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Paul Krugman’s Economic Blinders
Paul Krugman’s Economic Blinders
Paul Krugman is widely appreciated for his New York Times columns criticizing Republican demands for fiscal austerity. He rightly argues that cutting back public spending will worsen the economic depression into which we are sinking. And despite his partisan Democratic Party politicking, he warned from the outset in 2009 that President Obama’s modest counter-cyclical spending program was not sufficiently bold to spur recovery.
These are the themes of his new book, End This Depression Now. In old-fashioned Keynesian style he believes that the solution to insufficient market demand is for the government to run larger budget deficits. It should start by giving revenue-sharing grants of $300 billion annually to states and localities whose budgets are being squeezed by the decline in property taxes and the general economic slowdown.
All this is a good idea as far as it goes. But Mr. Krugman stops there – as if that is all that is needed today. So what he has done is basically get into a fight with intellectual pygmies. Thus dumbs down his argument, and actually distracts attention from what is needed to avoid the financial and fiscal depression he is warning about.
Here’s the problem: To focus the argument against “Austerian” advocates of fiscal balance, Mr. Krugman hopes that economists will stop distracting attention by talking about what he deems not necessary. It seems not necessary to write down debts, for example. All that is needed is to reduce interest rates on existing debts, enabling them to be carried.
Mr. Krugman also does not advocate shifting taxes off labor onto property. The implication is that California can afford its Proposition #13 – the tax freeze on commercial property and homes at long-ago levels, which has fiscally strangled the state and led to an explosion of debt-leveraged housing prices by leaving the site value untaxed and hence free to be pledged to banks for larger and larger mortgage loans instead of being paid to the public authorities. There is no hint in Mr. Krugman’s journalism of a need to reverse the tax shift off real estate and finance (onto income and sales taxes), except to restore a bit more progressive taxation.
The effect of Mr. Krugman’s suggestions is for the government to subsidize the existing financial and tax structures, leaving the debts intact and ignoring the largely regressive, unfair and inefficient system of taxation. It is unfair because the profits of the rich – and even worse, their asset-price (“capital”) gains are taxed at lower rates and riddled with tax loopholes and giveaways. The wealthy benefit from the windfall gains delivered by the public infrastructure investment advocated by Mr. Krugman, but there is not a word about the public recouping this investment. Governments are indeed able to create their own money as an alternative to taxing, but some taxes – above all, on windfall gains, like locational value resulting from public investment in roads or other public transportation – are justified simply on grounds of economic fairness.
So it is important to note what Mr. Krugman does not address these issues that once played so important a role in Democratic Party politics, before the Wall Street faction gained control via the campaign financing process – even before the Citizens United case. For over a century, economists have recognized the need for financial and fiscal reform to go together. Failure to proceed with a joint reform has led the banking and financial sector – along with its major client base, the real estate sector – to scale back property taxes and “free” the economy with taxes so that the revenue can be pledged to the banks as interest to carry larger loans. The effect is to load the economy at large down with private and public debt.
In Mr. Krugman’s reading, private debts need not be written down or the tax system made more efficient. It is to be better subsidized – mainly with easier bank credit and more government spending. So I am afraid that his book might as well have been subtitled “How the Economy can Borrow its Way Out of Debt.” That is what budget deficits do: they add to the debt overhead. In Europe, which has no central bank permitted to monetize the deficit spending, this pays interest to transfers to the bondholders (and their descendants). In the United States, the Federal Reserve can monetize this indebtedness – but the effect is to subsidize domestic debt service.
Mr. Krugman has become censorial regarding the debt issue over the last month or so. In last Friday’s New York Times column he wrote: “Every time some self-important politician or pundit starts going on about how deficits are a burden on the next generation, remember that the biggest problem facing young Americans today isn’t the future burden of debt.”
