For years, elites of the academic, media, and political classes have argued that we should be more like Europe, but now that we have managed to create something akin to the European economy -- high rates of unemployment and high job stratification -- Paul Krugman and others don't like it.
Today, he argues that we need more "jobs programs," that young people cannot find work and that the Bad People in Congress aren't interested in spending billions more in "creating" new jobs for people who cannot find work. Now, I don't make light of people who lose their jobs and often lose their homes and face other financial calamities. Furthermore, it is very discouraging for young people who are graduated from college or even graduate school and then find door after door closed to them.
This is what we have seen in Europe for a long time, and I don't think we should be surprised that this country adopts European-style policies, that we get European-style results. I doubt Krugman recognizes this, and even if he did, he still would advocate that the government create what essentially would be "make-work" jobs.
In the past, Krugman has pointed to the "success" of the WPA during the Great Depression, a program that Krugman has claimed was devoid of politics. The truth is much, much different. Some WPA programs (which tended to be run by local Democratic politicians) required that anyone with a WPA job pay donations to the Democratic Party, and nationally, Harry Hopkins, FDR's right-hand-man who ran the program, used it as a way to buy votes for his party.
(William Shughart and James Couch in their book The Political Economy of the New Deal, do a lot of myth busting in this book, and I would tend to trust some people doing real research as opposed to a guy who has become a party shill under the guise of being an academic economist.)
Today, Krugman claims that the government not only should avoid cutting the budget, but should EXPAND this already unsustainable budget because, after all, interest rates are now very low. (Gee, think that the Federal Reserve might have something to do with this?) Thus, we are dealing with near-free money, he reasons:
Yet polls indicate that voters still care much more about jobs than they do about the budget deficit. So it’s quite remarkable that inside the Beltway, it’s just the opposite.Now, the only references I have seen to "bond vigilantes" in recent times have been in Krugman's columns. Second, cutting government spending is only one aspect of getting our economic house in order.
What makes this even more remarkable is the fact that the economic arguments used to justify the D.C. deficit obsession have been repeatedly refuted by experience.
On one side, we’ve been warned, over and over again, that “bond vigilantes” will turn on the U.S. government unless we slash spending immediately. Yet interest rates remain low by historical standards; indeed, they’re lower now than they were in the spring of 2009, when those dire warnings began.
On the other side, we’ve been assured that spending cuts would do wonders for business confidence. But that hasn’t happened in any of the countries currently pursuing harsh austerity programs. Notably, when the Cameron government in Britain announced austerity measures last May, it received fawning praise from U.S. deficit hawks. But British business confidence plunged, and it has not recovered.
Krugman approaches the subject purely from standard macroeconomic viewpoints. An economy is a homogeneous mass of factors that will become "fully employed" when enough money flows through the system, a "just add money." He has absolutely no idea of what entrepreneurs do, or that they even matter.
The problem, from an Austrian viewpoint, is not that of "idle resources," but instead we have massive amounts of malinvested resources. This country, like other countries in Europe, went whole hog in throwing money into housing at a rate that clearly was unsustainable, and when the crisis finally hit, the government's response was sad, but predictable: it ratcheted up the spending in hopes of propping up the housing market and everything else.
In the end, Krugman really does not believe that there is opportunity cost, or he seems to believe that opportunity cost does not matter when "interest rates are at the zero bound," as though the laws of economics are superseded by high rates of unemployment. The U.S. Government has thrown literally trillions of dollars at this economy and yet we are dead in the water.
It does not have to be like this, but we get the worst of both worlds. We have just enough "spending" to at least give the Keynesians a few bones, but then the government does everything it can to block real entrepreneurs through regulations and tax policies, which means the government is blocking a recovery.
Contra Krugman, contra the "Liquidity Trap" doctrines, the Law of Opportunity Cost is not repealed by low interest rates and high rates of unemployment.
26 comments:
"It does not have to be like this, but we get the worst of both worlds. We have just enough "spending" to at least give the Keynesians a few bones, but then the government does everything it can to block real entrepreneurs through regulations and tax policies, which means the government is blocking a recovery."
See.
http://www.themoneyillusion.com/?p=9247
Dear Mr. Anderson,
I was just wondering are you getting paid for this incomprehensible crap you are writing. I checked your credentials and they are truly "impressive". I would imagine assistant professor in a local community college is not getting paid much.
@anon 10:06:
It's quite obvious from your behavior that you are at the mental age of a middle schooler. In that case, it's rather obvious you lack the ability to comprehend much of economics, and I wonder why you're wasting your time here. Surely you have some colorful blocks you'd rather play with?
