Monday, June 25, 2012

"The Great Abdication" -- Of What?

Perhaps the most constant theme in Paul Krugman's recent columns has been his unwavering belief that the only way out of this depression is for governments to borrow and spend, and for central banks to inflate, and he repeats this theme again in his latest column. The way out, he believes, is easy and painless: borrow, spend, and inflate:
So what should European leaders — who have an overwhelming interest in containing the Spanish crisis — do? It seems obvious that European creditor nations need, one way or another, to assume some of the financial risks facing Spanish banks. No, Germany won’t like it — but with the very survival of the euro at stake, a bit of financial risk should be a small consideration. 

But no. Europe’s “solution” was to lend money to the Spanish government, and tell that government to bail out its own banks. It took financial markets no time at all to figure out that this solved nothing, that it just put Spain’s government more deeply in debt. And the European crisis is now deeper than ever. 

Yet let’s not ridicule the Europeans, since many of our own policy makers are acting just as irresponsibly. And I’m not just talking about Congressional Republicans, who often seem as if they are deliberately trying to sabotage the economy. 

Let’s talk instead about the Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come. 

This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment. 

So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.
 And why are governments (and especially the Federal Reserve System) "abdicating" their responsibility to borrow, spend, and inflate? In a word, Goldstein:
Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. Maybe there’s some other explanation, but the fact is that the Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility. 

None of this should be happening. As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them. 

And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread. 
 To be honest, I am filled with dread, too, but it is not because governments have not been spending enough. Central Banks have been piling new reserves into banks, purchasing government securities, mortgage securities, and other assets and pretending that they actually have real value (as opposed to the paper value of "governments always can print money to pay for these 'assets'"). At home, federal borrowing accounts for 40 cents of every dollar the government spends, yet Krugman claims that this is not enough. 

If governments are abdicating anything, it is responsibility and understanding of the basic creation of wealth. Keynesians have this view that if government increases spending, the new money will trickle down to all of the various factors of production in perfectly proportional amounts so that those factors that are unemployed or underemployed will get a boost, and the factors running at higher rates of employment will not be negatively affected. Not even the University of Chicago financial economists ever came up with a Perfect Market Hypothesis to match this one!

(Krugman now is championing a new cause for the current downturn: not enough spending by state governments. His point is that the projected "job growth" of state employees is not where it is "supposed" to be right now, so the federal government must borrow more and give to the state governments, while taxes in the states need to be raised so that there can be more state spending. You see, there is no such thing as opportunity cost when governments borrow, tax, and spend.)

To buttress Krugman's points, I found another blog which worships FDR and also professes the same kind of thinking that Krugman gives us: government spending is the SOURCE of all wealth. The blog declares:
If I were the head of the US government, the first thing I would do would be to introduce a Job Guarantee program and set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. You can’t do this by “internally deflating” your economy a la Ireland or Estonia.

Franklin Delano Roosevelt understood this better than any of our current leaders. He knew that workers’ wages are not just a cost but a source of INCOME. The mainstream economics profession continues to ignore the income side of the wage deal. Supply and demand are not independent variables, just as fiscal policy cannot be viewed outside the broader construct of the economy as a whole. Mass unemployment occurs when there are not enough jobs and hours of work being generated by the economy to fully employ the willing labor force. This is because there is insufficient aggregate spending. Government spending is the one obvious remedy.
 Notice that the writer does acknowledge that workers wages really are a "cost," but then ignores that fact when he goes into the rest of his spiel. As for causality, that is, why this situation occurs in the first place, fuhgeddaboudit. All of a sudden, people stop spending enough money to keep the Perpetual Motion Machine known as the "circular flow economy" going at "full employment," so government must step in and fill the hole.

Murray Rothbard understood these arguments quite well when he wrote in 1969:
The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx. Marx saw that, before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subject; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. Since these cycles also appeared on the scene at about the same time as modern industry, Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: that these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.
 Unfortunately, we have learned nothing. In the past decade, both the spending and regulatory burdens -- yes, burdens -- of the state have multiplied immensely. Entrepreneurs are finding it more and more difficult to negotiate the legal steps in cities across this country to simply start businesses. In an experiment, John Stossel looked at what it would take for a kid to legally open a lemonade stand in New York City, and he found it would take about 65 days, not to mention the opportunity cost of going through all of the legal procedures.

