"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.