Thus, he reasons, there must be a much darker reason that some people out there seem to believe that piling on more government debt and spending might not have the effects that Krugman claims will be at the end of the tunnel. Isn't he a Nobel winner? Is he not on the Princeton faculty? Did he not receive his doctorate at prestigious MIT? So, to disagree with him is to engage in No-Nothingness!
As the election has approached, Krugman has become even more shrill than usual, laying out personal attacks and portraying anyone who might disagree with him as being motivated by pure evil. Why are they evil? Read the second paragraph again.
In his column today, Krugman now lays our present troubles at the feet of what he calls "debt moralizers." He writes:
“How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills?” That’s the question CNBC’s Rick Santelli famously asked in 2009, in a rant widely credited with giving birth to the Tea Party movement.First, I see Krugman continue his practice of taking stray quotes and fashioning huge movements from them. Being that the vast majority of so-called Tea Partiers could not tell you who Rick Santelli is, I doubt that hundreds of thousands of people have demonstrated across the country in the Name of Rick. (I guess we are supposed to believe that had he not said anything, the Democrats would not be facing huge midterm election losses.)
It’s a sentiment that resonates not just in America but in much of the world. The tone differs from place to place — listening to a German official denounce deficits, my wife whispered, “We’ll all be handed whips as we leave, so we can flagellate ourselves.” But the message is the same: debt is evil, debtors must pay for their sins, and from now on we all must live within our means.
And that kind of moralizing is the reason we’re mired in a seemingly endless slump.
Second, I have not heard any U.S. politician claim that America must be good for its debts to China and other entities that have purchased U.S. Treasury debt, and the notion that suddenly we have become a nation of "debt moralizers" is really silly. Does anyone really think that if the Republicans take over Congress (or at least the House) -- or even the White House in two years -- that the USA suddenly will stop being the world's largest debtor nation in history?
But, even with these Krugman pronouncements, what I find amazing is his belief that the real problem is that businesses and individuals refuse to take on even more debt, and, specifically, that the infamous Housing Bubble was nothing more than a zero-sum game. He writes:
The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing, going far beyond the subprime loans many people still believe, wrongly, were at the heart of the problem. Real estate speculation ran wild in Florida and Nevada, but also in Spain, Ireland and Latvia. And all of it was paid for with borrowed money.Thus, in Krugman's view, the Keynesian Cross really is a Model for the Whole World. The bubble really was nothing more than a huge wealth transfer, and now the people who got the wealth are selfishly squirreling it away. He goes on:
This borrowing made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. But it made the world vulnerable. When lenders suddenly decided that they had lent too much, that debt levels were excessive, debtors were forced to slash spending. This pushed the world into the deepest recession since the 1930s. And recovery, such as it is, has been weak and uncertain — which is exactly what we should have expected, given the overhang of debt.
The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.
Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang.So there you have it. There WERE no malinvestments. All of the assets created in the boom have exactly the same value that they had before the crash occurred. However, those Bad, Bad Moralizers want to see people suffer for their sins:
So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.
But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving.I can't say that I have watched too many "moralizers" flying into a rage, as the Rage Guy is Krugman himself. People who disagree with him, he writes, can only be motivated by Really Bad Intentions, and if you wonder why that is so, read the second paragraph of this post (again).
And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist. Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss, and they start ranting like Mr. Santelli. No question about it: the moralizers are filled with a passionate intensity.
However, in this Keynesian-Cross/Zero-Sum analysis, something does not make sense. If all of this really is a zero-sum game, as Krugman is claiming, then why would the houses have to be sold at a loss? Is the lowering of housing values also a plot by Mitch McConnell and The Forces of Evil? After all, Krugman has written elsewhere that the Austrian Theory of the Business Cycle is nothing more than an economic version of the Phlogiston Theory of Fire. Part of that theory says that credit-fired economic booms also create large amounts of malinvested assets that cannot be sustained over time, and certainly the housing boom/bubble fits that description. (David Gordon wrote an excellent rebuttal to Krugman's portrayal of the ATBC in 1998.)
My point is this: Krugman cannot have it both ways. He is not free to claim both that all that has occurred is a transfer of wealth, and, at the same time, the value of housing truly has fallen. Furthermore, we are not just dealing with a "capacity" issue, as Robert Higgs' "Regime Uncertainty" theory has merit here.
For the past four years, the political Left has controlled the U.S. Senate and the U.S. House of Representatives, and for the last two years, the White House as well. All three entities have been a wellspring of anti-enterprise rhetoric, and we are reading on the NY Times editorial page that government must be more aggressive in criminalizing entrepreneurial error. This hardly is an atmosphere in which any firm would want to invest, given that if a someone were to misread the future, that mistake would mean he or she goes to prison.
Furthermore, Krugman's notion that more spending will cure everything by giving the economy more "traction" is nothing more than the application of circular logic to economic theory. Unfortunately, circular logical today is passed off by our "elites" are Real Wisdom.
When it became evident three years ago that the Housing Boom could not be sustained, the Bush administration and Congress had a couple of choices. They could have realized that it was futile to continue down the same path and to permit the economy to adjust to those assets that were sustainable, or it could pretend that all the economy needed to keep the charade going was to inject more "spending." Not surprisingly, they chose the latter, although now Krugman says that they were not playing Charades aggressively enough. Moreover, he further claims that the Really Bad People know the truth, but just enjoy making others suffer.
No, an economy is not a zero-sum game, nor is it just one big circle in which (to take Israel Kirzner's example) someone eats breakfast so he can go to work, and then goes to work so he can eat breakfast.