"This is what we have seen in Europe for a long time, and I don't think we should be surprised that this country adopts European-style policies, that we get European-style results"
Yes, mainly due to the neoliberal Eurozone and its idiotic fiscal and monetary constraints.
"The problem, from an Austrian viewpoint, is not that of "idle resources," but instead we have massive amounts of malinvested resources."
Which can still be liquidated perfectly well if the economy is stimulated.
What's facinating here is that you rarely give us your Austrian policy presciption for the aftermath of the Great recession.
What is it exactly?? Savage austerity? Massive cuts? Abolishing government and the Fed?
In other words, a more extreme version of the auterity that has turned Latvia to hell:
http://socialdemocracy21stcentury.blogspot.com/2011/03/austerity-new-cross-of-gold.html
@lord Keynes, or at least about: Remember back when I said I missed LK and AP Lerner, them being a bit more intelligent and presenting better arguments than that troll Dan? I take it back. They haven't provided any decent arguments since their return.
@lk: New Rule. As AP Lerner has the nickname 'hut tax', until LK actually demonstrates an understanding of Austrian school principles and debates without resorting to the use of fallacies, he shall hereby be dubbed 'Duchess'.
Lord Keynes explains the MMTers:
"Neochartalism/MMT provides the best theory and empirically-sound explanation of how our modern fiat monetary systems actually work. MMT tells us that the government is the monopoly issuer of its own currency. Hence the government is not revenue-constrained. Taxes and bond issues do not finance government spending. No entity with the power to create and destroy money at will requires anyone to “fund” its spending. Having said this, one must immediately say that, even though deficits are not “financially” constrained in the normal sense, they do face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, labour available (= unemployment level), and external balance. But these constraints are very different from the fictional “financial” constraints imposed on governments in the modern world, where monetising budget deficits (itself an inaccurate and redundant expression and a relic of gold standard thinking) is hysterically denounced from virtually all quarters."
http://socialdemocracy21stcentury.blogspot.com/2010/09/would-keynes-have-endorsed-modern.html
Considering LK’s apparently vast knowledge of the history of economics, isn’t it strange that he hasn’t a clue about Austrian concepts or that his beloved vanilla Keynesianism and the Bolshevik MMT has been eviscerated by the Austrians?
One strange statement from LK (but it's important to understand where our "critics" are coming from):
One could also say that there will probably always be a need for government bonds as risk-free financial assets, so that retirees or people saving for retirement do not have to gamble their money on casino-like financial markets and asset price speculation. Government bonds can thus be considered a type of welfare instrument, so that completely eliminating the stock of such bonds would just hurt savers looking for safe financial assets.
The savings of retirees would be a lot safer if they weren't always being stolen via the government's constant theft by dilution of the funny money supply.
LK, like most of what you post, your article at socialdemocracy21stcentury is complete bunk. You make the claim:
Neoliberal austerity [sc. in Latvia] has created demographic losses exceeding Stalin’s deportations back in the 1940s ... As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labour force) now works abroad.
No go and check some basic facts like, well let's start with the population of Latvia? That might be at least worth a look, just as a quick check.
http://en.wikipedia.org/wiki/File:Population_of_Latvia.PNG
Oh wait, the population peaked in 1991, which hmmm seems to be when they got independence from the Soviet Union. How exactly is "Neoliberal austerity" responsible for a steady emigration that has been happening ever since the borders opened and people saw an opportunity to work elsewhere?
What could have caused this in Latvia????:
The prices of real estate, which were at some points appreciating at approximately 5% a month, were long perceived to be too high for the economy, which mainly produces low-value goods and raw materials. Latvia plans to introduce the Euro as the country's currency but, due to the inflation being above EMU's guidelines, the government's official target is now January 1, 2012. However in October 2007, with inflation above 11%, the head of the National Bank of Latvia suggested that 2013 may be a more realistic date.
Keynesian money dilution creates bubbles and malinvestment and the resulting poverty is blamed on Austrian "austerity".
http://en.wikipedia.org/wiki/Latvia
"Neochartalism/MMT provides the best theory and empirically-sound explanation of how our modern fiat monetary systems actually work. MMT tells us that the government is the monopoly issuer of its own currency. Hence the government is not revenue-constrained. Taxes and bond issues do not finance government spending. No entity with the power to create and destroy money at will requires anyone to “fund” its spending. Having said this, one must immediately say that, even though deficits are not “financially” constrained in the normal sense, they do face real constraints in the inflation rate, exchange rate, available resources, capacity utilization, labour available (= unemployment level), and external balance. But these constraints are very different from the fictional “financial” constraints imposed on governments in the modern world, where monetising budget deficits (itself an inaccurate and redundant expression and a relic of gold standard thinking) is hysterically denounced from virtually all quarters."
