Paul Krugman and the New Austerity: Get Used to It


“American voters are being given a choice between a representative of the public sector and a representative of the financial sector, when they want less of what both groups are doing.”


John Dizard

Financial Times

July 22, 2012


London – Traveling in the EU in these days of economic crisis is a surreal experience.  The Summer Olympic Games in London are in full swing, with hundreds of private corporate sponsors seeking to achieve branding nirvana before the millions of people expected to watch the summer games between now and September.  Belying claims in many quarters that the economic world is about to end, the UK seems ready to achieve yet another triumph when it comes to sales and marketing.  


Politicians in the UK fret about austerity, but as in the US, the cost cutting is mostly falling on the public sector.  Non-financial corporations in the EU and the US are in relatively good shape, suggesting that growth in 2013 and beyond may be better than is commonly expected.  In the public sector in the UK and elsewhere, however, workers are facing a grim future as excessive salaries and headcount are being brought back into line with private industry and true need.   


A growing number of cities in the US seeking protection in bankruptcy, for example, and are doing so in order to reduce wages to something like parity with similar levels in the private sector.  When you recall that public sector workers in the US and EU alike make 2x the level of compensation paid to comparable workers in private industry, the task ahead to bring the global fiscal situation back into balance becomes clear.  


“Six of the 17 countries that use the euro currency are in recession,” CBS News reports ominously.  “The U.S. economy is struggling again. And the economic superstars of the developing world — China, India and Brazil — are in no position to come to the rescue. They're slowing, too.”  And this is all true, but our friends in the Big Media rarely point out that it is in the public sector in the US and other nations where most of the pain is being felt.  


In nations such as China, India and the EU where the state sector is predominant, the perceived economic pain is obviously worse – especially if you are a politician whose future livelihood is tied in some way to an endless increase in public spending and related economic activity.  The bailouts in the US and EU alike are not so much for the holders of bad debt as for the politicians whose careers will end as and when the debt defaults.   


Of course, nations like China and India still claim to be growing at rates that American politicians can only dream about – that is, if you believe the bogus economic statistics issued by these corrupt regimes.  In a world where political fortunes are tied to perceived economic vitality, statistics regarding rates of growth in employment and output should be suspect.  Yet for reasons that are all too obvious, institutional investors seem too willing to accept the self-serving economic nonsense as a good pretext for making asset allocation choices into nations that neither respect property rights nor international legal norms. 


In the US, luminaries such as Paul Krugman complain about an economic “depression” and suggest massive new public spending programs to address it.  Again, our esteemed Nobel laureate is correct, but somehow he fails to explain that most of the economic pain is being felt among the public sector constituencies that underpin the Democratic Party.  


Since the Great Depression and subsequent New Deal, the liberal tendency in American politics has embedded itself in the public sector.   The poor imitation of Euro-fascism created by FDR with the New Deal is all about creating mandates for bureaucracy and public sector workers and unions.  But the “New Austerity” so fearful to Krugman and his liberal comrades is really about ridding America, at least, of the terrible legacy of FDR’s love affair with European models of political economy.


When you hear about a city or county rolling back excessive wages or retirement benefits for public sector workers, remember that this is the bedrock foundation of American liberalism.  Or as I told my friend and diehard New Dealer Bill Janeway many years ago, being an American liberal is a coward’s route to socialism.  Needless to say, Bill has stopped speaking to me. 


As the US public sector is forced to realign its economic load from 25% of GDP down to something closer to the 18% actually covered by tax revenues, the political fortunes of American liberals will shrink accordingly.  With the shrinkage of the public sector, so too the political fortunes of the Democratic Party will also evaporate.


Krugman and his fellow Democrats are haunted by the ghost of Al Smith, the hapless Democratic presidential candidate who unsuccessfully sought the White House three times prior to the ascension of FDR and the New Deal.  And the saddest part of all is that it was Barack Obama, a supposed liberal Democrat from Illinois, who set in motion the end of the New Deal.  


By supporting a “temporary” holiday for employer contributions to the bankrupt Social Security “trusts funds,” Obama has started the unraveling of the financial fraud foisted upon Americans 80 years ago by FDR.  Indeed, you have to feel sorry for Krugman and his ilk.  Far from achieving a second “New Deal” under Barack Obama, American liberals have instead faced something that looks like the blessed era of Calvin Coolidge in the 1920s, when the Money Trusts controlled American politics.  


