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Myths of Austerity?

Leo Kolivakis's picture




 

Via Pension Pulse.

I want
to follow-up on an article Paul Krugman published a few days ago in the
NYT, Myths
of Austerity
:

When I was young and naïve,
I believed that important people took positions based on careful
consideration of the options. Now I know better. Much of what Serious
People believe rests on prejudices, not analysis. And these prejudices
are subject to fads and fashions.

 

Which brings me to the
subject of today’s column. For the last few months, I and others have
watched, with amazement and horror, the emergence of a consensus in
policy circles in favor of immediate fiscal austerity. That is, somehow
it has become conventional wisdom that now is the time to slash
spending, despite the fact that the world’s major economies remain
deeply depressed.

 

This
conventional wisdom isn’t based on either evidence or careful analysis.
Instead, it rests on what we might charitably call sheer speculation,
and less charitably call figments of the policy elite’s imagination —
specifically, on belief in what I’ve come to think of as the invisible
bond vigilante and the confidence fairy.

 

Bond
vigilantes are investors who pull the plug on governments they perceive
as unable or unwilling to pay their debts. Now there’s no question
that countries can suffer crises of confidence (see Greece, debt of).
But what the advocates of austerity claim is that (a) the bond
vigilantes are about to attack America, and (b) spending anything more
on stimulus will set them off.

 

What reason do we have to
believe that any of this is true? Yes, America has long-run budget
problems, but what we do on stimulus over the next couple of years has
almost no bearing on our ability to deal with these long-run problems.
As Douglas Elmendorf, the director of the Congressional Budget Office,
recently put it, “There is no intrinsic contradiction between
providing additional fiscal stimulus today, while the unemployment rate
is high and many factories and offices are underused, and imposing
fiscal restraint several years from now, when output and employment
will probably be close to their potential.”

 

Nonetheless, every few months we’re told that
the bond vigilantes have arrived, and we must impose austerity now now
now to appease them. Three months ago, a slight uptick in long-term
interest rates was greeted with near hysteria: “Debt Fears Send Rates
Up,” was the headline at The Wall Street Journal, although there was no
actual evidence of such fears, and Alan Greenspan pronounced the rise a
“canary in the mine.”

 

Since then, long-term rates have
plunged again. Far from fleeing U.S. government debt, investors
evidently see it as their safest bet in a stumbling economy. Yet the
advocates of austerity still assure us that bond vigilantes will attack
any day now if we don’t slash spending immediately.

 

But
don’t worry: spending cuts may hurt, but the confidence fairy will take
away the pain. “The idea that austerity measures could trigger
stagnation is incorrect,” declared Jean-Claude Trichet, the president of
the European Central Bank, in a recent interview. Why? Because
“confidence-inspiring policies will foster and not hamper economic
recovery.”

 

What’s the evidence for the belief that fiscal
contraction is actually expansionary, because it improves confidence?
(By the way, this is precisely the doctrine expounded by Herbert Hoover
in 1932.) Well, there have been historical cases of spending cuts and
tax increases followed by economic growth. But as far as I can tell,
every one of those examples proves, on closer examination, to be a case
in which the negative effects of austerity were offset by other
factors, factors not likely to be relevant today. For example,
Ireland’s era of austerity-with-growth in the 1980s depended on a
drastic move from trade deficit to trade surplus, which isn’t a
strategy everyone can pursue at the same time.

 

And current examples of austerity are
anything but encouraging. Ireland has been a good soldier in this
crisis, grimly implementing savage spending cuts. Its reward has been a
Depression-level slump — and financial markets continue to treat it
as a serious default risk. Other good soldiers, like Latvia and
Estonia, have done even worse — and all three nations have, believe
it or not, had worse slumps in output and employment than Iceland,
which was forced by the sheer scale of its financial crisis to adopt
less orthodox policies.

 

So the next time you hear
serious-sounding people explaining the need for fiscal austerity, try
to parse their argument. Almost surely, you’ll discover that what
sounds like hardheaded realism actually rests on a foundation of
fantasy, on the belief that invisible vigilantes will punish us if
we’re bad and the confidence fairy will reward us if we’re good. And
real-world policy — policy that will blight the lives of millions of
working families — is being built on that foundation.