This is the situation across the country, yet we hear from people like Krugman is that (1) there is not enough regulation of business, (2) increasing the financial and regulatory burdens of government will help create prosperity, and (3) government spending will fill all of the holes and overcome the vast numbers of barriers that governments place in front of entrepreneurs. In fact, if I read Krugman correctly, entrepreneurs are predators, while government regulators protect us, and the income that we are taxed to pay these regulators contributes to prosperity.

The cart truly is before the horse, but Keynesians always will be in denial. Instead, they claim that if government borrows and prints new money in massive amounts, somehow all of this will translate into prosperity. I don't see how that is possible, but I guess everything is possible in Wonderland.


JfW said...

Telling people how they cannot create value is a fine way to stimulate the economy.

JfW said...

Keynesianism varies from sanity because of the following. In the normal world, when you produce something and someone else wants it, they look to exchange for it. Money is merely a conveniently created medium of faith which is backed by value.

Keynesians seem to think money has it's own intrinsic value, because if you produce money someone will produce something of value to clamor after it.

I'm sure this works most of the time, but there is still value missing from the system

Lord Keynes said...

"All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: that these business cycles originate somewhere deep within the free-market economy. The market economy is to blame"

LOL... In fact, that view is the essence of the Austrian business cycle theory.

Since capitalism has an endogenous/elastic money supply, not only from fractional reserve banking, but also even from things as simple as bills of exchange and promissory notes, it will be hit by perpetual cycles as imagined in the ABCT. Hayek even admitted this:

"we can also see how nonsensical it is to formulate the question of the causation of cyclical fluctuations in terms of “guilt,” and to single out, e.g., the banks as those ‘guilty’ of causing fluctuations in economic development. Nobody has ever asked them to pursue a policy other than that which, as we have seen, gives rise to cyclical fluctuations; and it is not within their power to do away with such fluctuations, seeing that the latter originate not from their policy but from the very nature of the modern organization of credit. So long as we make use of bank credit as a means of furthering economic development we shall have to put up with the resulting trade cycles. They are, in a sense, the price we pay for a speed of development exceeding that which people would voluntarily make possible through their savings, and which therefore has to be extorted from them."

Hayek, F. A. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. p. 102.

As for the cult of Rothbard, it's one of the most ignorantly anti-capitalist ideologies imaginable, with its gross misunderstanding of, and hostility to, fractional reserve banking, a fundamental institution of capitalism.

Bob Roddis said...

1. Like Krugman and all of the other Keynesians, LK still does not understand the concept of economic [mis]calculation nor does he incorporate it into his analysis. Thus, in everything he ever says he is simply talking around the gist of Austrian theory. Which means we've won because LK, like all of the rest of them, is afraid to directly engage us.

2. And, of course, LK's still beating that dead horse of FRB, ignoring the fact that private competitive FRB is quite different than government currency FRB

a) in that private FRB would only be not fraudulent if PAYEES have a full and complete understanding regarding the nature of the notes they are accepting AND

b) that any price distortions would only be stated in terms of those notes so that any possible price distortions would be limited and limited to users of a particular brand of notes.

3. In case anyone was still disputing my insistence that the MMTers are central planning commies, try this:

and especially this:

Pulverized Concepts said...

Joseph Tainter's The Collapse of Complex Societies puts Austrian founder Carl Menger's ideas about marginal utility in a different perspective, extending them to the increasing burden of the state on the citizenry with shrinking benefits. We pay immensely more for the research, development, construction and deployment of an F-17 fighter for instance, than we did for a P-51 but don't receive commensurate advantages. The plane still just shoots down other planes and maybe strafes targets on the ground. Adding the expense of one more cop to a metropolitan police force at considerable expense probably doesn't reduce the crime rate at all. Eventually, so much of private resources are devoured by the state that the society itself can no longer function. It's then taken over by adjoining societies, as was the case with the Romans, or disappears entirely, as happened with the Maya. Tainter points out that the globe is so integrated now that any collapse is unlikely to involve just one society, that it will be world-wide.

leptium said...
This comment has been removed by the author.
leptium said... Greetings from Guayaquil - Ecuador, South America.

