Friday, March 29, 2013

Our Children ARE the “Ourselves”

Samuel Johnson wrote that “patriotism is the last refuge of a scoundrel,” but in modern America, being “for the children” now has taken that august refuge of the rogue. Thus it is that Paul Krugman has decided to join such company as he appeals to us to think of “our children.”

Krugman doesn’t have any children, but he is such a collectivist that I am sure that he would claim as much “ownership” over my kids as I might do (although no one “owns” kids). I doubt Krugman’s concern for my children would extend to helping pay the substantial bills that accompany their presence.

The normal “cheating our children” has to do with the belief that through government, Americans of my generation (and Krugman’s too, since he and I were born in the same year) have borrowed such huge amounts of money that the debts either will be paid through inflation or through another means that will place a lot of the younger generation in poverty.

Krugman, however, sees it differently. Our “crime” against the children is not borrowing and spending beyond our present means so that we dump huge financial burdens on them in the future. No, our “crime” is that we are not borrowing and spending enough beyond our present means. That’s right; Krugman claims that by seeking to lessen the future financial burdens on our children, we are cheating them.

Why? Because, according to Krugman, if the government borrows lots of money and then spends it immediately, there actually is no effective opportunity cost. He writes:
Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. (emphasis mine)

He goes on to explain how the lack of current spending is depriving young people of teachers, more aid to college, and, of course, he mentions the “I” word, infrastructure. In Krugman’s view, it is a simple thing; just borrow, print and spend, and a strong economy will appear out of the mixture. Malinvestments? No problem. Just spend enough and the economy will expand to the point where there are no malinvestments.

So, there we have it. Borrow, spend, run up the credit card. We "owe it to ourselves," which means that government borrowing also manages to cheat the Law of Scarcity. Borrow now and the kids won't owe anything at all. The Inflation Fairy will do the rest. Just believe and do it for the children. For the children.


Lord Keynes said...

lol.. And I am sure youth now and the young in general would just *love* Austrian liquidationism: mass banking collapse, mass loss of deposits, poverty, economic collapse, and unemployment far worse than anything seen at the moment, economic stagnation for years on end...

Mike said...

"debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves."

The "we owe it to ourselves" rationale should be "we lie to ourselves"

The only reason the US has gotten away with the lie for so long is it has had monopolistic reserve status by edict. That privilege is methodically being reordered and the USD will find itself occupying a different seat on the bus, and not the drivers seat.

Mike said...

The perpetual flaw in LK's premise is that the is no reconciliation of of excess and mismanagement. He plays games with words and speaks as if the Austrian advocate wants the things he describes. The Austrian doesn't not wish for the reconciliation pain but merely acknowledges the inevitability. Better to stop drinking and get through the hang over than keep drinking and destroy the body. But go ahead LK, keep drinking. Others have left the party and are leaving the party to mitigate the hangover.

William L. Anderson said...

LK, do you have any proof that allowing bad investments to be liquidated instead of subsidized by the few companies that are healthy somehow is the only reason we don't have mass poverty? You make the statement as though you have absolute proof that the results are exactly as you claim they will be.

No, Hoover openly rejected Mellon's advice, so you cannot use that one. Hoover intervened in ways that had not been done before.

By the way, if you are correct, then why didn't the Panic of 1921 last until the next millennium?

You claim that the ONLY alternative to inflation and mass borrowing is a horror show. If that were true, then the entire 1800s would have been depressed.

Lord Keynes said...

(1) It is perfectly possible to liquidate unprofitable companies or correct asset bubbles without collapsing the economy.

(2) Hoover intervened in minimal ways.

His weak and uneven fiscal expansion was grossly inadequate in and of itself, and when examined in the context of total state, local and federal fiscal policy had a minimal stimulative effect.

It is easy to demonstrate this. Just observe total state, local, and federal spending from 1928-1933, and you can see that total spending never departed from its 1920s trend line:

Year | Total spending* | increase
1928 | $11.44 | $0.22
1929 | $11.68 | $0.24
1930 | $11.92 | $0.24
1931 | $12.18 | $0.26
1932 | $12.44 | $0.26
1933 | $12.62 | $0.18
*Total US government spending

There is no massive spike in overall spending at all.

As for Hoover's alleged high wage policy -- mostly favoured by a number of private big business and corporate capitalists anyway -- that pretty much ended by 1931 (as even Rothbard admitted), but the economy still crashed.

Furthermore, given the severe debt deflationary dynamics of this era, if wages had been cut far more deeply, then that would only have severely exacerbated the depression: cutting wages when nominal debt levels are fixed by contract just causes more bankruptcy of both debtors and creditors.

(3) I never said depression would last forever. I said for years.

And for the record, the 1870s and 1890s in the US were years of severe economic malaise and debt deflationary crisis: years of rising unemployment and either recession or inadequate growth.

JJ CHimpihan said...

