Five or six years ago, Paul Krugman was my idle, but gradually his being an op ed reporter on the New York Times forced him away from things he likely would have posted but for restrictions on what the "mainstream media" can say about the government's activites. But I find his column today an appropriate one vis-a-vis the new situation in Greece.

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July 5, 2015                                                                                                                                     Original Here

Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands. And even the most ardent supporters of European union should be breathing a sigh of relief.

Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.

But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.

What’s more, they weren’t. The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the “no” side offers at least a chance for an escape from this trap.

But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.

Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue — let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits?

Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.

It's good that the GOP has admitted to lying about the fiscal crisis. However, the question remains: Will Obama now back off his plan to cut Social Security and Medicare?

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MONDAY, MARCH 18, 2013 05:15 AM MST

GOP: We’ve been lying all along

Boehner's admission that we don't really have a debt crisis reveals his party's ulterior, program-cutting motives

BY DAVID SIROTA

John Boehner (Credit: AP/Susan Walsh)

I never thought I’d write these words, but here goes: Thank you, John Boehner. Thank you, Mr. Speaker, for finally admitting on national television that all the fiscal cliffs, sequestrations and budget battles you’ve created are, indeed, artificially fabricated by ideologues and self-interested politicians and not the result of some imminent crisis that’s out of our control.

America owes this debt of gratitude to Boehner after he finally came clean on yesterday’s edition of ABC’s “This Week” and admitted that “we do not have an immediate debt crisis.” (His admission was followed up by Budget Committee Chairman Paul Ryan, who quickly echoed much the same sentiment on CBS’ “Face the Nation”).

In offering up such a stunningly honest admission, the GOP leader has put himself on record as agreeing with President Obama, who has previously acknowledged that demonstrable reality. But the big news here isn’t just about the politics of a Republican House speaker tacitly admitting they agree with a Democratic president. It is also about a bigger admission revealing the fact that the GOP’s fiscal alarmism is not merely some natural reaction to reality, but a calculated means to other ideological ends.

Before considering those ends, first remember that Boehner (like Obama) is correct on the facts.

As Nobel-winning economist Paul Krugman has pointed out, “Even if we do run deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II” and “it will also be substantially less than, say, debt in several European countries in the mid- to late 1990s.” It is also lower than the 80 percent of GDP level that many economists say starts to put countries in a precarious position. Additionally, citing Congressional Budget Office data, the Center for American Progress notes that the long-term debt outlook is only dire because the projections simply assume without question that “future Congresses will enact huge new deficit-increasing tax cuts and spending hikes.”

“The debt outlook is bad (but) we’re not looking at something inconceivable, impossible to deal with,” writes Krugman. “We’re looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with.”

So yes, we should start dealing with the long-term debt in a pragmatic and sober way, but we shouldn’t pretend it is some sort of imminent crisis worthy of draconian austerity measures.

If we could somehow do that, then there would be plenty of gradual steps that could be taken right now — steps that deal with the debt in measured ways that do the least harm to the overall economy. Those include starting to phase out the Bush tax cuts, which show no correlation with job growth and yet are the single largest driver of annual deficits; starting to reduce defense and war spending, which, job-creation-wise, is one of the least effective ways for the government to spend money; starting to move the United States toward the least costly, more efficient, and more effective single-payer healthcare system that most industrialized countries have, and that lowers overhead for employers; and starting to spend more money on social programs that fight economic inequality, with the understanding that driving down such inequality tends to boost macroeconomic growth and consequently boost public revenues (this is the Reagan-esque idea of growing one’s way out of debt).

But, of course, we aren’t having a sober and measured discussion about such pragmatic solutions. Instead, the national conversation about the budget is dominated by debt demagogues with ulterior motives. Taking a page out of the shock doctrine playbook that says every crisis is an opportunity, these alarmists have sought to create the perception of an immediate crisis in order to quickly manufacture opportunities to legislate their otherwise politically impossible agenda items.

