Monday, April 29, 2013

The Fairy Tale of Our Time

Paul Krugman is nothing if not consistent. Once again, we are told that Kenneth Rogoff is the main reason that our economy is not roaring along like boom times, and that massive consumer spending is what fuels an economy, and that by employing the Debt Fairy and the Inflation Fairy, or, more specifically, putting them on steroids, we can lick this thing and have yet another boom.

Writes Krugman:
Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment.
Thus, the Twin Fairies should make their grand entrance:
So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.
(I can envision the debate in the halls of government around the world in which politicians declare their utter fealty to Ken Rogoff and tremble in fear at the prospect of violating his "90 percent" Rule. Yes, politicians that invariably benefit from spending schemes meant to gain votes are going to tremble in fear lest they disturb The Rogoff.)

Understand that Krugman defines "austerity" as anything short of a massive increase in government spending, with debt and inflation leading the charge, since the economy is not producing enough in order to pay for this spending with taxes. Whatever increases in spending that have come from the Obama administration, they are not enough, not nearly enough.

In Krugman's view, money coming from the sources of borrowing and creating new money is a near-perfect substitute for real wealth, as money borrowed at low interest rates essentially is "free" money and more spending will bring about more capital investment, although Krugman has made it clear elsewhere that capital investment is pretty much irrelevant in the scheme of things, except for the spending that comes with that investment.

Krugman also seems to believe that money borrowed essentially for consumption purposes really is no different than money borrowed for private capital investment. (J.M. Keynes in The General Theory surmised that changes in investment spending were what caused ups and downs of the business cycle, and those changes centered around the "animal spirits" of investors.) In the end, it is the spending and only the spending that matters.

Furthermore, as Krugman wrote last week, the real villains behind supposed austerity are the wealthy "one percent" who benefit from others being out of work. He continues today with that theme:
Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net.
There really is no way to bridge the intellectual gap between Austrians and Keynesians. In the Keynesian view, the "social safety net," massive subsidies for "green energy," and other instances of government spending are the economic equals of private investment. Perhaps Obama said it best when he announced he was delaying action on the Keystone Pipeline and declared that an increase in unemployment benefits actually would be economically superior to investment in an oil pipeline, since new benefits (which would be financed by new borrowing) would fuel immediate consumer spending, as opposed to the spending that would accompany creation of Keystone.

(This is not an endorsement of the pipeline itself. Instead, I am demonstrating how Keynesians and fellow travelers like Obama see an entire economy in terms of nothing but current spending.)

In contrast to the Keynesian position, Bill McNabb of the Vanguard Group writes that what Robert Higgs has called "regime uncertainty" is behind the dearth of private capital investment:
Companies and small businesses are also dealing with the same paradox. Many are in good shape and have money to spend. So why aren't they pumping more capital back into the economy, creating jobs and fueling the country's economic engine?

Quite simply, if firms can't see a clear road to economic recovery ahead, they're not going to hire and they're not going to spend. It's what economists call a "deadweight loss"—loss caused by inefficiency.

Today, there is uncertainty about regulatory policy, uncertainty about monetary policy, uncertainty about foreign policy and, most significantly, uncertainty about U.S. fiscal policy and the national debt. Until a sensible plan is created to address the debt, America will not fulfill its economic potential.
Yes, Krugman derides such thinking as the "Confidence Fairy," but Krugman and the Keynesians want us to believe that as long as government borrows and spends, business investors are going to ignore the heated anti-enterprise rhetoric from the administration, and are not going to be affected at all by hostile regulators from the EPA and Department of Labor, and the new burdens of ObamaCare, not to mention all of the new taxes that Obama is demanding as part of any budget deal. Keynesians can speak all they want about businesses simply waiting for people to spend, but if they believe that the president wants to impose new policies that will negate any future profits, they are not going to invest at all.

As I see it, the biggest fairy tale of all is that government can bring back prosperity by borrowing, printing and spending and substituting Crony Capitalism for the real thing. There is a reason this economy wallows in depression, and empowering the Twin Fairies and a president who believes private enterprise is evil will magically turn around our fortunes. It is more likely that a poor maid can spin straw into gold.


Forrest said...

Okay and I am the first to dislike the remedy that Krugman peddles but lets face ti if the Government does what Krugman suggests there will be a more immediate recovery.
Now I would suggest that it simply sets the stage for more economic problems down the road but in the end are we not going to see the private market do the same thing again anyway even without the help of the Federal Government? In other words will there not ALWAYS be a business cycle of boom bust as that is simply the natural way that the market behaves?
I am not saying he is correct but the logic is SO TEMPTING. Imagine a world where you can never fail, where we will always have the ability to soften the blow of a down turn and then kick back into a real system of actual productivity. IT IS SO TEMPTING.
The real issue is that people do not behave the way Krugman thinks they behave. Which I always figured was the point behind the study of Economics. To understand how people relate money to their lives and make choices on how they will trade.
The fact that people stop spending so much has to do with a realization that they were on an unsustainable road of debt. Yet he argues that this is a non-sequitur belief that people should have. Not understanding that if people believed what he is peddling as the solution, just make it so the Government does not remove the confidence of others, would mean this needed recalculation of risk and the over correction on it would simply build to a larger bubble.
The cycle must be completed or else the following bubble will be even greater.