Mr. Krugman has been busy lately, appearing on
Charlie Rose
, and on Sunday he took part in the roundtable
discussion on ABC's This Week
, discussing the jobless recovery and
why he was correct that more stimulus was needed in the first package.

Krugman
also appeared
on CNN's Fareed Zakaria
stating that more needs to be done to shore
up the economy in the form of spending on public works and other
programs. On the flip side, Mr. Zakaria interviewed Harvard economic
historian Niall Ferguson who thinks we need to stop spending and
"radically simplify the tax code" to shore up business confidence. I embedded the video with both interviews below and will go over a few key points.

First, as I have
stated before, implementing austerity measures at a time when private
sector recovery is still fragile is very dangerous and will ultimately
threaten the global recovery
.

Second, Krugman is right
that austerity will work against governments trying to shore up their
fiscal position. Why? Because if austerity slows the recovery, or worse
still, kills it, then governments will see their tax revenues shrink
dramatically. Imposing austerity measures during a fragile recovery is
akin to engaging in fiscal suicide.

Third, Krugman is right
about Ireland, Latvia and Estonia. They all implemented savage cuts,
unemployment went up, as did the cost of insuring their debt, and
government revenues dwindled. It has been nothing short of a monumental
disaster.

Fourth, "invisible bond vigilantes" do not pose a
serious threat for the US or even Japanese bond market. Bond vigilantes
can easily pick on Greece, Portugal and maybe even Spain, but that game
has run its course too. The Europeans finally woke up and sent out a
strong signal to speculators in the form of a trillion
dollar gamble
.

Importantly, the
big, bad bond vigilantes are simply no match for the Federal Reserve and
they know it. Bernanke can squash them like a bug if they get too smug
and start speculating on US sovereign debt.

Fifth, as I wrote in
my last comment, the bond market is more
worried about a 1930s echo
right now, which is driving yields
lower. If they were more worried of massive fiscal crisis leading to a
run on the US dollar, then yields would be skyrocketing up, not down.

Sixth,
I do not agree with all of Krugman's proposals. Spending on public
works is not a long-term solution to bolstering the labor market. You
need to implement a much more radical approach which will target new emerging
industries. I was happy to see president Obama announce that the
government is handing out nearly $2
billion for new solar plants
, but this is a drop in the bucket,
basically peanuts.

Seventh, I think Mr. Ferguson is right that
we need to simplify the tax code, but I prefer a consumption tax which
does not penalize low income families over any flat income tax. Mr.
Ferguson was coy stating that "Keynesian policies were an abysmal
failure in the past". It wasn't Keynesian policies that led to the 1970s
stagflation episode, but supply shocks and funding the Vietnam war
through expansionary monetary policy.

Finally, one thing
Krugman said on ABC's This Week really struck me. He said he doesn't
like the term 'double-dip' because even of the US economy grows at 1%
but unemployment rises to 10.5%, it won't technically be another
recession, but that doesn't mean much to those who are currently
struggling to find work.

We are at a crossroad. Millions of
unemployed people are losing hope, waiting for policymakers to come up
with a program targeting job growth. Instead, all they are seeing is
political feuding that doesn't address the central core issue - jobs.
It's as if politicians have run out of ideas and go with whatever the
latest poll tells them is the flavor of the day. The lack of leadership
from politicians and business leaders during these unnerving times is
truly disheartening.

Let me end by wishing all my US readers a
Happy Fourth of July. As bad as it gets, never lose hope in America.

 

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Mon, 07/05/2010 - 08:18 | 452837 Catullus
Catullus's picture

So how do the government know which projects to allocate money to? Do they have some magic CBA tool with a "social welfare" plug in the model?  Did they buy a crystal ball from Best Buy to tell them which project will be most benefitial?  And who will this be benefitial to? "Society as a whole"? 

There's no objective way to assess it.  And the long history of abuse through government spending just constantly invites the crony capitalists back to the honeypot.  The only idealism that goes on with this discussion is people assuming that the government could direct resources in some sort of pragmatic manner.

Sun, 07/04/2010 - 16:35 | 452066 WaterWings
WaterWings's picture

You need to a much more radical approach which will target new emerging industries. I was happy to see president Obama announce that the government is handing out nearly $2 billion for new solar plants, but this is a drop in the bucket, basically peanuts.

LOL! CHINESE SOLARS BITCHES!!!

