Krugman again... here's the thing fellow forumites - I know that most of you are capable of understanding his arguments. Because I believe there is no more pressing issue than what to do with the economy in the political world at the moment, I ask that you please read the article. Once you understand what he is saying you may not agree with it; if so, please make cogent arguments against what you think is wrong with what he is saying.

[krugman.blogs.nytimes.com]

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What, after all, is the story of this crisis? The simple take many of us have now adopted, which I think gets at most of it, runs along the lines of my Sam and Janet story. At any given time there are some people who would like to borrow more at current interest rates, but are constrained by norms about how much debt is too much. If these norms are loosened, they will borrow more — which is in fact what happened between around 1980 and 2007, as deregulation, financial innovations nobody understood, and general complacency led to a broad willingness to accept higher leverage.

Now, if people are borrowing, other people must be lending. What induced the necessary lending? Higher real interest rates, which encouraged “patient” economic agents to spend less than their incomes while the impatient spent more.

OK, so that’s what happens when an economy is engaged in increased leveraging. Then something makes people remember the dangers of debt, and leveraging gives way to deleveraging.

You might think that the process would be symmetric: debtors pay down their debt, while creditors are correspondingly induced to spend more by low real interest rates. And it would be symmetric if the shock were small enough. In fact, however, the deleveraging shock has been so large that we’re hard up against the zero lower bound; interest rates can’t go low enough. And so we have a persistent excess of desired saving over desired investment, which is to say persistently inadequate demand, which is to say a depression.

By the way, this is in a fundamental sense a market failure: there is a price mechanism, the real interest rate, that because of the zero lower bound can’t do its job under certain circumstances, namely the circumstances we face now.

What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.

Now look at what the serious people say: we must have fiscal austerity, not stimulus, because debt is bad; we must not have unconventional monetary policy, because that would endanger “credibility” (where it’s not at all clear what that means).

So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.

It’s really awesome, when you think about — not just that we’re committing this massive act of folly, but that it’s all being done in the name of sound policy.

I like that he alludes to the morality mentality that seems to have an undue influence on some people. They see what is happening as some kind of morality play - people did a bad thing by taking on too much debt and now they have to pay the price for it. It is true that too many people took on stupid debt and they do need to deleverage (reduce their debt), but a LOT of people who are suffering through this quasi-depression did not act irresponsibly but are never-the-less suffering from the economic downturn. Looking at this as purely a morality play is a cop-out for digging in and really getting an understanding of what has happened. Instead of looking at it as a morality play we should look at the situation like engineers trying to solve a problem. We have an economic machine that has the capacity to produce much more goods and services - and very importantly, the jobs that go with doing so - than it is now producing. What needs to be done to fix it? Well, identify the limiting factor. I think that the empirical evidence is clear - the limiting factor is demand. Krugman is saying what a good economic engineer would say in this situation:

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What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.

What are we getting instead of those things? A federal government seized by a paroxysm of austeritism and a Fed that whines that the government should do something rather than itself push capital to stimulate demand by making the cost of holding money too great by making real interest rates negative by creating more inflation. It's like having a broken down car and being told by the mechanics to get down on your knees and pray for forgiveness for your sins rather than them setting about the business of actually making the thing run.



Edited 1 time(s). Last edit at 06/26/2012 09:24AM by Ted King.

its a colorful description of the problem that i largely agree with.

somehow a lot of us have confused virtue with wealth

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Ted,

Unfortunately, I am not an economist, so much of the background to this argument is not familiar to me. However, my first impressions on reading the piece seem to be echoed in the comments below it. These comments speak of a mistrust of government, as well as, structural malformations that prevent an effective use of ever expanding government debt. I think that counter to the persuasive longing to help those who sufer from economic forces beyond their control, a strong argument exists about, for lack of a better term, political cronyism. The money the population intends to help the economy, inordinately benefits those who are politically connected. Of course, the Supreme Court did us no favors with its ulimited money as speech garbage. I hate to be one to watch something burn, but I am less and less hopeful that the cooperation necessary to thrive exists in our society. I wish I could put forth an economic argument for you, but I will have to sit back and try to absorb those that come along.

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August West
Ted,

Unfortunately, I am not an economist, so much of the background to this argument is not familiar to me. However, my first impressions on reading the piece seem to be echoed in the comments below it. These comments speak of a mistrust of government, as well as, structural malformations that prevent an effective use of ever expanding government debt. I think that counter to the persuasive longing to help those who sufer from economic forces beyond their control, a strong argument exists about, for lack of a better term, political cronyism. The money the population intends to help the economy, inordinately benefits those who are politically connected. Of course, the Supreme Court did us no favors with its ulimited money as speech garbage. I hate to be one to watch something burn, but I am less and less hopeful that the cooperation necessary to thrive exists in our society. I wish I could put forth an economic argument for you, but I will have to sit back and try to absorb those that come along.

Do you have a problem with this?

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Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Money is not speech. Is speech money?

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Do you have a problem with this?

Yes, and your reading comprehension is spot on today.

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August West
Ted,

Unfortunately, I am not an economist, so much of the background to this argument is not familiar to me. However, my first impressions on reading the piece seem to be echoed in the comments below it. These comments speak of a mistrust of government, as well as, structural malformations that prevent an effective use of ever expanding government debt.

Yes.

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August West
I think that counter to the persuasive longing to help those who sufer from economic forces beyond their control, a strong argument exists about, for lack of a better term, political cronyism. The money the population intends to help the economy, inordinately benefits those who are politically connected.

