. Total consumer credit, which includes non-revolving debt like car loans, has stabilized, and it rose in both June and July. It’s back to where it was in the second quarter of 2009. Collectively, we don’t seem to have run our credit cards through shredders. Mailboxes are again stuffed with credit card solicitations. Newspapers are filled with come-ons from car dealers offering zero-percent financing. The Federal Housing Authority offers mortgages on houses for as little as 3 percent down. You’d be forgiven for thinking that we’ve flown back in time to September 2006.

And, believe it or not, that’s a good thing. The economic expansion that has been going along in fits and starts since June 2009 was initially powered by government stimulus and business investment. But for this recovery to mature, broaden and persist, the greatest economic force known to mankind — the American consumer — has to get back in the game. (Emphasis mine)

In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel.
Somehow, it does not surprise me that our "elite" thinkers believe this nonsense. (Almost everyone I have known who has been associated with the NYT has considered himself or herself to be intellectually and morally superior to the rest of us mundanes. Over time, these people really do become caricatures of themselves.)

However, if what he is saying is true, then we really should be passing on this Great Secret. Tell the people of Haiti that if they want to have a thriving economy and recover from the recent earthquake, they need start borrowing lots and lots of money so they can buy consumer goods, houses, and the like and spend themselves into prosperity. As for the goods on the shelves, if you spend, they will magically appear.

I would like to contrast Gross's comments with some real economic analysis from Robert Higgs, who recently wrote:
As every student of the business cycle learns early on, the most variable part of aggregate expenditure is private investment. When real gross private domestic investment peaked, in the first quarter of 2006, it was $2,265 billion, or 17.5 percent of GDP. When it hit bottom in the second quarter of 2009, it had fallen by 36 percent to $1,453 billion, or 11.3 percent of GDP. (Deducting investment expenditures aimed at compensating for depreciation of the private capital stock [Table 1.7.6], we find that real net private investment – the part that contributes to economic growth—in the most recent quarter was only one-third as great as it was at its peak in early 2006.) The ups and downs of the business cycle are obviously driven not by consumption spending, but by investment spending.
The difference becomes even more obvious when we compare quotes from Gross and Prof. Higgs. First, I quote Gross:
John Maynard Keynes wrote of the paradox of thrift — if everyone saves, everyone becomes poorer, because demand for goods and services will fall. Here’s another paradox: Running up consumer debt may be a moral failure and a recipe for long-term damnation, but it also contains the roots of our short-term salvation.
Now I quote Prof. Higgs:
Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption. In the most recent quarter, real gross private domestic investment was running at an annual rate more than 20 percent below its previous peak and, as noted, real net private investment was fully two-thirds below its previous peak.

To bring about this essential revival of investment, the government needs to put an end to actions that threaten investors’ returns and create uncertainty that paralyzes their undertaking of new long-term projects. Gigantic measures such as the recently enacted health-care legislation and the financial-reform law, which entail hundreds of new regulations whose specific content, enforcement, and costs are impossible to forecast with confidence, contribute to “regime uncertainty” and thereby encourage investors to hold large cash balances or to park their funds in short-term, low-yield, less risky securities. Such investments cannot support genuine recovery and sustained long-run growth.

In sum, our crying need at present is for a robust revival of private long-term investment. Consumption-oriented government “stimulus” programs, at best, only ensure a protracted period of economic stagnation.
Gross, like Krugman, seems to believe that all that is necessary for our economy to recover and grow is for the government to shower dollars on everyone, who will then take the money and spend it, and borrow to add to whatever they don't have. And if people and businesses are not willing to spend, then it is up to the government to confiscate that money via taxation and inflation and other methods of coercion, if necessary.

Prof. Higgs, on the other hand, says that economies grow when businesses are able to invest for the long term and find ways to produce more using fewer resources over time. Thus, the value of "investment spending" is NOT the spending per se, but rather the fact that the lines of production in which they invest are able to produce goods that satisfy the needs and desires of consumers.

I would add that the Krugman-Gross-NYT approach assumes that spending is mechanistic and exists only to clear the shelves so producers can put more goods on the shelves again. In that view, production and consumption are not intricately related, and entrepreneurship is useful ONLY in the fact that they are able to provide jobs for people so they can spend, clear the shelves, and put more stuff back on them.

This is not an economy; it is a circular pattern, and in that view, production is useful only in the fact that it keeps people busy. It would be just as useful for people to be paid to dig holes and then fill them afterward, and continue the process indefinitely. And this is the best that our "elites" can do?


Bob Roddis said...

One can quickly discern from reading Krugman blog comments that NYT readers are a bunch of noodle-brains. Their “mindless external (to real human beings) machine” vision of “the economy” which lacks “traction” appears to be impregnable.

BTW, Peter Schiff’s brother snuck a debate challenge to Krugman in the blog comments.

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Dan said...

Peter Schiff on Glenn Beck predicting 30% inflation, martial law, and rolling blackouts in 2010.

What a joke...

Anonymous said...

What is the relevance, Dan?

Anonymous said...

We are not Haiti. We have several, otherwise healthy sectors of the economy that are being adversely affected by the liquidation of malinvestments from the boom.

To think that we should just let the good go down with the bad so prices can adjust seems crazy and wasteful to me.

Inquisitor said...

"We are not Haiti."

Which should not matter... money created out of thin air can create wealth, after all.

"We have several, otherwise healthy sectors of the economy that are being adversely affected by the liquidation of malinvestments from the boom."

Possibly. So what?

"To think that we should just let the good go down with the bad so prices can adjust seems crazy and wasteful to me. "

If they're "good" they can stand on their own feet by offering profitable value propositions to consenting consumers. To think that "we" need to print more useless paper to prop up bad, indeterminate malinvestments for the sake of good, indeterminate ventures is beyond stupid. More thna that, the malinvestments' liquidation frees up resources available to these good ventures. How does one determine where the "stimulus" should go anyway when one takes the specificity of several FOP into mind? It's easy to say "fire up the presses!", much harder to explain what good (none) this will do.

Anonymous said...


Gold up around 20%. Silver 30%.

Riots in Europe (not reported by US media).

Energy costs up around the world.

Protests even in the US.

Schiff's predictions are looking pretty good. And we've still got two months of Fed inflation to go!

Another Anonymous said...

To think that "we" need to print more useless paper Hey, if you think it is useless, send some to me.

Of course printing money in depressions has always done a lot of good. But that's reality for you; never lives up to noble Austrian daydreams. Very easy to say where stimulus should go - US infrastructure has decayed to sh*t since Reagan. Having bridges that don't collapse and levees that don't fail is a real plus to the economy.

money created out of thin air can create wealth, after all. Well, everyone nowadays lives in a money economy, not a barter one. Money economies seem to do better at creating wealth. And there ain't any other way to create money than creating it out of thin air by government spending. That's the source of all the money that you or anyone else has.

Money is a creature of the state, created by governments. Historically pretty much one government = one currency. Not what one would expect if it had been spontaneously generated by "free markets".

We need to keep printing money just to keep up with all the $ the Chinese insist on draining away, deflating our economy (and giving us lots of good stuff).

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