You can't drink the hangover away if it ain't water. 10am is coming, whether you like it or not. The sun also rises.

Sun, 07/04/2010 - 16:30 | 452062 knukles
knukles's picture

The fundamental precept upon which the discussion rests is whether governmental spending and taxation effect a multiplier effect greater than, equal to or less than 1. 

Very little of the vast majority of rigorous intellectual and statistical/mathematical work has suggested other than a multiplier less than 1.

QED

Sun, 07/04/2010 - 17:54 | 452183 ozziindaus
ozziindaus's picture

Three Examples of Total Rubbish

  • People who think crack addicts can smoke crack to cure their addiction
  • Alcoholics who think they can drink their way out of alcoholism
  • Debt junkies (and Keynesian clowns) who think one can spend one's way out of a spending problem

I've followed Mish's logic and subscribe to his views well. But I believe in this case he is missing an important point.
  • Consumers who think they can consume their way back to prosperity.

Absolutely. Why not?? As long as manufacturing repatriates back to the US AND new technologies are pioneered in the US as seen may times before. A $14T consumer based economy is sustainable but requires reinvention continuously. 

Mon, 07/05/2010 - 01:22 | 452661 TBT or not TBT
TBT or not TBT's picture

"A $14T consumer based economy is sustainable but requires reinvention continuously. "

Somebody has to produce what the consumers want, however.   If incentives for doing so are removed, the repatriation and/or reinvention of the reproductive economy does not occur.   Welcome to Obama-/Reido-/Pelosi-nomics.

I'm trying to remember the name of the economic theory that worked before.   Had the words "supply" and "side" in it.   The cheerleader in chief at the time kept carrying on about "freedom" and what not.   Help me out here.

Sun, 07/04/2010 - 20:07 | 452295 Temporalist
Temporalist's picture

How about the fact that that consumerism is based in debt and not real savings or income but just "potential" income.

Now that the entire U.S. and most of the world has learned the lessons of governments, i.e. spend and pretend, they want to continue the same insanity endlessly.

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein

Sun, 07/04/2010 - 18:07 | 452196 Shameful
Shameful's picture

How do you propose to bring the jobs back?  What madman would open a manufacturing plant in the US?!?!  Explain to me why an industrialist would not seek low wages overseas or Mexico.  Remember because of NAFTA and GATT it's not like we could raise tariffs.  So America has to offer, high wages, high regulation, and gov uncertainty to the potential industrialist.  So who is going to build these factories here?

The industrial economy has already left the barn, and we need to accept that and look at the position we are in.  If we want it back changes have to be made not even more government intervention.

Sun, 07/04/2010 - 18:24 | 452214 ozziindaus
ozziindaus's picture

You're right. Repatriation is a stretch since it was corporate driven with political coercion. But now that that's done and buried, it's time to focus on the second point. Invest in new technologies that command a premium and ones that can be sustainably manufactured in the US. Without this, we are nowhere near competitive. 

PS. IBM issues more patents than all of China combined. That's what i'm talking about. Hope we can maintain the drive to propel us out of this shit. 

Sun, 07/04/2010 - 19:14 | 452224 Shameful
Shameful's picture

And?

Guess where those innovations go?  They go overseas to boost productivity in their facilities. So the gains in productivity from those innovations leave.  I'm failing to see how this helps us.  Sure we can employee a few million of the smartest Americans as scientists and engineers in high skill positions.  However we can't swing a nation of 150+ million scientists.

New innovations will head out the door because through a combination of factors it is better to run industries in places other then America.  Unless we change that then the innovations won't make a lick of difference and will only boost up the productivity of overseas facilities.  After all where is Apple making all it's innovative gadgets?

Sun, 07/04/2010 - 16:41 | 452080 geminiRX
geminiRX's picture

"First, as I have stated before, implementing austerity measures at a time when private sector recovery is still fragile is very dangerous and will ultimately threaten the global recovery."

- Leo, get your lips off the government tit. Austerity should have happened on day 1 after Lehman collapsed. We would be in much better shape for recovery now (i.e. purged all marked to market diarrhea and derivatives from the economy). What kind of person celebrates an economic recovery (er...falicy) built entirely upon taxpayer "stimulus"? I appreciate an opposing view from time to time, but your thoughts are becoming a little ridiculous. Do you run your household like the US Fed runs theirs (I seriously doubt it)? Do you have children (austerity not passed now - means you hand the shit to the next generation)?