To the extent that politicians are willing to seriously consider fiscal stimulation (government) as a means of dealing with an economy stuck in a situation where monetary policy's (the Fed's) most optimum strategies no longer have much affect, then, yes, there will always be corrupt greedy people distorting the egalitarianism of our political foundation to get at that money - as they do for most (if not nearly all) the money spent by the government. Unfortunately, the populist impulse that tends to erupt when that type of corruption gets too great can be usurped into a broad political agenda that actually has little interest in reducing that type of corruption; e.g., what happened with a certain fairly strong strain of early Tea Party groups - and is something the Occupy Wall Streeters are trying to resist (but seem to not be able to create a coherent political force without being usurped).

At any rate, I'd hate to see that argument used only against government programs meant to stimulate demand when the very same dynamic happens in just about every weapons program the Pentagon has (a dynamic that all too often happens in truly gross proportions).

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August West
Of course, the Supreme Court did us no favors with its ulimited money as speech garbage.

I agree with this. (More about this in another post.)

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August West
I hate to be one to watch something burn, but I am less and less hopeful that the cooperation necessary to thrive exists in our society. I wish I could put forth an economic argument for you, but I will have to sit back and try to absorb those that come along.

I think many "middle-class" folks undervalue the huge and necessary amount of cooperation it takes for a modern (even fairly primitive) economic system to run. I'm okay with valuing and rewarding competition and individual initiative, but it needs to be balanced with a firm appreciation of the cooperative nature of, and government regulation necessary for the proper functioning of, a modern economic system. I agree with you that it sure seems like too many folks are out-of-balance, tilted toward undervaluing the role of cooperation.

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freeradical

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August West
Ted,

Unfortunately, I am not an economist, so much of the background to this argument is not familiar to me. However, my first impressions on reading the piece seem to be echoed in the comments below it. These comments speak of a mistrust of government, as well as, structural malformations that prevent an effective use of ever expanding government debt. I think that counter to the persuasive longing to help those who sufer from economic forces beyond their control, a strong argument exists about, for lack of a better term, political cronyism. The money the population intends to help the economy, inordinately benefits those who are politically connected. Of course, the Supreme Court did us no favors with its ulimited money as speech garbage. I hate to be one to watch something burn, but I am less and less hopeful that the cooperation necessary to thrive exists in our society. I wish I could put forth an economic argument for you, but I will have to sit back and try to absorb those that come along.

Do you have a problem with this?

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Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

No, I don't have a problem with that, for two primary reasons. One has to do with the nature of corporations vis-a-vis rights outlined in the Constitution. I think the rights in the Constitution are meant for people, not virtual legal entities formed by people. I wasn't one of those liberals who got down on Romney for saying that corporations are people because he went on to explain that what he meant was that corporations are comprised of people working within the corporate framework. He's right about that, but here's the thing about how that translates in terms of giving corporations as virtual legal entities a right to free speech - if corporations are people (in the way Romney said), then I see no need for a legal entity called a corporation to have free speech rights because the people who make up the corporation already have free speech rights. The same goes for unions and churches as virtual legal entities - it goes for any collective group of people that form a virtual legal entity; the virtual legal entity should get no more rights than those already given to individual people who "work" under the auspices of the virtual legal entity. That isn't to say that I think it is desirable to have a lot of repressive laws that silence collections of people as virtual legal entities, just that I don't think those collectives should have free speech rights apart from the individual free speech rights each person already has and there are times when regulating speech of virtual legal entities is genuinely in the public interest in total.

The other primary reason I agree with this is that no Constitutional freedoms are absolute. To the increasing degree that someone doing and/or saying as they please (taking advantage of their freedoms) causes negative consequences to others, the freedom becomes more and more constrained in general. Property rights are constrained in that you generally can't do something to your property that will have a significant adverse affect on my property. Likewise, freedom of expression also has been accepted to be constrained in many circumstances; e.g., yelling fire in a crowded movie theater, enlistees and draftees into the military have fairly highly constrained freedom of speech, your job is not protected by freedom of speech if you speak out against your employer, etc.

Specifically with reference to the United decision - electioneering laws that limited how and how much money can be spent independent of a candidate were meant to constrain free speech rights that if taken advantage of much too often leads to large negative consequences to the welfare of the citizenly as a whole. The supposedly "conservative" Supreme Court majority that voted for the United decision evidently decided that they couldn't plausibly make the case that corruption wouldn't matter if it happened by granting a liberal expansion of virtual legal entity corporate free speech, so instead they just simply declared that such corruption just didn't, doesn't and won't happen as a matter of fact. (Which will go down in the history of the Supreme Court as one of the most asinine statements ever written in an opinion.) I think they are so embarrassed by the lameness of that judgment that when the State of Montana tried to argue that their history does indeed show that allowing such freedom can lead to wide and deep corruption (IOW, that their history says that the court's judgment that such corruption can't happen is factually incorrect), that the same "conservative" majority figuratively stuck their fingers in their ears by refusing to even hear the State of Montana's argument. It's shameful.

We could have a better reality show than anything on TV if the Fed would just tack a couple of zeros onto the end of everybody's bank account balance in the U.S.

That'd be pretty stimulating, broadly-based.

Seems the Brits were on the road that Krugman examples and while it may not have been getting better for them it wasn't getting worse. Then they changed governments and installed Conservatives who immediately installed austerity measures. Within months the British economy was once again in a downward spiral that it's yet to recover from.

Ask the Japanese how well austerity works, they'll tell you it dosen't.

Austerity is a banker's solution to a geopolitical problem.

People like "austerity" because of its negative impact on the lower and lower-middle classes: two groups of people who do not deserve any of the promise this country is supposed to offer. If they were worthy of any consideration, they wouldn't be in that position.

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"You can believe me because I never lie and I'm always right."