In practice, that means Wall Streeters and conservative ideologues citing the supposedly imminent crisis to successfully nudge the political establishment to endorse cuts to Social Security, even though the program has almost nothing to do with the debt crisis. It also means a GOP budget that targets most of its cuts at the social programs that the poor and middle-class most rely on (this, at the same time most of these same alleged budget hawks supported an extension of most of the deficit-expanding Bush tax cuts; decry any cuts to the defense budget; and either outright oppose a single-payer system or support the Obama healthcare law that while certainly expanding coverage, nonetheless buttresses the private health insurance industry and, thus, arguably makes such a single-payer system more out of reach).

From Boehner to Ryan to the Bowles-Simpson tandem to an unending parade of television pundits, the last year has been marked by the most prominent political voices ignoring the more prudent way forward, and instead claiming that these shock doctrine prescriptions — i.e., Social Security/Medicare cuts, social program cuts, etc. — are all required. And not just required, but required immediately, because of the supposed urgency of the debt crisis.

Using that supposed urgency as a rationale to create fiscal cliffs, sequestration battles and debt ceiling crises, their talking points have lately assumed a similar tenor to that of the old Thatcherites’ “There Is No Alternative” mantra, the idea being that because the emergency is supposedly so imminent, there is simply no other way forward than the conservative neoliberal path of profligacy for the rich (tax cuts, continued corporate subsidies, etc.) and austerity for everyone else.

But suddenly, thanks to yesterday’s declarations by Boehner and Ryan, the charade’s most sacred lie has been exposed. In acknowledging that “we do not have an immediate debt crisis,” GOP leaders are admitting that there is, in fact, an alternative. They are also admitting that their longtime claims to the contrary were ends-justify-the-means tactics to manufacture an unnecessary panic — one that they hoped would scare America into abruptly accepting the kind of draconian policies polls show the public opposes.

Now that the truth is out, maybe a more reasoned debate can begin and more pragmatic policies can finally take center stage.

 

David Sirota is a nationally syndicated newspaper columnist, magazine journalist and the best-selling author of the books "Hostile Takeover," "The Uprising" and "Back to Our Future." E-mail him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.  

MORE DAVID SIROTA. 
 

Notwithstanding Jon Stewart's ridicule of Paul Krugman's suggestion that the U.S. Treasury mint a trillion-dollar coin to avert austerity, all of the top economists who have not gone over to "the dark side of the force" (aka the neoliberal kleptocracy) know that (1) the platinum coin is but one of many viable ways to avert austerity and (2) imposition of austerity is a sure recipe to crash the economy, bringing great suffering to all but the top 1%. Here, top economist Bill Black relates the deep history of austerity, revealing it to be a self-serving right-wing dogma rather than a scientifically determined necessity.

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 theREALnews                                                                               Permalink

January 18, 2013

Stewart vs Krugman and the Religion of Austerity

Bill Black: Obama has options, including the trillion dollar coin, to refuse to negotiate under the gun but he's taken them off the table; both sides subscribe to the dogma of austerity
Watch full multipart The Black Financial and Fraud Report


Bio

William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics. Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.

UBER ECONOMIST MICHAEL HUDSON TAKES TO TASK MY ECONOMIST HERO OF SOME TIME AGO, PAUL KRUGMAN

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Paul Krugman’s Economic Blinders

Posted on May 14, 2012 by Mitch Green |


By Michael Hudson

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 site 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.”[1] 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.”[2]

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 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. But 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.

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;[3]

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):

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.

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.[4]

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 through 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.”[5] 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, 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 Finance, Insurance and Real Estate (FIRE) expenditures. 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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[1] Paul Krugman, “Easy Useless Economics,” The New York Times, May 11, 2012.

[2] Ibid.

[3] Paul Krugman, “Conscience of a Liberal” blog, March 27, 2012, Minsky and Methodology (Wonkish).