Just my thoughts.

Dennis said...

So according to the Keynesians, economic actors really only have two choices: spend or hoard. If you hoard, the economy could potentially fill up with hoarded, idle resources and thus collapse while individuals wait for prices of consumer goods to go down. Therefore, government must intervene and force individuals to start spending again.

Does it ever occur to these people that economic actors might have another choice? Ever heard of saving and investment? Saving means that individuals delay consumption and instant gratification in the present for greater production in the future. Yes, this probably means a period of higher unemployment while capital goods and labour are shifted from industries with no future to those which have better prospects. All the more incentive to make the shifts happen as quickly as possible. If you waste time in this matter you just waste jobs. This is a far better alternative than propping up "zombie" industries just because some defunct economist was fixated on spending.

Anonymous said...

Is there really any evidence that uncertainty regarding the regulatory environment or the future of the economy is preventing businesses from spending their cash? My understanding is that numerous surveys shows these are trivial factors at best, and the evidence of such a mindset is anecdotal. Moreover, if businesses thought there was demand for their products and services and they could sell them, it seems contrary to basic economics to think that businesses wouldn't do so. I don't think one can realistically argue that regulatory uncertainty is the cause of lack of business spending. The evidence does suggest a lack of demand in the economy.

Anonymous said...

From Bogart:
Time is the missing factor. It takes time go get products to market. It takes time for people to realign their lives to fit the realities of job loss or business failure. It takes time for companies to adjust to Obamacare and higher minimum wages. None of this happens instantly.

Of course in PK world all of this happens instantly by simply giving people more to spend. If GM and Chrysler are bankrupt then just spend more on un-bankrupting them, how easy can it get? If too much money goes to China then give people more money to spend on things made here. In this world all the benefits come in an instant while the bad results can just be avoided by generating more electronic money.

Cato said...

I love it when someone named anonymous thinks that a sentence beginning with "my understanding is..." is relevant.

Even if we knew who you were, why should we give a damn about your understanding?

At any rate, here's the report in the Wall Street Journal of a study from Vanguard showing that regulatory uncertainty has "created a $261 billion drag on the U.S. economy."

Mike said...

Anonymous at 11:59 AM

Respects Uncertainty: You're wrong. I run a business. My clients are all business people. There is nothing trivial about the uncertainty factor. It is like a wet heavy blanket covering the entrepreneurial spirit imbedded in business. Yes there are exceptions, but robust growth is not built on exceptions.

The lack of demand argument is nonsensical. Human beings have virtually insatiable demand for things and upgrades thereof. There is a lack of ability and confidence.

Pulverized Concepts said...

Krugman isn't upset about the state of American business, the stock market is hovering around an all time high and according to experts corporations are awash in cash. He's defining a recession as a level of unemployment that's higher than "normal", perhaps 10% or even more.

Now if I advertise a job opening for a position that requires a person that shows up for work on time every day, can read and write intelligible English, understands general mathematics, and presents a business-like appearance, out of 100 applicants how many do you suppose would not meet these simple requirements? Do you think it would be more or less than 10? I'm saying that the unemployment rate should probably be higher than it is now, if those requirements are to be met by everyone that holds a job.

It's my contention that the increase in unemployment is directly related to the increase in visible tattoos and piercings.

John Dunham said...

Uncertainty has no effect? While I am no big fan of stuff in economic journals, this one seems timely

Bachmann, Rüdiger, et. al., Uncertainty and Economic Activity: Evidence from Business Survey Data, American Economic Journal: Macroeconomics, April 2013

This paper uses survey expectations data to construct a model of varying business-level uncertainty in Germany. Surprise movements in uncertainty lead to significant reductions in production that abate fairly quickly. The authors then extend the analysis to US data, using forecast disagreement from the Business Outlook Survey as a measure of uncertainty. They find that uncertainty led to more persistent reductions in production than in the US than in Germany.

Anonymous said...

This commentator might have a point in his last sentence.


Admin said...

I did not know until now that "Lord Keynes" had his own blog. How cute.

Keep up the great work Prof. Anderson.

Bob Roddis said...

Philip Pilkington is perhaps three times the monstrous liar as is "Lord Keynes". Pilkington lies about everything. Listen to this podcast of him explaining Hayek.

Where LK would quote Hayek and then misrepresent what the quote meant, Pilkington does not bother with quotes and just lies about what was allegedly written without actually ever having read it. It is clear from the podcast that Pilkington has never read a word of Hayek, even "The Road to Serfdom" which he is allegedly explaining.

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