Unfortunately, Mr. Krugman’s failure to see today’s economic problem as one of debt deflation reflects his failure (suffered by most economists, to be sure) to recognize the need for debt writedowns, for restructuring the banking and financial system, and for shifting taxes off labor back onto property, economic rent and asset-price (“capital”) gains. The effect of his narrow set of recommendations is to defend the status quo – and for my money, despite his reputation as a liberal, that makes Mr. Krugman a conservative. I see little in his logic that would oppose Rubinomics, which has remained the Democratic Party’s program under the Obama administration.
Many of Mr. Krugman’s readers find him the leading hope of opposing even worse Republican politics. But what can be worse than the Rubinomics that Larry Summers, Tim Geithner, Rahm Emanuel and other Wall Street holdovers from the Democratic Leadership Committee have embraced?
Perhaps I can prod Mr. Krugman into taking a stronger position on this issue. But what worries me is that he has moved sharply to the “Rubinomics” wing of his party. He insists that debt doesn’t matter. Bank fraud, junk mortgages and casino capitalism are not the problem, or at least not so serious that more deficit spending cannot cure it. Criticizing Republicans for emphasizing structural unemployment, he writes: “authoritative-sounding figures insist that our problems are ‘structural,’ that they can’t be fixed quickly. … What does it mean to say that we have a structural unemployment problem? The usual version involves the claim that American workers are stuck in the wrong industries or with the wrong skills.”
Using neoclassical sleight-of-hand to bait and switch, he narrows the meaning of “structural reform” to refer to Chicago School economists who blame today’s unemployment as being “structural,” in the sense of workers trained for the wrong jobs. This diverts the reader’s attention away from the pressing problems that are genuinely structural.
The word “structural” refers to the systemic imbalances that neoclassical economists dismiss as “institutional”: the debt overhead, the legal system – especially unfair and dysfunctional bankruptcy and foreclosure laws, regulations against financial fraud, and wealth distribution in general. In 1979, for example, I juxtaposed economic structuralism to Chicago School monetarism in my monograph on Canada in the New Monetary Order. I have elaborated that discussion in my textbook on Trade, Development and Foreign Debt (new ed. 2010). The tradition is grounded in the Progressive Era’s reform program. Correcting such structural and institutional defects, parasitism and privilege seeking “free lunches” is what classical political economy was all about – and what the neoclassical reaction sought to exclude from the economic curriculum. But from the perspective of neoclassical writers through Rubinomics deregulators, the problem of massive, unpayably high debt expanding inexorably by compound interest (and penalty fees) simply disappears.
So the great problem today is whether to stop the siphoning off of income and wealth to financial institutions at the top of the economic pyramid, or reverse the polarization that has taken place over the past thirty years between creditors and debtors, financial institutions and the rest of the economy. I realize that it is more difficult to criticize someone for an error of omission than for an error of commission. But the distinction was erased a month ago when Mr. Krugman got lost in the black hole of banking, finance and international trade theory that has engulfed so many neoclassical and old-style Keynesian economists. Last month Mr. Krugman insisted that banks do not create credit, except by borrowing reserves that (in his view) merely shifts lending savings from wealthy people to those with a higher propensity to consume. Criticizing Steve Keen (who has just published a second edition of his excellent Debunking Economics to explain the dynamics of endogenous money creation), he wrote:
Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.
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Keen says that it’s because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can’t increase unless the money supply rises, but that’s only true if the velocity of money is fixed;
But “velocity” is just a dummy variable to “balance” any given equation – a tautology, not an analytic tool. As a neoclassical economist, Mr. Krugman is unwilling to acknowledge that banks not only create credit; in doing so, they create debt. That is the essence of balance sheet accounting. But writing like a tyro, Mr. Krugman offers the mythology of banks that can only lend out money taken in from depositors (as though these banks were good old-fashioned savings banks or S&Ls, not what Mr. Keen calls “endogenous money creators”). Banks create deposits electronically in the process of making loans.
Mr. Krugman then doubled down on his assertion that bank debt creation doesn’t matter. People decide how much income they want to save, or decide how much to borrow to buy goods that their stagnant wage levels no longer enable them to afford. Everything is a matter of choice, not a necessity (“price-inelastic” is the neoclassical euphemism) said Krugman:
First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand.