Bob Roddis said...

If you translate what Krugman is saying, he is saying that PEOPLE JUST DON’T UNDERSTAND OR APPRECIATE THE JOYS AND BLESSINGS OF KEYNESIAN MONEY DILUTION AND UNPAYABLE DEBT. And it’s all the fault of those dastardly Republicans, Ron Paul and those austerian Austrians. The MMTers constantly engage in the same whine.

That’s also my position that average people do not understand or appreciate Keynesianism. Average people have acquiesced in the present system because they have no idea that inflation is a purposeful government policy just like deficits. (It doesn’t help that most people are brain dead.) Heck, only 20% of young people (the Obama cohort) believe that government spending helps the economy.

Keynesianism originally triumphed because Keynes was a genius and the hoax he perpetrated was unintelligible to average people, and even to old economists.
It is our job to alert average people that Keynesianism is nothing but a hoax designed to rob them of their wealth and that inflation is a purposeful policy advocate by real live, but powerful fools. It should have been the aim of the Ron Paul campaign to inform everyone that inflation is nothing but a liberal democrat government policy and then smeared all of its advocates as liberal Democrats stealing your wealth. He failed.

Anonymous said...

I remember when I was struggling to understand economics. None of that made much sense, but hey, who was I to doubt the bunch of geniuses that could come with incredibly complex formulae and mind-numbingly complex theories?

Now I know economists suffer from the problems induced by the law of Triviality. The changes proposed by Keynesians, MMT's and economis alike are so complex non-economists think "hey, they must know what they're doing". We, non-economists, are afraid of being considered a bunch of idiots because we don't understand the complex scenarios and formulae proposed by pretty much all of the modern economists.

Austrian theories were the first ones I could read and really connect to the real world. It makes sense, it is logic and it's been proven correct so many times in the last decades. Obviously, economists like LK will always actively refuse to acknowledge they are not right. After all, how can people say he isn't part of the dust fairies that know how to build the magic powder that will fix the economy? Economists want the state to have power because, well, economics is a professing that has been bought by governments all over the world. It's quite difficult to not defend the same institution that guarantees you a job.

William L. Anderson said...

Like most Keynesians, LK and Paul Krugman have mechanistic views of the economy. It is all a math equation, and all production is nothing more than a production function.

Just stir in money, make sure there is lots of spending, and the production function automatically kicks in. Now, that might be how neo-classicals like to do their analysis, but it is NOT economics. Instead, it is a really perverse version of something the Keynesians claim to loathe: the Perfect Market Hypothesis (or Efficient Market Hypothesis).

The Keynesians believe that if government spends and creates new money and dumps it into the economy, that the market will perfectly sort out things because, after all, there is no such thing as a structure of production. No, it is all homogenous "goo" which just needs some manipulating.

A Singaporean said...

Wow, so many mis-representations of Keynesian ideas. (And I'm just a layman, not an economist, but you guys are making all the classic mistakes we teach in argumentation class.)

Krugman was very accurate when he predicted my country's lack of productivity improvement, in his 1994 paper. It's not a happy thing for us Singaporeans, but we pay the price for putting into power politicians who put their private interests above public ones.

Maybe you could learn from us.

Tel said...

I'm looking at SGPRGDPC vs USARGDPC on the St Louis Federal Reserve research site. Over 50 years, the US "Real GDP per capita" went up by about 270% while over the same 50 years, the same measure for Singapore went up by a freaky 1100% (that's four times better growth than the USA, sustained over 50 years).

Krugman's prediction from 1994 doesn't even show up on the graphs. There's a few tiny wrinkles around 1998 and 2001 and a bit of a dip when the GFC hit. In each case it gets right back onto the growth trend right after.