Tuesday, June 29, 2010

Krugman's Global Depression Hysteria

I got around to reading liberal economist Paul Krugman's recent NY Times editorial of last Sunday. It's a real scary piece calculated to frighten anyone reading it into believing that only large-scale government spending can possibly save the world.

If only Krugman were more accepting of the facts of the world's first major Keynesian intervention in America in the 1930s. That is, the fact of the failure of FDR's massive borrowing and spending economic regime.

I've read Amity Schlaes' excellent work on the subject, The Forgotten Man. Not only does Schlaes use economic data to refute the commonly-held belief, obviously shared by Krugman, that FDR's massive spending did little, if anything, to facilitate new job growth. She also describes perhaps better than anyone else has how massive government spending, borrowing and money printing naturally accompanies a loss of individual freedoms and a gradual growth in power of the state. Power which never completely recedes.

But, back to Krugman. He contends,

"And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels."

Perhaps if this were 1930s, governments could fool capital markets. But, since this is 80 years later, and deficits have not really declined in that time, investors realize that governments don't really ever stop excessive spending. And programs, once in place, don't end.

Krugman seems to live in a fantasy world of theoretical economics, rather than the real one which, in Adam Smith's time, was more correctly named political economics.

Krugman never addresses what would occur if government simply cut taxes and let people choose to spend or invest. It's not as if money the government spends doesn't ever exist otherwise. Sure, some of the borrowing wouldn't. Certainly the purely printed money doesn't, although some would argue it doesn't truly exist, in that that manner of its creation reduces the value of existing money, thus making the sum remain equal in value.

But, more importantly, Krugman's assumption, going in, is that only government can remedy shortfalls of demand. And that economic cycles are to tamed, not accepted.

Well, we've been trying that recipe, with the exception of the Reagan years, for essentially the 80 years since FDR's massive, ineffective economic tonics.

Krugman ends with a notional nod to global investors,

"It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

It's hard to understand the analytical basis for Krugman's contention in that first paragraph. It's as if he chooses to credit private sector markets when it suits him, i.e., that they appreciate long term fiscal rectitude, but currently punish 'bad policy.'

Could it be, instead, that investors are punishing the obvious fiscal messes that governments around the globe have created? Too much hard-to-service debt, the money from which went to pure consumption by early retirees, universal health care consumers, and so on?

Perhaps that, rather than discount Greece, Greece is the example investors now fear being a global reality?

Let's face it- Krugman simply refuses to acknowledge reality. Spending with borrowed and printed money by governments worldwide, not for lasting investments in infrastructure, but for social welfare consumptions, have hit a wall of unwilling investors. Debts are coming due without matching appetites, at acceptable interest rates, to simply roll those debts over.

The good news is that, ultimately, markets discipline governments. Regardless of Krugman's ignorance of that fact. And we are now seeing that dynamic in play in capital markets' responses to sovereign monetary and fiscal policies.

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