So how much currency does the public choose to hold, as opposed to stashing funds in bank deposits? Well, that’s an economic decision, which responds to things like income, prices, interest rates, etc.. In other words, we’re firmly back in the domain of ordinary economics, in which decisions get made at the margin and all that. Banks are important, but they don’t take us into an alternative economic universe.
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As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.
Not only do banks create new credit – debt, from the vantage point of their customers – but in the absence of government spending and regulation along more progressive lines, this new debt creation is the only way that the economy has avoided a sharp shrinking of consumption as real wages have remained stagnant since the late 1970s. The banks offer is one most people can’t refuse: “Take out a mortgage or go without a home,” or “Take out a student loan or go without an education and try to get a job at McDonald’s.” In other words, “Your money or your life.” It is what banks have been saying throughout the ages.
The difference is that they can now create credit freely – and as Alan Greenspan has pointed out to Senate committees, workers are so debt-burdened (“one check away from homelessness”) that they are afraid that if they complain about working conditions, ask for higher salaries (to say nothing of trying to unionize), they will be fired. If they miss a paycheck their credit-card rates will soar to about 29%. And if they miss a mortgage payment, they may face foreclosure and lose their home. So the banking system has cowed the population with its credit- and debt-creating power.
Mr. Krugman’s blind spot with regard to the debt overhead derails trade theory as well. If Greece leaves the Eurozone and devalues its currency (the drachma), for example, debts denominated in euros or other hard currency will rise proportionally. So Greece cannot leave without repudiating its debts in today’s litigious global economy. Yet Mr. Krugman believes in the old neoclassical nonsense that all that is needed is “devaluation” to lower the cost of domestic labor. It is as if he is indifferent to the suffering that such austerity imposes – as Latin American countries suffered at the hands of IMF austerity plans from the 1970s onward. Costs can “be brought in line by adjusting exchange rates.” The problem thus is simply one of exchange rates (which translates into labor costs in short order). Currency depreciation will (in Mr. Krugman’s trade theory) reduce labor’s cost and other domestic costs to the point where governments can export enough not only to cover their imports, but to pay their foreign-currency debts (which will soar in depreciated local-currency terms).
If this were the case, Germany could have paid its reparations debt by depreciating the mark in 1921. But it did so by a billion-fold and even this did not suffice to pay. Neither neoclassical trade theorists nor Chicago School monetarists get the fact that when public or private debts are denominated in a foreign (hard) currency, devaluation devastates the economy. The past half-century has shown this again and again (most recently in Iceland). Domestic assets are transferred into foreign hands – including those of domestic oligarchies operating out of their offshore dollar or Swiss-franc accounts.
Blindness to the debt issue results in especial nonsense when applied to analysis of why the U.S. economy has lost its export competitiveness. How on earth can American industry be expected to compete when employees must pay about 40 percent of their wages on debt-leveraged housing, about 10 percent more on student loans, credit cards and other bank debt, 15 percent on FICA, and about 10 to 15 percent more in income and sales taxes? Between 75 and 80 percent of the wage payment is absorbed by the Finance, Insurance and Real Estate (FIRE) sector even before employees can start buying goods and services! No wonder the economy is shrinking, sales are falling off, and new investment and hiring have followed suit.
How will the government running a larger deficit cope with today’s dimension of the debt problem – except by taking Mr. Krugman’s suggestion to enable states and localities to spend marginally more revenue and avoid further layoffs, while the military industrial complex steps up its “Pentagon capitalism”? So far, the great increase in recent government debt has been to bail out the banking sector, not to help the “real” economy recover.
Increasing the debt burden of European nations has the same dire consequences. Germany balks at bailing out Greece unless Greece moves to streamline its bloated government and inefficient bureaucracy, stop tax evasion by the wealthy, clean up corruption and, in a word, be more Germanic. The U.S. “Austerian” budget cutters whom Mr. Krugman criticizes likewise can point to wasteful government spending, failing to distinguish positive infrastructure investment from pork-barrel “roads to nowhere” and tax loopholes promoted by Congressional politicians whose campaigns are sponsored by special financial interests, real estate and monopolies.