 

Sun, 07/04/2010 - 17:31 | 452155 ozziindaus
ozziindaus's picture

Austerity should have happened on day 1 after Lehman collapsed.

Correct but it didn't and now that the same banks who contributed to the collapse have recapitalized using public money, why strengthen their position by cutting spending on the productive economy?? This is exactly what the bailed-out-beneficiaries want. Would you rather suck the governments tit or the banks dick?

Sun, 07/04/2010 - 17:04 | 452103 Leo Kolivakis
Leo Kolivakis's picture

Last I checked, governments were never run like households. If you still have not figured why, then you don't understand public economics 101. Also, I am not advocating spending just for the sake of spending. I want targeted spending on industries of the future. Finally, if we had let AIG collapse, the entire world would have been purged straight into a living hellhole. I do not need to speculate on that, and don't tell me otherwise.

Mon, 07/05/2010 - 01:59 | 452691 faustian bargain
faustian bargain's picture

targeted spending on industries of the future

It's called free markets. Which we don't have, and won't, as long as the Fed is in charge.

Mon, 07/05/2010 - 01:15 | 452657 TBT or not TBT
TBT or not TBT's picture

"If you still have not figured why, then you don't understand public economics 101. "

Um, no.  We DO understand "public economics 101", as currently practiced, and we're pissed off.   T.E.A. party is not about some sexual depravity (however entertaining), it is about Taxed Enough Already.   A group of bureaucrats backed by heavily armed police and extensive jails is motivation to keep your head down, and at some point to restrain or withdraw your productive zeal.   This is where the country is today, beyond that point in the curve where enough for the government is way too much for We The People.   The result won't be a double dip, but rather, as Mish explains, a failure to ever exit the initial dip before the next long painful leg down.

Sun, 07/04/2010 - 23:54 | 452539 Hulk
Sun, 07/04/2010 - 23:44 | 452529 Nihilarian
Nihilarian's picture

 I want targeted spending on industries of the future.

Last time I heard a comment on this level of asininity I was being indoctrinated with the virtues of FDR's New Deal in High School. 

Sun, 07/04/2010 - 22:21 | 452409 OldTrooper
OldTrooper's picture

I want targeted spending on industries of the future.

Leo, I don't think government can predict what the industries of the future will be. 

And I certainly don't want the government to pick what the industries of the future will be.

It's a very bad idea to get the next wave of malinvestment started before we clear out the last one.

Mon, 07/05/2010 - 08:05 | 452828 docj
docj's picture

Leo, I don't think government can predict what the industries of the future will be.

Leo is not interested in the Fed.Gov investing in "the industries of the future" - what he wants is for the Fed.Gov to pour tons of other peoples' money into what he is invested in so he (Leo) can make a killing.

Nothing more.  Nothing less.

Sun, 07/04/2010 - 21:12 | 452347 Kayman
Kayman's picture

Rewarding the arsonists for burning the economy to the ground sounds like fine social/economic policy to me. (sarcasm off)

Until the rotten toilet paper contained in the Wall Street Casino and the Fed are written down, until criminal charges of fraud and conspiracy against Treasury and Fed officials (past and current) are implemented, this economy is going nowhere.

Trust is lost. Look at the oil mess in the GOM - no one is in charge of this rudderless ship.

Of course Leo governments are never run like households- household spend their own money, not the money of others, and if households borrow more than they can repay, they go broke.  

If not for passing an insurmountable debt load onto our children and grandchildren I would say go ahead Leo and Kruggy- burn Rome to the ground.

 

Sun, 07/04/2010 - 20:25 | 452309 exportbank
exportbank's picture

Leo.. PLEASE speculate on that - every time some shit box company that should have failed was kept on very expensive life support the reason given was "end of the world". How about we revert back to capitalism and allow scummy, thieving worthless companies fail. They would have died because they sold insurances (CDS) to others that had no insurable interest in what they bet on. I'm sick and tired of watching what was a good economic system be turned into world of businesses that can't stand on their own two feet with management that pays itself billions. I guarantee that the day after the end of AIG the sun will rise and we'll deal with the issues.