Krugman is a charlatan of the highest order

Elmer Gantry come to life as economist-snake oil salesman


Anonymous said...

Nobody with any political intelligence believes there is any serious concerns about the deficits from the Right-just a bunch of people wanting to pay lower taxes, who want to have intellectual underpinnings for their concerns that don't appear too self-involved.

Only people who care about the deficit on the Right have no power, so who cares?

Pulverized Concepts said...

Using "the children" as an excuse for borrowing and spending is life in the moral basement. Long term, the kids will be able to make their own decisions about what they want and how they wish to pay for it. Imagine if, on your 18th birthday, Dad says to you, "You know, way back when, great grand pappy bought a team of horses expecting a big harvest. But things didn't quite work out here on the farm and those horses still aren't paid for, even though they've been dead for about 90 years. Now it's your turn to chip in some money every month on the note for those ponies." Wouldn't that be just great?

bej said...

Said Bernanke, “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the financial crisis and the recession if—and I stress if—our country takes the necessary steps to secure that outcome.”

His testimony to Congress was very clear: in the absence of private investment, the government's investment (the opposite of austerity measures, even if by austerity measures we mean smaller increases in spending than originally planned)is critical in reducing unemployment and future deficit.

Luckily, whether it's due to a renewed look at the recession brought on by FDR's austerity measures in '37, or more attention being paid to the current failures of the austerity measures in countries overseas recently, it seems like Krugman's position is being both bore out, and gaining traction.

macroman said...

The funny thing about the predictions of dire consequences for our children when they have to repay debt is that it didn't seem to hurt anyone much in the years 1946 to 1976 when debt/GDP fell steadily from 110% to 25%. In fact, most people seem to thing it was a great time.

Could it be that paying back debt in the good times is not so bad, nothing to scare the children about? Could it be that the things which were pruchased with the debt had a lasting effect making subsequent years pretty good?

macroman said...

“Imagine if, on your 18th birthday, Dad says to you, "You know, way back when, great grand pappy bought a team of horses expecting a big harvest. But things didn't quite work out here on the farm and those horses still aren't paid for, even though they've been dead for about 90 years. Now it's your turn to chip in some money every month on the note for those ponies." Wouldn't that be just great?”@pulverised concepts

How about a realistic example: in 1960 your dad in San Francisco says “You know way back in 1930 or so, the Bay Area Counties built the Golden Gate Bridge. We couldn’t afford to pay for it then. We were warned that going into debt during a financial crisis was crazy but we didn’t listen. We voted to borrow and the debt still isn’t paid back. So sorry son you still have to pay tolls, at least until that debt we saddled you with is paid (probably another 5 or 6 years). I am really sorry I didn’t sacrifice more but we weren’t as rich as you and your friends are now. Nevertheless you are our children and we could have borrowed less and you could be driving your Mustangs and Corvettes toll free over that bridge now. Please forgive us.”

Pulverized Concepts said...

Tolls are a straight-forward way of paying for a bridge or highway. Unfortunately, we can see that in the case of Pennsylvania, for instance, public toll roads have been a cesspool of graft and corruption. Projects like that should be done by the private sector.

Dinero said...

Krugman seems to think it is of some profound consequence when he makes the statement
"we owe it to ourselves".
But that observation is irrelevant in analysing what debt spending does in the economy. The transfer in debt spending is not from debtor to creditor. interest aside, - it is from the debtor to the recipient of the spending. He differentiates foreign borrowing but Interest aside - whether the creditor is domestic, foreign, or the Fed the debt equation is the same. The creditor is only re-instated to their original funds, interest aside. The tax payer has less money and the money is transfered to the recipient of the government spending. The children will infact have a higher tax bill in the future. Now if the spending turns out to be a positive investment then the children could be earning more, but that is a different point.

macroman said...

"Tolls are a straight-forward way of paying for a bridge or highway."@pulverized concepts

Getting back to the debt issue and the poor children who had to pay for it, consider another realistic example: the Interstate Freeway system which we know was not paid for by tolls.

Your dad could have the same conversation with you; "Son, Eisenhower/we did this silly thing - he/we decided to spend enormous amounts to build new roads when we had roads already and had enormous debt from WWII, and I'm afraid you have to pay taxes for it, and you never got to vote for it. Yes I know we could have pulled in our belts even more if we wanted good roads, but we were greedy and saddled you with this debt. I know you should have all the benefits of the Interstate Freeways and your parents should have paid for it. Can you forgive us?"

Chad said...

Perhaps you should realize that not all government debt is manifested in material assets.

This means its far worse than the previous examples as all this debt is either paying for direct consumption or useless tasks leaving nothing of value for future generations.

macroman said...

"all this debt is either paying for direct consumption or useless tasks leaving nothing of value for future generations." @chad

I don't believe when you say all this debt is ... leaving nothing of value for future generations" but now you not talking about how debt shouldn't be left to future generations. You are saying money should be spent wisely. And I agree, it is very unwise to spend money unwisely.