But I fear that Mr. Krugman is being drawn into the gravitational pull of Rubinomics, the Democratic Party’s black hole from which the light of clarity dealing with the debt issue and bad financial and legal structures simply cannot escape. The only variables he admits are structure-free: The federal government can indeed spend more and reduce interest rates (especially on mortgages) so that the higher mortgage debt, student debt, personal debt and corporate debt overhead can be afforded more easily. No need to write any of these debts down. That seemingly obvious and sensible structural solution lies outside the scope of Mr. Krugman’s neoclassical economics. He fails to recognize that debts that can’t be paid, won’t be. This is the immediate problem facing the U.S. and European economies today – and the way in which it is resolved will shape the coming generation.
The problem with Mr. Krugman’s analysis is that bank debt creation plays no analytic role in Mr. Krugman’s proposals to rescue the economy. It is as if the economy operates without wealth or debt, simply on the basis of spending power flowing into the economy from the government, and being spent on consumer goods, investment goods and taxes – not on debt service, pension fund set-asides or asset price inflation. If the government will spend enough – run up a large enough deficit to pump money into the spending stream, Keynesian-style – the economy can revive by enough to “earn its way out of debt.” The assumption is that the government will revive the economy on a broad enough scale to enable the individuals who owe the mortgages, student loans and other debts – and presumably even the states and localities that have fallen behind in their pension plan funding – to “catch up.”
Without recognizing the role of debt and taking into account the magnitude of negative equity and earnings shortfalls, one cannot see that what is preventing American industry from exporting more is the heavy debt overhead that diverts income to pay the Finance, Insurance and Real Estate (FIRE) sector. How can U.S. labor compete with foreign labor when employees and their employers are obliged to pay such high mortgage debt for its housing, such high student debt for its education, such high medical insurance and Social Security (FICA withholding), such high credit-card debt – all this even before spending on goods and services?
In fact, how can wage earners even afford to buy what they produce? The problem interfering with the circular flow between producers and consumers (“Say’s Law”) is not “saving” as such. It is debt payment. And unless debts are written down, the U.S. economy will shrink just as will the economies of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity.
Michael Hudson’s new book summarizing his economic theories, “The Bubble and Beyond,” will be available in a few weeks on Amazon.
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Iceland is doing great because they repudiated their debts.
Krugman is taking a lot of heat recently from all directions:
An Attack on Paul Krugman
By Michael Edesess
http://bubblesandbusts.blogspot.com/2012/05/lack-of-clarity-in-economic-terminology.html
Hudson is discussing the above issues in light of Krugman’s new book. On Twitter the past couple days people have been offering up responses to #WhyImALibertarian. My partial answer is because both political parties appear determined to largely defend the status quo. Rubinomics has played just as significant a role in creating income inequality over the past 30 years as Reaganomics. Choosing between these two options will not offer any long-lasting solutions to our underlying economic troubles.
http://bubblesandbusts.blogspot.com/2012/05/michael-hudson-paul-krugmans-economic.html
I like Hudson, but this article shows why he doesn't have a solution. You can't look past the forest when you're only willing to see trees.
I think most would agree there is no reason to tax labor income differently than other forms of income
Dropping capital gains and dividend interest rates gave a one time gift to owners of capital at the time the law was implemented. The market is efficient enough to have revalued higher and returns essentially normalized after that to previous levels and ratios
Nobody that invests now thinking they are only paying 15 percent capital gains tax is actually getting any extra value except hedge funds disguising labor income as carried interest
The initial cost of your capital that is taxed at only 15 percent is now higher, the gift given away to capital owners at the time the law was implemented, but this is Bastiat's unseen so uneducated ignorant people which comprise the majority dont notice what was essentially a one time theft of value
another link to an attack on krugman
http://www.advisorperspectives.com/newsletters12/An_Attack_on_Paul_Krugman.php
http://ineteconomics.org/blog/inet/what-are-economists-anyway
What are economists for, anyway? by The Institute for... on May 21, 2012In the wake of INET’s conference in Berlin, Executive Director Robert Johnson poses a profound question during this interview with the German foundation Stiftverband. Who does the economist serve: powerful interests or society?