Sun, 07/04/2010 - 19:09 | 452256 AR15AU
AR15AU's picture

Your ability to reason is a disgrace.  Since when does Nancy Pelosi have a handle on which industries are best to invest in.  Central planners are not smarter than the free market.  You can't just dump a trillion dollars into solars and expect rainbows and unicorns.

Sun, 07/04/2010 - 19:18 | 452261 ColonelCooper
ColonelCooper's picture

LMAO

Sun, 07/04/2010 - 18:52 | 452248 ColonelCooper
ColonelCooper's picture

"I want targeted spending on industries of the future."

Translation:

I want more governent subsidies thrown at alternative energy so I don't lose my ass in solars.

Sun, 07/04/2010 - 18:25 | 452215 Temporalist
Temporalist's picture

Of course industries of the future!  We should all be as prescient as you to know what those are!  The government is so good at picking out winners that is why the future is so bright.  I guess that is one reason that the space program needs to be cut...Tang was their greatest achievement.

"It's all ball bearings nowadays."

http://www.youtube.com/watch?v=4prqDn7QS8I&feature=related

 

Sun, 07/04/2010 - 18:20 | 452210 Rogerwilco
Rogerwilco's picture

"Finally, if we had let AIG collapse, the entire world would have been purged straight into a living hellhole. I do not need to speculate on that, and don't tell me otherwise."

And your proof of this is? Without the 2008 bailouts, we would have seen some unpleasant situations and the collapse of large corporations. But the markets would have cleared all the bad debts in a far more efficient manner than what we're seeing now. Instead of TARP and the AIG rescue, the federal government could have stepped in to fully insure deposit accounts for Americans (individuals and businesses). Everything else would be left to sink or swim. Pain? of course, but it would have been over in 6-12 months, and by now we would have real economic growth instead of 50 zombie banks and phony GDP "growth" propped up only by 12% deficits.

Mon, 07/05/2010 - 04:15 | 452738 Droops
Droops's picture

There isn't enough money to insure all of those deposits, it's a ridiculous assertion that you could somehow have let all the banks burn but got out with your deposits. If the banks go, the deposits would have gone too - FDIC is already insolvent. Or do you want the Government to print money just to repay your bank accounts? I think we can see where that one would lead.

Sun, 07/04/2010 - 17:37 | 452168 Shameful
Shameful's picture

Indeed if Goldman had not gotten paid out 100 cents on the dollar it would have been the end of mankind.  The seas would have turned to blood, fire would have rained from the sky, dogs and cats living together, mass hysteria!  Let us bow our heads and thank the Almighty that he has given us such men that no banker shall ever be left behind!

I for one don't want to live in a world where there is no TBTF!!!

/sarcasm

Sun, 07/04/2010 - 17:23 | 452141 Gordon Freeman
Gordon Freeman's picture

Watch your choice of words.  The entire world would most assuredly NOT have been "purged straight into a living hellhole".  It is just such hysterical statements that forever retard, and ultimately poison, any sensible discussion of these issues.

 

Sun, 07/04/2010 - 21:25 | 452361 mtomato2
mtomato2's picture

He was doing "not as bad as usual" until that idiotic line.

Sun, 07/04/2010 - 22:15 | 452399 Leo Kolivakis
Leo Kolivakis's picture

So if you're so smart, tell me, what would have happened had they let AIG collapse?

Mon, 07/05/2010 - 01:27 | 452670 maddy10
maddy10's picture

They could have given the real life, business, auto insurance owners 100 cents on the dollar and said the paper insurance crowd to FO

Real Business would have gone on as normal

If investments banks went belly up so be it

Holding banks could have insured 100% for normal account holders and their accounts could have been transferred to a healthy bank of their choice

Voila.

But this would take a bank holiday for a week or so for which you have the entire national network at your service to keep everyone informed 24/7 unlike 1907

If you say on TV that your bank accounts,trading accounts upto 1 million and all 401k will be insured fully there would be no bank runs

BUT this would mean bankruptcy for the Top 100 institutions in US who sponsored the politicians left and right

You see ,there is never a bad time to do the right thing

Mon, 07/05/2010 - 18:29 | 453521 Glaucus
Glaucus's picture

"Public economics"?  What the fuck is that?  Oh, that's right; it's macroeconomics.  Here's it's "flaw" chart:

http://en.wikipedia.org/wiki/File:Circulation_in_macroeconomics.svg

And what's the flaw?  Well, it's right there in the center of it, as in (Central) Government. As in the inherently flawed components of macroeconomics: fiscal and monetary policy, which is to say, intervention in the market via government spending on the one hand and quasi-government (corporatist) control of the money supply on the other.