[4] Banking Mysticism, Continued, “The Conscience of a Liberal,” March 30, 2012.
http://krugman.blogs.nytimes.com/2012/03/30/banking-mysticism-continued/?emc=eta1

[5] Paul Krugman, “The Euro Trap,” The New York Times, April 30, 2010.

Paul Krugman: "Notice ... how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy."

August 19, 2010

Appeasing the Bond Gods

By PAUL KRUGMAN

As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind. I know it’s over the top, but here it is anyway: the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods.

Hey, I told you it was over the top. But bear with me for a minute.

Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover, even though unemployment remained disastrously high across much of America and Europe, creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits.

Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math. Never mind the numbers, they declared: immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments, driving up their borrowing costs and precipitating a crisis. Look at Greece, they said.

The skeptics countered that Greece is a special case, trapped by its use of the euro, which condemns it to years of deflation and stagnation whatever it does. The interest rates paid by major nations with their own currencies — not just the United States, but also Britain and Japan — showed no sign that the bond vigilantes were about to attack, or even that they existed.

Just you wait, said the austerians: the bond vigilantes may be invisible, but they must be feared all the same.

This was a strange argument even a few months ago, when the U.S. government could borrow for 10 years at less than 4 percent interest. We were being told that it was necessary to give up on job creation, to inflict suffering on millions of workers, in order to satisfy demands that investors were not, in fact, actually making, but which austerians claimed they would make in the future.

But the argument has become even stranger recently, as it has become clear that investors aren’t worried about deficits; they’re worried about stagnation and deflation. And they’ve been signaling that concern by driving interest rates on the debt of major economies lower, not higher. On Thursday, the rate on 10-year U.S. bonds was only 2.58 percent.

So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away. It’s hard to convey the sheer audacity of this argument: first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets; now we’re being told to ignore what those markets are actually saying because they’re confused.

You see, then, why I find myself thinking in terms of strange and savage cults, demanding human sacrifices to appease unseen forces.

And, yes, we are talking about sacrifices. Anyone who doubts the suffering caused by slashing spending in a weak economy should look at the catastrophic effects of austerity programs in Greece and Ireland.

Maybe those countries had no choice in the matter — although it’s worth noting that all the suffering being imposed on their populations doesn’t seem to have done anything to improve investor confidence in their governments.

But, in America, we do have a choice. The markets aren’t demanding that we give up on job creation. On the contrary, they seem worried about the lack of action — about the fact that, as Bill Gross of the giant bond fund Pimco put it earlier this week, we’re “approaching a cul-de-sac of stimulus,” which he warns “will slow to a snail’s pace, incapable of providing sufficient job growth going forward.”

It seems almost superfluous, given all that, to mention the final insult: many of the most vocal austerians are, of course, hypocrites. Notice, in particular, how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy. But that won’t stop them from continuing to pose as deficit hawks whenever anyone proposes doing something to help the unemployed.

So here’s the question I find myself asking: What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?

Bomb the enemy "back into the stone age": Familiar military hubris befitting the Federal Government's evident intention to financially squeeze the 50 states back into the stone age.

Natalie Bartling stands beneath the streetlight she petitioned to have put on her residential street five years ago in the city of Colorado Springs.

August 8, 2010

America Goes Dark

By PAUL KRUGMAN

The lights are going out all over America — literally. Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights, but similar things are either happening or being contemplated across the nation, from Philadelphia to Fresno.

Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel.

And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled; in Hawaii, the school year itself is being drastically shortened. And all signs point to even more cuts ahead.

We’re told that we have no choice, that basic government functions — essential services that have been provided for generations — are no longer affordable. And it’s true that state and local governments, hit hard by the recession, are cash-strapped. But they wouldn’t be quite as cash-strapped if their politicians were willing to consider at least some tax increases.