The answer seems clear-cut. Economists today primarily serve the needs of powerful interests at the expense of society in general.
But why?
To answer this, Johnson peals back the surface of overt corruption to explain how the problem goes far beyond that. It was not that economists were all on the take leading up to the global financial crisis, Johnson says, but that those whose visions aligned with powerful financial interests “were used as marketing vehicles, and they were not adequately skeptical as scientists of what the flaws in their vision might be.”
“The world is always uncertain,” Johnson continues, “so when people become anxious, they want the expert to tell them what is going to happen.” The problem is that these experts don’t shoulder much of the risk of being wrong – or of selling confidence when humility is called for - and it is society that ultimately pays the full price of their deception.
Yet many economists don’t even see the problem. They don’t know – or don’t want to know – that they are selling snake oil and that the abstract precision of their finely tuned mathematical models doesn’t hold up to the many contingencies of the real world.
In this regard, “economists are the victim of the Thirty Years War,” Johnson says. “Economists now worship at the altar of abstract theory which was the product of the fear and anxiety that followed the Thirty Years War 350 years ago. It’s time to reexamine our methods very fundamentally.”
The problem is exemplified by David Collander’s study of the economics profession, Johnson says. Collander found that of economics Ph.D. students “85% say they need to know a lot about mathematics, while only 13% say they need to know anything about the economy in order to become an economist,“ Johnson notes.
To remedy this deficiency and prevent the influential and misguided advice of economists from helping to cause another financial crisis, Johnson calls for a change in the way economics is taught.
First, the basic paradigm through which the economics profession sees itself and presents itself to society needs to change. “Rather than teaching economics 101 as an indoctrination in method, they should teach it as a course in philosophy of science where the subject is economics and its assumptions, and the tradeoffs and the flaws as well as the strengths are explored on behalf of the student,” Johnson says.
Second, economics must lose its fascination with deduction and reincorporate context into the profession. “Understanding the context of institutions, understanding economic history, and particularly the history of economic thought (where the subject is economic thinking embedded in the real context of the problems and vested interests of the day, the various challenges, the state of technology), would help people to develop a more humble and realistic of what economic thinking is all about,” Johnson says.
These changes will make it much more difficult for economists to forget that economics really is about “politics, politics, and politics,” Johnson says. “At the core, economics is about politics and about power, and the question for the economists is whose power are you going to serve as an expert.”
To Johnson, avoiding the methodological and professional hubris of the recent past will help the economics profession and its constituents remain ever mindful of the central question they face: “Are you going to serve institutions of power or the people more generally?”
Economists. What – and who - are they good for?
In the wake of INET’s conference in Berlin, Executive Director Robert Johnson poses a profound question during this interview with the German foundation Stiftverband. Who does the economist serve: powerful interests or society?
The answer seems clear-cut. Economists today primarily serve the needs of powerful interests at the expense of society in general.
But why?
To answer this, Johnson peals back the surface of overt corruption to explain how the problem goes far beyond that. It was not that economists were all on the take leading up to the global financial crisis, Johnson says, but that those whose visions aligned with powerful financial interests “were used as marketing vehicles, and they were not adequately skeptical as scientists of what the flaws in their vision might be.”
“The world is always uncertain,” Johnson continues, “so when people become anxious, they want the expert to tell them what is going to happen.” The problem is that these experts don’t shoulder much of the risk of being wrong – or of selling confidence when humility is called for - and it is society that ultimately pays the full price of their deception.
Yet many economists don’t even see the problem. They don’t know – or don’t want to know – that they are selling snake oil and that the abstract precision of their finely tuned mathematical models doesn’t hold up to the many contingencies of the real world.
In this regard, “economists are the victim of the Thirty Years War,” Johnson says. “Economists now worship at the altar of abstract theory which was the product of the fear and anxiety that followed the Thirty Years War 350 years ago. It’s time to reexamine our methods very fundamentally.”