"Public economics," in other words, is just another word for "socialized economics," which in turn is just another word for socialism.  As is Keynesianism (though "fascialism" is probably a more accurate description of it), which is to economics what astrology is to astronomy.  And you're just another dyed-in-the-wool Keynesian, Leo, no matter how oblivious you are of this fact.  

If and when you ever open your eyes to the truth of the following, let us know.  Until then, you might want to keep your hands off the keyboard:

"Everything the state says is a lie. And everything it has it has stolen." -- Frederick Nietzsche

Mon, 07/05/2010 - 00:04 | 452555 malek
malek's picture

If they had let AIG collapse and done nothing at all:
We would be using silver coins again, and lots of people would be digging for roots.

If they had let AIG fail (and lots of banks as well) and used the TARP plus $185 billion AIG rescue money for propping up the FDIC to rescue the savers (but not the stock- or bondholders) and help found new smaller banks:
It would have been a hell of a ride. But we would be on an stable upward path for a year now, and a financially sustainable path to begin with! Small businesses and entrepreneurship would be thriving again. Lots of scamsters would have been burned so badly, lots of people would not try such a thing anymore in their lifetime.

Mon, 07/05/2010 - 00:01 | 452548 mtomato2
mtomato2's picture

Leo, it's much simpler than you are willing to admit.  I respect you for your guts and tenacity, but simply put, even the dumbest among us is learning that "spending money to make money" only works with a positive ROI.

"We lose money on every unit, but we make up for it in volume" seems to be government's argument for hope. 

With all due respect, sir, we are slowly wising up to the idiocy, strike that, evil overwhelming us.  I seriously wonder whose side you're on. 

Sun, 07/04/2010 - 21:42 | 452375 ColonelCooper
ColonelCooper's picture

Way to set the standards high.  Love the avatar.  Quite appropriate for Leo. Never gets to kick the ball.

Sun, 07/04/2010 - 16:12 | 452038 traderjoe
traderjoe's picture

1. Krugman never discusses the quality of spending v. quantity. He seems to believe this is a cyclical recession and not a structural depression. 

2. The federal government spends 80% more than it receives in revenue. Illinois 100%. If spending more money was the answer, wouldn't this already have worked by now? Santelli said it best, if the multiplier was above 1, then we could spend infinitely. Why would another 10% on the top solve the problems? Aren't we currently in a cycle of perpetual stimulus spending?

3. I hate the concept of the vigilantes. Bond investors want to get paid back. In a classic Prisoners Dilemma, once confidence is lost that lenders will get paid back, everyone rushes to the exit. The time to fix our problems is when confidence is still there, not after it is lost. 

4. It's already too late. Neither solution will work. "Austerity" would spark a new leg down, especially if it doesn't invest and addresses structural issues but simply cuts spending and raises taxes. Spending more just to create aggregate demand is chasing your tail - it will never end because "just one more rush" will hopefully fix the problem. 

5. I read an interesting article on ZH about the siren song of growth. Why growth? Why inflation? What's wrong with stability? What's wrong with sustainability? At some point growth hits an finite limit of resources. When, who knows. But why not create sustainability on our own terms as opposed to letting a crisis dictate it?

6. Krugman rails against opinions based upon prejudices, not facts. Of course, his are as well. Macroeconomics, IMHO, is not a science. It's a bunch of theories that are twisted to match the purposes of the speaker/theorist. I didn't hear him mention one fact or hard analysis in both of his interviews today.  

Sun, 07/04/2010 - 23:06 | 452468 stpioc
stpioc's picture

["Krugman rails against opinions based upon prejudices, not facts. Of course, his are as well. Macroeconomics, IMHO, is not a science."]

Yea, right. Give five examples.

The amount of people I've seen railing against Krugman who:
- cannot deal with his arguments
- then go on to dismiss him as a crank, a policy hack, a socialist, etc. (not you, but many others have done this)
- or even dismiss macroeconomics altogether (yes, you..)