Unbelievable. "Normal sense?" Please tell that to Greece which was on the verge of defaulting a couple of weeks ago but the ECB stepped in yet again to save it by pumping up the bailout fund. What happens when Spain and Italy need bailed out next? Or are they too not constrained financially in the "normal sense." I normally like reading criticism of the ABCT (mainly because it is vindicated in the end) but LK's rhetoric is not at all practical when dealing with the modern day financial system. It's is if he is living in a world with a one world currency. Thank you for pointing this out Bob.
I posted the quote "they do face real constraints" because it seems to answer my repeated question to AP "Hut Tax" Lerner about where all the stuff was going to come from to satisfay all of the debt. We all agree that the fiat money government can pay its debts with diluted funny money (which won't buy anything if push comes to shove). LK is stating that there are REAL contraints on the MMT dreams in the REAL WORLD, but, of course, will deny that the obvious implication of such an admission is the demise of both the Keynesian and MMT hoaxes.
More Abba Lerner (the original), the Trotskyite:
Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change.
http://tinyurl.com/4rfk3jk
I'm so glad I went to law school so I could administer the sale and exchange of the rights to change prices. Note, I didn't find any mention or refutation of the Austrians in the above paper. Did you?
"The savings of retirees would be a lot safer if they weren't always being stolen via the government's constant theft by dilution of the funny money supply."
Again the response to this rubbush is that
(1) the anti-FRB Austrians are clueless about the legal/ethical nature of FRB
(2) FRB and fiduciary media have always been a part of modern capitalism - restricting them requires violation of liberty and private contract
(3) Inflationary pressures tend to happen in boom times even under a gold standard - you may as well say:
"The savings of retirees would be a lot safer if they weren't always being stolen via inflationary growth by the private sector's constant theft by dilution of the funny money supply etc etc."
Yeah, savings would be worth more through deflation, but you would choke off the dynamism of capitalism by strangling credit and inhibiting growth, you would hit the economy with debt deflation, and poison business confidence and expectations.
""Normal sense?" Please tell that to Greece which was on the verge of defaulting a couple of weeks ago but the ECB stepped in yet again to save it by pumping up the bailout fund. What happens when Spain and Italy need bailed out next? Or are they too not constrained financially in the "normal sense."
You clearly know very little about MMT.
If you did, you would know that these Eurozone countries have been hit by bond market problems precisely because they have been robbed of their currency, monetary and fiscal sovereignty.
You clearly know very little about MMT.
We know enough about MMT to know that Abba Lerner (1903-1982) wrote a book in 1980 proposing a ghastly and barbaric rube-Goldberg system where one would be precluded from raising (setting) one’s one prices without trading the right to do so with somebody else under penalty of statist law. Apparently, there were more problems within the fiat flick-of-a-keystroke system of theft and fraud than Dr. Hut Tax or LK has let on.
I thought the donut eaters could cure the problems of diluted funny money with just taxes and make things perfect again. Why do we need a "Market Anti-inflation" (MAP) program? ["Market"??]
"rube-Goldberg" should have been written "Rube Goldberg" (Reuben Lucius Goldberg) the cartoonist.
http://en.wikipedia.org/wiki/Rube_Goldberg
"If you did, you would know that these Eurozone countries have been hit by bond market problems precisely because they have been robbed of their currency, monetary and fiscal sovereignty."
And this is a critique of the ABCT and free market economics how?
For the record, as a proponent of free banking, I think FRB is perfectly fine as long as those banks are allowed to fail whenever they become insolvent for whatever reason. It serves as an incentive to not extend enormous amounts of unbacked credit.
As for inflation incurring under a true 100% gold standard, it only would occur as more gold is mined. How else could it occur?
Saying I know very little about something is fine as long as you present your knowledge on the subject to inform me. Stating that I don't know much about a certain subject without elaboration is cop-out.
LK equates the purposeful theft of purchasing power by fiat money dilution with normal changes in market value. According to LK, if your priceless Elvis memorabilia collection loses value over time due to a lessening interest in Elvis, that is no different from a moral standpoint than if your current valuable collection is stolen by thugs. (This demonstrates the true nature of the "debating" techniques of our opponents.)
Further, FRB (as LK admits) is not stable and cannot be justified on a historical basis. Jesus Huerta de Soto has written a 900 page book with the history:
Chapter 3: Attempts to Legally Justify Fractional-Reserve Banking
Why it is Impossible to Equate the Irregular Deposit with the Loan or Mutuum Contract
The Roots of the Confusion
The Mistaken Doctrine of Common Law
The Doctrine of Spanish Civil and Commercial Codes
Criticism of the Attempt to Equate the Monetary Irregular-Deposit Contract with the Loan or Mutuum Contract
The Distinct Cause or Purpose of Each Contract
The Notion of the Unspoken or Implicit Agreement
An Inadequate Solution: The Redefinition of the Concept of Availability
http://mises.org/resources/2745/Money-Bank-Credit-and-Economic-Cycles
FRB might "work" in a laissez faire economy with full disclosure, but then again it might not.