The problem is exemplified by David Collander’s study of the economics profession, Johnson says. Collander found that of economics Ph.D. students “85% say they need to know a lot about mathematics, while only 13% say they need to know anything about the economy in order to become an economist,“ Johnson notes.
To remedy this deficiency and prevent the influential and misguided advice of economists from helping to cause another financial crisis, Johnson calls for a change in the way economics is taught.
First, the basic paradigm through which the economics profession sees itself and presents itself to society needs to change. “Rather than teaching economics 101 as an indoctrination in method, they should teach it as a course in philosophy of science where the subject is economics and its assumptions, and the tradeoffs and the flaws as well as the strengths are explored on behalf of the student,” Johnson says.
Second, economics must lose its fascination with deduction and reincorporate context into the profession. “Understanding the context of institutions, understanding economic history, and particularly the history of economic thought (where the subject is economic thinking embedded in the real context of the problems and vested interests of the day, the various challenges, the state of technology), would help people to develop a more humble and realistic of what economic thinking is all about,” Johnson says.
These changes will make it much more difficult for economists to forget that economics really is about “politics, politics, and politics,” Johnson says. “At the core, economics is about politics and about power, and the question for the economists is whose power are you going to serve as an expert.”
To Johnson, avoiding the methodological and professional hubris of the recent past will help the economics profession and its constituents remain ever mindful of the central question they face: “Are you going to serve institutions of power or the people more generally?”
Economists. What – and who - are they good for?
http://ineteconomics.org/blog/inet/what-are-economists-anyway
Is it just me, or does Krugman's beard, as placed on his particular face, make him look precisely like a common toilet brush ?
to me he the Kroog-man needs to get out of the stars for five seconds and do a detailed analysis of what he thinks we should be doing with General Motors which we the taxpayer still own. I have a LOT of ideas on that front...the least of which is to sell the darn thing. A vehicle recycling program for example. "give us your old full size pick up and we'll give you a brand new one for 5,000 bucks." how about forced conversion of the entire government vehicle fleet to natural gas? the postal service alone has 200,000 vehicles! or better yet "let's execute on an industrial policy". Germany has one and they have been vastly more successful to date than we have "post collapse." Let's go! Chop, chop! "And what about AIG" as well? (on that front things seem okay. insurance rates have been at record lows for some time now. that's a big positive for the economy going forward btw...
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Gggg-go-go Krugman gadget! (money printing arm, rose colored glasses).
Economics 101 - High School Level
If Paul Krugman were to go back and take that class all over again - using what he now constitutes as his "mantra", I doubt he'd pass the class.
Peer pressure and ridicule alone from his fellow classmates would have him dealing with wedgies and spitballs.
Krugman has gone so far off charts away from fundamental economics it's scary.
You need to look again at HS Econ 101 textbooks ... they're all Krugmanized now.
You must be right, had a group of college students tell me that consumption is all there is; the economy is consumption and there is nothing else that matters.
...then we are totally fucked. If indeed Econ books have been Krugmanized, Economics itself has been hijacked.
If David Ricardo, Adam Smith et. al. have been rubbed off the pages, by some Progressive schmuck, then STUPID-nomics is being taught.
@eb....that must have been eye-opening, and disheartening. This bodes well for my 3rd world economics course students in the islands. They'll be GIANTS in no time.
Just waking up are we? Economics has long since been hijicked, finance has been hijacked, history is being re-written, science has also been hijacked, etc. etc. Those few that have benefitted from this corrupt system are (admittedly) doing everything they can to stay in power. Atlas has been shrugging for quite some time.
Have you seen the home-ec textbooks? Are they Krugmanized too?
A few good points, but unfortunately devalued by an even larger number of ridiculous statements - for example Prop 13 effects.
need i remind anyone- michael hudson is not michael hundson phd ?
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Hudson has it half right. It is unfair that labor is taxed to such a high degree compared to real estate and other passive income. But the solution isn't to raise taxes on the FIRE sector, but reduce taxes on labor and shrink the size of government. imo
Keeping government trimmed down to size is a critical and never ending job, much like keeping bushes in your landscaping from becoming overgrown and a nuisance rather than a benefit.