What do you suggest should replace macro-economics? Common sense? Whose? Yours? Considering your point 2, where you've just invented your own "macro-economics" doesn't bode well. To ascertain whether the stimulus worked or not is quite a bit more complex than you seem to think:
http://shareholdersunite.com/2010/07/04/keynesianism-zerohedge/

Mon, 07/05/2010 - 14:13 | 453241 traderjoe
traderjoe's picture

I'll bite...Macro-economics - in the sense that it is used by Krugman, et. all, - is not a science because IMHO, science requires an evidence-based proof to a hypothesis. Krugman's points are theories. The trouble, IMHO, is that he presents them as facts. From your own link:

"First off, whether a particular economic policy isn’t working is extremely difficult to ascertain, all kinds of statistical heroics need to take place and multiple studies need to confirm as few of these ever become clear-cut. The problem with economics is that there are just too many variables, and many are interdependent."

What I am asking for from Krugman, and the economics profession, is the intellectual acknowledgment that we are running experiments, without control groups, and the end result is unknown. We may not even be able to draw conclusions at the end about why something worked or did not. I believe economists like Krugman use their theories to gain celebrity, power, and for personal gain maintain the illusion that their knowledge of economics creates certainty. Just as Fed researchers can suggest economics is hard, and without a PhD you just can't contribute (even that researcher suggested Krugman was a blowhard). 

And of course, politicians use economists to maintain that illusion of certainty and gain support for a particular set of policies (typically ones that favor more spending for constituents). How many times has Obama said "the majority of mainstream economists say this...". 

You asked me for 5 examples (I am not sure of what), I will ask for just one in return. What is the Keynesian Multiplier of government spending expressed as an integer (and not a theory)? What is the number?? My point is that it is not a single number - precisely as you suggest - that it will be different in each of the infinite circumstances which it might apply. Which means you can't predict the result of said spending in advance, which makes the spending proposition nothing more than a theory. 

Mon, 07/05/2010 - 01:08 | 452647 TBT or not TBT
TBT or not TBT's picture

Let's see, government spending directly stimulates what?

Buehler?

Sun, 07/04/2010 - 18:12 | 452201 Temporalist
Temporalist's picture

I agree TJ.  I was thinking that there is no proof that the govt. can spend efficiently and if that were the case Japan would be the strongest economy in the world right now.  Building things that nobody needs makes you seem productive but ultimately it is just wasted investment.  I guess until the destitute masses need to live somewhere and can squat in abandoned buildings.

And Paul E., the growth for growth's sake pisses me off too.  As someone pointed out the blivet is a huge problem not an answer.  There is a natural growth rate in nature.  One can't make a sequoia grow faster.  It's as if the lessons of the dot com era have disappeared from the collective memory.  I remember when clothing stores were closing down everywhere because they grew too fast.  So what happens as a result?  The stores get closed!  That is what needs to happen now ...close the store.

Here is a George Carlin clip about stuff (miss that man they broke the mold when they made him):

http://www.youtube.com/watch?v=MvgN5gCuLac

 

Sun, 07/04/2010 - 23:21 | 452487 dnarby
dnarby's picture

I dunno about that re: sequoias.

Ever think of dumping a couple hundred gallons of fertilizer on the roots of one every week for a couple decades?  I think you might be surprised!

Mon, 07/05/2010 - 15:20 | 453303 A Nanny Moose
A Nanny Moose's picture

Classic hubris. Trees grow where they grow for a reason. Like everything else, they serve a purpose, and have adapted to their surroundings.

 

Human doings however choose to defy nature and adapt their surroundings to their desires. Hence the need for fertilizer in the first place.

Mon, 07/05/2010 - 03:33 | 452727 Temporalist
Temporalist's picture

Give it a try and get back to me.

Sun, 07/04/2010 - 17:19 | 452131 Paul E. Math
Paul E. Math's picture

Why growth?  Why inflation?  Because it favors the powers that be, that's why.

I have recently concluded that Deflation is actually the solution to our problems.  Deflation is the reset button that many hope for.  Painful, to be sure, but afterwards we would have a real economy again.

Today, power is located in large corporate interests.  These large corporate interests relied on cheap money and an inflationary Fed to provide even cheaper money when times got tough to ensure that corporate leverage always paid off.  They just became richer and more powerful through leverage and inflation.

And deflation would destroy them as they would be unable to repay the debts they have built up.

So they want us to fear deflation like they do.  This is why they always point to the mass layoffs that would occur if corporations went out of business due to deflation.