And the federal government, which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent, isn’t cash-strapped at all. It could and should be offering aid to local governments, to protect the future of our infrastructure and our children.  [Blogger's emphasis]

But Washington is providing only a trickle of help, and even that grudgingly. We must place priority on reducing the deficit, say Republicans and “centrist” Democrats. And then, virtually in the next breath, they declare that we must preserve tax cuts for the very affluent, at a budget cost of $700 billion over the next decade.

In effect, a large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble — literally in the case of roads, figuratively in the case of education — they’re choosing the latter.

It’s a disastrous choice in both the short run and the long run.

In the short run, those state and local cutbacks are a major drag on the economy, perpetuating devastatingly high unemployment.

It’s crucial to keep state and local government in mind when you hear people ranting about runaway government spending under President Obama. Yes, the federal government is spending more, although not as much as you might think. But state and local governments are cutting back. And if you add them together, it turns out that the only big spending increases have been in safety-net programs like unemployment insurance, which have soared in cost thanks to the severity of the slump.

That is, for all the talk of a failed stimulus, if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we’re going into reverse.

But isn’t keeping taxes for the affluent low also a form of stimulus? Not so you’d notice. When we save a schoolteacher’s job, that unambiguously aids employment; when we give millionaires more money instead, there’s a good chance that most of that money will just sit idle.

And what about the economy’s future? Everything we know about economic growth says that a well-educated population and high-quality infrastructure are crucial. Emerging nations are making huge efforts to upgrade their roads, their ports and their schools. Yet in America we’re going backward.

How did we get to this point? It’s the logical consequence of three decades of antigovernment rhetoric, rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted, that the public sector can’t do anything right.

The antigovernment campaign has always been phrased in terms of opposition to waste and fraud — to checks sent to welfare queens driving Cadillacs, to vast armies of bureaucrats uselessly pushing paper around. But those were myths, of course; there was never remotely as much waste and fraud as the right claimed. And now that the campaign has reached fruition, we’re seeing what was actually in the firing line: services that everyone except the very rich need, services that government must provide or nobody will, like lighted streets, drivable roads and decent schooling for the public as a whole.

So the end result of the long campaign against government is that we’ve taken a disastrously wrong turn. America is now on the unlit, unpaved road to nowhere.

Obama’s Stimulus Plan Is Failing, Not because the Solution Is More Tax Cuts (as Claimed by Republicans), but because the Stimulus Is Way INSUFFICIENT!

The American Recovery and Reinvestment Act of 2009 (ARRA), based largely on proposals by President Obama (but weakened by the centrists), was passed by Congress in its conference version on February 13, 2009 and signed into law by the President on February 17, 2009.

Paul Krugman, 2008 Nobel Prize winner in Economic Sciences, wrote on February 8th:

Even if the original Obama plan — around $800 billion in stimulus, with a substantial fraction of that total given over to ineffective tax cuts — had been enacted, it wouldn’t have been enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years.

Yet the centrists did their best to make the plan weaker and worse.

One of the best features of the original plan was aid to cash-strapped state governments, which would have provided a quick boost to the economy while preserving essential services. But the centrists insisted on a $40 billion cut in that spending.

On the eve of the House passing the conference version, Krugman summarized ARRA this way:

...In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration’s tax cuts is more Bush-style tax cuts.

And the rhetorical response of conservatives to the stimulus plan — which will, it’s worth bearing in mind, cost substantially less than either the Bush administration’s $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq — has bordered on the deranged.

It’s “generational theft,” said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.

It’s “destroying my daughters’ future. It is like sitting there watching my house ransacked by a gang of thugs,” said Arnold Kling of the Cato Institute.

And the ugliness of the political debate matters because it raises doubts about the Obama administration’s ability to come back for more if, as seems likely, the stimulus bill proves inadequate.

For while Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough. We’re probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree...