Unfortunately, if you neglect it too long, it can cause permanent problems for the bushes that have to be trimmed back too far, leaving unsightly holes and dead spots.
Sometimes it can get bad you need to uproot the darn thing and start over.
Hopefully we haven't gotten to that point yet with our government.
But we can't neglect our necessary duty, and we need to start right now before further damage is done.
A lack of a tax on land value is begging for more blowing bubbles.
Do you need a bubble economy to bring you out of the temporary, but earned, discomfort, or do you want to prolong the discomfort indefinately, and upgrade it to a rising level of pain?
Yeah, but that wouldn't do anything to improve the lot of our lords and masters, so that idea is clearly a non-starter.
Oh, for pity's sake!
Enough of this constant bickering.
You there! Krugman. Choose your weapon.
Keynesian blunderbuss? Well, ok...
Looks kind of worn out. Sure it still works?
All right, now to you Mr. Hudson, what's your choice?
HK169 with 40x46mm HE debt round? Sweet!
No, Mr. Krugman. You cannot change your mind.
I agree with the author that debt write downs are needed, and tax reform.
But he's still in the big spender camp which would get us right back into problems down the line.
Fuck Krugman! He gets far too much attention!
Debt jubilee the only answer.
50 years of an admixture of "austerity" and "spending" have given us the worst of both.
Crony Capitalism hand-in-hand or see-sawing with Keynesian debt spending.
The result is off-shoring of employment, forcing debt spending to maintain the status-quo, parasitic banking, privatized gains with socialized losses, and finally calls for "austerity" from households not governments or banks.
If nations don't run their economies the way a household runs them; why are they surprised it is all falling apart?
Financial engineering backstopped by complicit bailout government and justice system has, of course, led to a shit-storm of debt and failure with the call for the first free dollar to solve the gambling problem going to the worst gamblers at the expense of the taxpayers.
DUH.
It isn't rocket science on either side.
Wall Street and Washington are allergic to realistic common sense solutions because it doesn't allow for jiggering and gaming of the system to reward the greedy and indolent.
bank regulation needs to be not so much progressive as enforced honestly. marked to myth is neither liberal nor conservative; it is fraud.
and while we wonder, what's jamie thinking? j. hussman:
Based on this and other reports, it's not clear that the recent losses at JP Morgan were simply the result of a speculative trade gone bad. Rather, my impression is that the problems at JPM may be the result of using highly leveraged, illiquid derivative transactions as a "cross-hedge," intended to reduce the risk of default in a whole portfolio of complex positions including (but not limited to) European mortgage debt, but with the long and short portions of the position behaving unexpectedly in relation to each other. I'd be much more interested in how large JPM's mark-to-market losses are on the European mortgage-backed bonds than how much loss they've sustained on the hedge. Maybe the right question isn't why they lost money on the hedging transaction, but why they apparently have a boatload of questionable assets so massive that they need to use whale-sized leverage to hedge the default risk in the first place.
This was an awesome article. And it wasn't bludgeoning Prof Krugman at all. Generally, though, the term "debt forgiveness" implies at least a partially voluntary act on the part of the lender. TPTB would also have to close the loop and prohibit the IRS from treating such forgiveness as income. At that point the "debt" part of the debt/asset dual indeed provides relief to the borrower. But just as suddenly, an assigment of risk, once accepted as obvious ("lend someone money, you may not get some back") jumps back into the lenders' calculi that will quickly (as in "can you say the next day?") result in a proportional reduction in lendable money. I like Sheila Bair's tongue-in-cheek suggestion to solve this problem, elsewhere covered in ZH today. $10M interest-free loan to every family....thus privatizing debt repudiation once again.