After winning the White House four years ago, the paragons of the “progressive” fascism we know as American liberalism have been forced to watch as the large banks have continued to call the shots.  Obama is no “progressive,” Krugman whines, but instead the errand boy of the big bank financial cartel that controls much of the US economy.  The truth about American liberals like Krugman is that they are really defenders of big banks and the corrupt corporate state. 


The latest Krugman rant in the New York Review of Books, “Getting Away with It,” is notable because it documents the control of the too-big-to-fail banks over the US political process.  In particular, Krugman and his sidekick Robin Wells nicely confirm our view that former Citigroup Chairman, Treasury Secretary and Goldman Sachs CEO Robert Rubin continues to call the political shots inside the White House.  


In a perhaps too revealing review of Noam Scheiber’s  new book, “The Escape Artists: How Obama’s Team Fumbled the Recovery,” Krugman and Wells note:


“Scheiber starts with the influence Wall Street exerted over the assembly of that economic team. In its early stages, Scheiber tells us, Obama’s campaign relied for policy advice on “obscure academics, contrarian gadflies, and past-their-prime bureaucrats,” like Austan Goolsbee, a young economics professor from the University of Chicago, and Paul Volcker, the octogenarian though still vigorous former chairman of the Federal Reserve. But by September 2008, another economic group had formed and begun competing for influence, composed of “well-heeled insiders. Most [of them] had worked for former Clinton Treasury secretary Robert Rubin.” Rubin had been a partner at Goldman Sachs before joining the Clinton administration; after leaving, he became a director and counselor, and then chairman, of Citigroup.”


The reason political creatures like Rubin and his colleagues at Goldman Sachs care about exercising control over the White House is that politics has always been the mother’s milk of the Boys of Broad Street.  Start to reduce the size and scope of government, both at the state and federal level, and the Goldman banksters will have to find a new game to play.  End the ability of all the TBTF banks to obtain bailouts in Washington and second-rate investment banking firms like Goldman Sachs may cease to exist altogether.   


Without a steady flow of bailouts and subsidies from Washington, all of the large New York banks are in serious trouble – but the smaller firms will die first.  At the end of the day, Goldman Sacks is a customer of JPMorgan Chase just as Bear, Stearns was once upon a time.  As the flow of largesse from Washington ebbs, look for JPMorgan to focus more and more attention on taking revenue and market share away from the Goldman bankers and other smaller firms.  


The difference between, say, Barclays or UBS, and Goldman and its larger cousin Morgan Stanley, is that these latter investment banks are not really banks.  They lack the secure deposit funding base and large balance sheet necessary to compete with the universal banks in the brave new work of Basel III.  We should look for Morgan Stanley to eventually spin off Smith Barney and then sell the rest of itself to the Japanese.  But like Lehman Brothers, who wants or needs to own Goldman Sachs?  


As Jamie Dimon looks to rebuild his reputation and income statement, just watch the bankers at JPMorgan go after what remains of the Goldman franchise.  Have you heard the joke about Goldman getting into “private banking?”   This seems to be yet another indication that the visibility on revenue and liquidity at Goldman Sachs is growing worse with each passing day.  And notice that Citigroup, which has recently been adding to its banking and trading staff, is right behind JPMorgan in terms of attacking the market share of Goldman and other relatively small non-bank financial firms.  


So when you hear Paul Krugman and his analogs in Europe complain about the lack of a response to the New Austerity, remember that their pain is mostly political.  Krugman worries that his fellow “progressives,” really fascists in sheep’s clothing, are most worried about their loss of political power rather than the economic standing of their fellow citizens.  When you hear Krugman and the other New Dealers at the New York Review of Books whining about the lack of federal spending, there is a simple answer:  “Get used to it.”


And as the flow of subsidies from Washington slowly ebbs, the TBTF banks will begin to feed upon one another to win the remaining private business on Wall Street.  Look for the largest universal banks such as JPMorgan and Citi to eventually win that contest, with Morgan Stanley likely getting sold and Goldman Sachs, like Bear and Lehman before them, being fed to the proverbial wolves.  


In the event, we can take some small comfort that most of the folks at Goldman Sachs are really no different that the Krugmanite socialists who populate the world of American economics.  They want something for nothing, this something stolen from the pockets of working Americans via the coercive power of the state.  The New Austerity, far from being a disaster, is really about restoring American values and ending the liberal political choke hold of Washington over all facets of American life.  Despite the very real pain that the coming adjustment entails, individuals who believe in personal and economic freedom should rejoice at the New Austerity.