It is becoming more and more apparent every day that the stimulus provided by ARRA is, as Krugman has long predicted, frightfully inadequate. Today’s news that the unemployment rate came down a tic last month doesn’t begin to tell the full story. The graph at the top of this post (taken from the 19 June 2009 issue of Science magazine and modified to show today’s data) shows that since the passage of ARRA the unemployment rate has gotten WORSE relative to the “Projected Without Recovery Plan” ...and worst still when compared with Obama’s “Predicted With Recovery Plan.”

But the unemployment rate is only part of the picture. The other part has to do with the production and spending that comprise the Gross Domestic Product (G.D.P.). Two days ago, a column in the New York Times explained the situation with reference to the second graph at the top of this post:

Chump Change in the Latest G.D.P. Report
by Casey B. Mulligan

On Friday, the Bureau of Economic Analysis released its advance estimate of real G.D.P. for the second quarter of 2009. Although some say it provides some of the first evidence of the stimulus law’s efficacy, a close inspection of the results shows that the government sector’s contribution to real G.D.P. growth so far has been trivial at best.

G.D.P. measures the total amount produced and spent in the nation during a particular time frame, like a year or a quarter of a year, indicating the country’s economic fitness. Real G.D.P. for the first quarter of 2009 was sharply lower than it was in 2008’s last quarter, which was itself sharply lower than the quarter before that. Thus, it came as a bit of a surprise that second-quarter real G.D.P. was not also sharply lower, but rather was pretty close to what it was in the first quarter.

Some advocates were quick to congratulate the stimulus law that was passed in February, claiming that “The marked improvement in this quarter relative to last is largely due to the American Recovery and Reinvestment Act (ARRA).”

A closer inspection of the B.E.A.’s estimates gives no support for this claim. The chart [above] shows the change in the United States’ real G.D.P. from the first to the second quarter, broken into five expenditure categories: private domestic purchases, net exports, defense, federal nondefense purchases and state and local government purchases.

We were told that the stimulus law would invigorate the economy by spending on federal nondefense programs and helping state and local governments maintain and grow their public services. Stimulus advocates point to the fact that these spending categories indeed grew from the first to the second quarter, as shown in the chart by the fact that those two bars point upward. (Perhaps they believe that tax cuts and unemployment insurance have important effects, but these are not separate G.D.P. categories — they are included in whatever category the recipient spends them).

However, the chart also shows that these types of purchases were trivial. Real federal nondefense purchases increased by a mere $4 per American, while state and local government purchases increased by a mere $8 per person. Real defense purchases increased by $17 per person, which seems large when compared to the other government purchase categories, but is trivial by any other measure.

Another reason that we know that the stimulus bill had not yet delivered on its promise: employment plummeted from the first to the second quarter. We can continue to grade the stimulus law as the economy further evolves, but it finds no congratulations in the second quarter’s economic performance as measured.

--- Casey B. Mulligan is an economics professor at the University of Chicago.

Obama plan to create 3 ½ million jobs by late 2010; but we’re now 8 ½ million jobs in the hole, and the states are firing TEACHERS!

New York Times column

July 3, 2009

Op-Ed Columnist

That ’30s Show

By PAUL KRUGMAN

O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that?

Let’s do the math.

Since the recession began, the U.S. economy has lost 6 ½ million jobs — and as that grim employment report confirmed, it’s continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.

And the deeper the hole gets, the harder it will be to dig ourselves out. The job figures weren’t the only bad news in Thursday’s report, which also showed wages stalling and possibly on the verge of outright decline. That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on. Do you remember the administration’s plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level.

So have we failed to learn from history, and are we, therefore, doomed to repeat it? Not necessarily — but it’s up to the president and his economic team to ensure that things are different this time. President Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger.

Just to be clear, I’m well aware of how difficult it will be to get such a plan enacted.