But what they don't mention is that when we are unable to borrow money to buy new crap we will put more effort into maintenance of what we have.  And that requires labor and produced jobs too. 

When you decide to extend the life of your car the auto-makers and their wage slaves are hurt because you haven't purchased a new car.  But the skilled auto mechanic benefits.  And so, incidentally, does the environment.  And so does democracy as power shifts from large corporate interests to small business and skilled labor.

Deflation is the bogeyman only of the powers that be - to the rest of us it is the answer we have so long awaited.

Mon, 07/05/2010 - 05:14 | 452767 Popo
Popo's picture

Good post.  I agree mostly -- but I've got to take issue with a couple things you said. 

> "Deflation is the bogeyman only of the powers that be - to the rest of us it is the answer we have so long awaited."

It depends.  If you're in debt (as are many, if not most Americans) deflation will rip your face off.

> "And deflation would destroy (large corporate interests)."

Unless those corporate interests have a strong cash position, as many do.  In which case, deflation represents an amazing opportunity.

While you're right that the powers that be favor inflation, it should be noted that Deflation represents a very, very compelling opportunity for many major players as well. Deflation is characterized by an overhang of capacity.  And capacity (ie: The means of production) is ultimately 'the prize' -- and the opportunity to acquire productive capacity on the cheap is one compelling reason why many cash-rich players actually seek deflation.

Yes,the financial sector is completely freaked out by deflation -- because the sword of leverage cuts both ways.  But that's not to say that there aren't loads of cash rich big players licking their chops at the prospect of a collapse in valuations.

 

 

 

Sun, 07/04/2010 - 21:21 | 452356 mtomato2
mtomato2's picture

Freakin' awsome response, dude...  +1000

Sun, 07/04/2010 - 18:03 | 452191 Idiot Savant
Idiot Savant's picture

Thanks for the succinct response Paul.

 

Sun, 07/04/2010 - 17:15 | 452125 Idiot Savant
Idiot Savant's picture

4. It's already too late. Neither solution will work. "Austerity" would spark a new leg down, especially if it doesn't invest and addresses structural issues but simply cuts spending and raises taxes. Spending more just to create aggregate demand is chasing your tail - it will never end because "just one more rush" will hopefully fix the problem. 

 

That pretty much sums up my thoughts. Why all the arguing re: stimulus v austerity? Why not extend and pretend until we default? At least we'll have a few more years of air conditioning and internet porn.

I fail to see the point of austerity measures at this stage of the game as we're fucked either way. If you got em, smoke em! 

Sun, 07/04/2010 - 15:57 | 452019 DoctoRx
DoctoRx's picture

Ozzie is right.  It's about invention and innovation; positive ROI Fed spending.  Unfortunately we don't see that.

And I disagree w Leo when he says:

Importantly, the big, bad bond vigilantes are simply no match for the Federal Reserve and they know it. Bernanke can squash them like a bug if they get too smug and start speculating on US sovereign debt.

Remember Soros squashing the Bank of England like a bug?  IMO it's imprudent to gamble with tons of short-term debt.  What happens when "the market" simply finds ZIRP uncompetitive when the BRICs and other, better-run and more soundly-financed countries return to offering more attractive short-term investments with similar or even lesser risk profiles?  Then the game is up and at best it's Britain 1970's w the IMF coming in.  It then is not possible for Bernanke or the next Fed-head to squash "the speculators"; it will simply be the time for the US to stop living off its victories of years earlier and justify its uncompetitiveness.  So it will fail. 

Meanwhile, it's up to society to decide to allocate more resources to non-workers and the needy.  Fine in theory, just raise taxes to cover it.  Or cut subsidies to homeowners; get out of Afghanistan; etc.  Or cut spending elsewhere.  These debt imbalances are IMO lunatic.  Japan has been getting by because you may be aware it is a capital surplus country.  It produces more than it consumes.  Thus in its inscrutable way, it truly owes its debt to itself.  How it resolves that imbalance is not the US problem, as the US is a debt-seller, not a pos balances of payments country.  So the US continues to rely on the kindness of strangers.  Bad policy, Leo.

Finally, a generally unspoken truth is that it is the banksters who benefit from all the debt issuance.  Its business they wouldn't have if the govt began to run surpluses. 

 

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