"Further, FRB (as LK admits) is not stable and cannot be justified on a historical basis. Jesus Huerta de Soto has written a 900 page book with the history:"
And that is utter rubbish, as Lawrence H. White shows:
http://socialdemocracy21stcentury.blogspot.com/2011/02/lawrence-h-white-refutes-huerta-de-soto.html
A warehouse receipt (b) for specie (a) is quite a different animal than a 30 year mortgage note (d). A written contract or note for specie deposited with a bank and then loaned out with only fractional reserves as backing (c) is different than a warehouse receipt. There is nothing inherently wrong with any of these contractual forms. White notes this. But you can’t pay for lawn service with a mortgage note. And it's not considered "money" although it has value and can be traded or sold.
The problem comes from passing off (c) as (b). So long as all parties are aware of the nature of the contracts and notes, it is their problem if things go bad. There can be no fraud with full understanding and full disclosure. A third party recipient of notes will probably discount (c) over (b). However, I see a potential problem when people go around passing off (c) as (b) to unsophisticated third parties.
There may be a way to reconcile White and De Soto.
This all has nothing to do with laissez faire. The pre-fed problems caused by FRB were caused by a confusion between (c) and (b), people being MISLED by the nature of their money. Just like under the Keynesian Hoax. Problems will arise if the form of artificially created money makes people think they are richer than they really are.
To the extent deSoto disagrees, don't throw that back at me. This is just a factual, moral and contractual issue that is irrelevant to the importance and truth of Austrian methodology.
?"The problem comes from passing off (c) as (b). So long as all parties are aware of the nature of the contracts and notes, it is their problem if things go bad. There can be no fraud with full understanding and full disclosure. A third party recipient of notes will probably discount (c) over (b)."
Then you have inflation of the money supply by means of endogenous creation of fiduciary media.
All your complaints about the "evils" of "funny money" fall flat on their face.
Same ridiculous contradiction and flaw that all anti-FRB Austrians have.
Then you have inflation of the money supply by means of endogenous creation of fiduciary media.
All your complaints about the "evils" of "funny money" fall flat on their face.
With full disclosure, this isn't "inflation" but merely people valuing various types of money based upon their insight and subjective values. Of course, warehouse receipts will probably be worth more than FRB notes. I still think FRB notes are problematic. Even with full disclosure, I'm not sure people will accept them as money. They certainly aren't traveler's checks. Without full disclosure, they could be just as much trouble as funny money FRB notes. Caveat emptor and all that.
There's no contradiction here. Under laissez faire, you are free by definition of the ravages of the Einsatzgruppen. Under statism, you are not. By definition (kinda like an accounting identity).
"With full disclosure, this isn't "inflation" but merely people valuing various types of money based upon their insight and subjective values."
This isn't "inflation"?? And the sky isn't blue, birds dont fly ...
"Even with full disclosure, I'm not sure people will accept them as money."
You aren't sure? Try looking at history. FRB is as old as the Roman empire:
http://socialdemocracy21stcentury.blogspot.com/2011/02/romans-and-fractional-reserve-banking.html
You have some explaining to do.
I suppose that to the extent FRB notes are discounted vis-à-vis warehouse receipt notes, there will be “price inflation” as to the FRB notes. So what? Then don’t use them. As I have said, I think they will be problematic. Maybe I’m wrong.
The fact that people have been misled or confused historically about the nature of (b) vs (c) only means they need to wake up. Slavery was considered normal for most of history and that doesn’t make it right. This appeal to history as the arbiter of morality is bizarre.
Ron Paul has since at least 1998 proposed an Austrian solution to the Booms and Busts, and now big bust that is plaguing the USA. That is to first end all of these crazy wars including the War on Drugs and close all foreign military bases. Then take that money and reduce the deficits like the USA did in 1946 when hundreds of thousands of US Servicemen returned home to go to work and start businesses.
Then continue the reduction of the military to a size that is adequate to defend the borders of the USA and since the USA has nuclear weapons it can be exceedingly small.
Once done you can then make cuts in the domestic side of government spending to bring the budget into balance or better yet start paying off the trillions owed.
Sounds good to me, but wait Obama like Bush is a warmonger who has consistently broke promises and either kept up, added to, or worse started new conflicts.
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