There is also a certain ethic still prevalent, though under siege, that many will do what it takes to pay one's debts--barring encountering impossible circumstances. It is a proverbial point of honor to many. Too bad we didn't also absorb the proverb that points out "the borrower is slave to the lender" and "owe no one anything except the common debt of love for one another". It's one thing to know the words, another to discipline oneself to live by them. This nation has much need of discipline to correct our very self-enslaving habits. To those of you who figured that out already, BOO-YAH!
I would argue the opposite in fact. it rips krugman to shreds, but does so inthat gentile academic manner. He is ridiculing krugman's model of the universe and howthe economy works, by ignoring that banks exist, that banks don't exist in the manner he thinks they do, and pointing out to all his fix doesn't even address the real problems at all. corruption, leverage/ debt, crony capitialism. Krugmans solution isn't a solution at all. the solution is to fix the structure of the system. Krugman's solution preserves the structure of the system, and hence isn't a solution.
As I keep writing the NYtimes, the problem is the structure of the system, not the monetary policy. the status quo wants to preserve the structure of teh system at all costs, because that's what gives them the advantage. Hence, krugman is the same as the koch brothers.
both the republican, and krugman solutions preservethe system. By setting up the dabate in this manner the real solutions don't even get discussed in the public arena. Krugman is a propaganda mouth piece fot eh status quo and elites. His solutions aren't going to help.
"He rightly argues that cutting back".....
Are you kidding me?
You act as if the economy is some sort of tangible blob that can simply be fixed with ramblings about low Aggregate Demand and so forth.
Increasing government spending or keeping it constant will not solve any issues facing Americans at the moment(nor has it ever done so).
We are staring this economic depression right in the eye this time. The previous "solutions" that "worked" won't alleviate any of the financial pain.
It hasn't worked for the past three years and attempting to play the same hand again is pure insanity.
Krugman ALWAYS gets it wrong. Who could forget his ridiculous suggestion back in 2005 that America was in the midst of housing bubble that was about to burst with disastrous consequences for the US economy.
Thank goodness there were critics around like John Hinderaker to challenge him on this preposterous assertion. From Hinderaker's Powerline blog in August 2005:
That Hissing Sound Is Krugman
It must be depressing to be Paul Krugman. No matter how well the economy performs, Krugman’s bitter vendetta against the Bush administration requires him to hunt for the black lining in a sky full of silvery clouds. With the economy now booming, what can Krugman possibly have to complain about? In today’s column, titled That Hissing Sound, Krugman says there is a housing bubble, and it’s about to burst:
Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn’t have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero?
Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone – not just those who own Zoned Zone real estate – should be worried.
Well, if we believed anything Krugman writes, we’d be worried all the time. Or at least until we have a Democratic administration, when everything will be rosy again. Krugman’s description of the housing bubble is amusing for what it reveals about how Krugman views the country:
When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.
In Flatland, which occupies the middle of the country, it’s easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don’t really have traditional downtowns [Ed.: Huh? I don't think Krugman gets out here much.], just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started.
But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.
I don’t doubt that some people in places like San Francisco and San Diego have paid too much for their houses. But it isn’t clear, and Krugman doesn’t even try to explain, why that constitutes a bubble or why level or declining home prices in selected areas around the country will somehow imperil the economy. Here are Krugman’s reasons for claiming that a housing bubble exists:
One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller “Dow 36,000? are now among the most vocal proponents of the view that there is no housing bubble.
There are, of course, obvious differences between houses and stocks. Most people own only one house at a time, and transaction costs make it impractical to buy and sell houses the way you buy and sell stocks. Krugman thinks the fact that James Glassman doesn’t buy the bubble theory is evidence in its favor, but if you read Glassman’s article on the subject, you’ll see that he actually makes some of the same points that Krugman does. But he argues, persuasively in my view, that there is little reason to fear a catastrophic collapse in home prices. Krugman will have to come up with something much better, I think, to cause many others to share his pessimism.
How much does Krugman pay you to attach this response to every article on the internet critical of Krugman for months?
Somebody please explain why rational people would spend a minute of their valuable time debating what Paul Krugman thinks?
What a fucking waste of time ... especially when they could instead be making soap from liposuction fat, or something.
ManBernKrug!