There won’t be any cooperation from Republican leaders, who have settled on a strategy of total opposition, unconstrained by facts or logic. Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That’s ludicrous, of course. The administration warned from the beginning that it would be several quarters before the plan had any major positive effects. But that didn’t stop the chairman of the Republican Study Committee from issuing a statement demanding: “Where are the jobs?”

It’s also not clear whether the administration will get much help from Senate “centrists,” who partially eviscerated the original stimulus plan by demanding cuts in aid to state and local governments — aid that, as we’re now seeing, was desperately needed. I’d like to think that some of these centrists are feeling remorse, but if they are, I haven’t seen any evidence to that effect.

And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits. (Right now the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support.)

Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

So getting another round of stimulus will be difficult. But it’s essential.

Obama administration economists understand the stakes. Indeed, just a few weeks ago, Christina Romer, the chairwoman of the Council of Economic Advisers, published an article on the “lessons of 1937” — the year that F.D.R. gave in to the deficit and inflation hawks, with disastrous consequences both for the economy and for his political agenda.

What I don’t know is whether the administration has faced up to the inadequacy of what it has done so far.

So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.

Choice of Two Roads

Eponymous painting by Viktor Mikhailovich Vasnetsov in the Russian Museum in St. Petersburg.

Choice of Two Roads

Thanks to Wall Street bankers gone bonkers the entire world’s economy is in a tail spin ...which will not be fully ironed out until the last of $500 trillion worth of credit default swaps are unwound. But no one talks much about CDSs at the moment, because now is the time to do something that will at least pull the U.S. economy out of its present nose dive. Indeed, when an aircraft is in such dire straits the pilots don’t get into an argument as to whether the wings will come off if they pull back too hard on the stick...

In fact, bickering pilots in an out-of-control airplane is the perfect metaphor for the way Congress is delaying Obama’s economic stimulus plan. Republicans (and some Democrats) contend that “all deficits are bad” and therefore that any increased government spending to stimulate the private-sector economy should be offset by cuts in ongoing government programs ...like science. That’s right, science! Take a look at all the national science programs that Senators Ben Nelson (D-NE) and Susan Collins (R-ME) propose to strip from the Senate American Reinvestment and Recovery Act as a part of a $77.9 billion deficit reduction! And they propose this at a time when it has been projected that under present conditions in just 5 years 90% of all scientists and engineers will live in Asia! What are they thinking?

Even cave man didn’t take the road of eating his seed corn during the long ice-age winters ...or homo sapiens sapiens would already be extinct!

So exactly what road SHOULD Obama and the Congress be taking? Well, the best answer that anyone could hope for would be the recommendation of a Nobel-Prize-winning economist who is untainted by having worked either on Wall Street or at the Fed while these bodies were planting the seeds of the present economic melt-down. Of course, that economist is Paul Krugman, and fortunately he has written many columns on this very subject. Here is an earlier one, and here is his column from today’s New York Times ...from which I take the following excerpts:

Just to be clear, I’m not arguing that trying to reduce the budget deficit is always bad for private investment. You can make a reasonable case that Bill Clinton’s fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade, which in turn helped cause a resurgence in productivity growth.

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan were special circumstances: in both cases the government pulled back in the face of a liquidity trap, a situation in which the monetary authority had cut interest rates as far as it could, yet the economy was still operating far below capacity.

And we’re in the same kind of trap today — which is why deficit worries are misplaced.

One more thing: Fiscal expansion will be even better for America’s future if a large part of the expansion takes the form of public investment — of building roads, repairing bridges and developing new technologies, all of which make the nation richer in the long run.

Apropos of the absolute urgency for Congress to pass an un-watered-down stimulus bill ASAP, I call your attention to an excellent column by Joan Walsh on what Obama should be now telling the public...but hasn’t quite yet.

N.B. Here is a wonderful 11-min TV interview with (1) the whistleblower who tried to expose Madoff's $50-billion ponzi scheme to the hear-no-evil-see-no-evil-speak-no-evil SEC and (2) Paul Krugman regarding the current subject matter.