The unconscious liberal

Macroeconomic Populism Returns

By Paul Krugman

February 1 (NYT) — Matthew Yglesias says what needs to be said about Argentina: theres no contradiction at all between saying that Argentina was right to follow heterodox policies in 2002, but it is wrong to be rejecting advice to curb deficits and control inflation now. I know some people find this hard to grasp, but the effects of economic policies, and the appropriate policies to follow, depend on circumstances.

Yes, unemployment- source of the greatest economic loss as well as a social tragedy and a crime against humanity, is always the evidence deficit spending is too low. There is no exception as a simple point of logic. The currency is a simple public monopoly, and the excess capacity we call unemployment- people looking to sell their labor in exchange for units of that currency- is necessarily a consequence of the monopolist restricting the supply of net financial assets.

I would add that we know what those circumstances are! Running deficits and printing lots of money are inflationary

Why the undefined ambiguous empty rhetoric?

and bad

What does ‘bad’ mean here? For example, there is no evidence that inflation rates at least up to 40% hurt real growth, and more likely help it. Politically, however, it may be ‘very bad’. But those are two different things.

in economies that are constrained by limited supply;

Limited supply of what? Labor? Hardly! In fact, full employment is even more critical, if that’s possible, when there are limited supplies of other resources. Wasn’t Rome built without electricity, oil, bulldozers, the IMF, etc. etc.? OK, it took more than a day, but it was built. There is always more to do than people to do it. Economically, unemployment is never appropriate policy.

they are good things when the problem is persistently inadequate demand.

Unemployment is the evidence of this ‘inadequate demand’ which is necessarily created by taxation, the ultimate source of all demand for a given currency. In fact, taxation functions first to create unemployment- people looking for work paid in that currency. That’s how govt provisions itself- it creates people looking for jobs with its taxation, then hires those unemployed its tax created. What sense does it make for govt to create more unemployed than it wants to hire??? Either hire the unemployed thus created, or lower the tax!!!!!!!!!!!!

Similarly, unemployment benefits probably lead to lower employment in a supply-constrained economy; they increase employment in a demand-constrained economy; and so on.

With more that needs to be done than there are people to do it, the economy isn’t supply constrained until full employment. And nominal unemployment benefits are about the level of prices, wages, and the distribution of income rather than the level of potential employment, etc.

So sometimes the relationship and money looks like this, from the best economics principles textbook:

This is more about ‘inflation’ causing ‘money’ as defined.

But sometimes it looks like this:

This is more about partially defining ‘money’ as reserve account balances at the Fed but not securities account balances (tsy secs) at the Fed.

And just to repeat a point Ive made many times, those of us who understood IS-LM predicted in advance that the actions of the Bernanke Fed wouldnt be inflationary, while the other side of the debate was screaming debasement.

It’s not about ISLM, which is fixed fx analysis. It’s about recognizing that there is always precious little difference between balances in reserve accounts at the Fed and securities accounts at the Fed.

There’s something else to be said about Argentina and, it seems, Turkey namely, that were seeing a mini-revival of what Rudi Dornbusch and Sebastian Edwards long ago called macroeconomic populism. This involves, you might say, making the symmetrical error to that of people who think that running deficits and printing money always turns you into Zimbabwe; its the belief that the orthodox rules never apply. And its an equally severe mistake.

Unfortunately most of the ‘orthodox rules’ apply to the fixed fx policies in place when they were first stated, and not to today’s floating fx.

Its not a common mistake these days; a few years ago one would have said that only Venezuela was making the old mistakes, and even now its just a handful of countries. But it is a mistake, and we need to say so.

Yes, mistakes are being made by all of the headline economists and the global economy is paying the price.

Re: Financial services


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(email exchange)

Yes!

>   
>   Sounds like Krugman has been reading your blog:
>   

The Market Mystique

by Paul Krugman

Mar 26 (NY Times) — But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.


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Krugman: Stimulus package is now way inadequate


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He’s starting to sound more like me. Maybe reading my blog?

Be interesting if he starts pushing a full payroll tax holiday, though that’s tough for a Democrat ideologically nowadays, even though it’s their constituency that’s the most severely punished by it and needs it the most to stay in their homes, as they would be able to make their payments and thereby end the financial crisis as well.

Also, he should favor the idea of giving the states revenue sharing on a per capita basis which means it can be ‘no strings attached.’ $300 billion/$1,000 per capita would be a good starting point.

Feel free to forward this to him, thanks.

What the centrists have wrought

by Paul Krugman

Feb 7 (Wall Street Journal)

I’m still working on the numbers, but I’ve gotten a fair number of requests for comment on the Senate version of the stimulus.

The short answer: to appease the centrists, a plan that was already too small and too focused on ineffective tax cuts has been made significantly smaller, and even more focused on tax cuts.

According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.

The real question now is whether Obama will be able to come back for more once it’s clear that the plan is way inadequate. My guess is no. This is really, really bad.


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Krugman again


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In case you thought Krugman isn’t part of the problem.

From his recent column:

Ideas for Obama

by Paul Krugman

Jan 12 (New York Times) &#8212 OK, I’ll bite — although as I’ll explain shortly, the “jump-start” metaphor is part of the problem.

First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.

Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more.

If he understood non-convertible currency, he wouldn’t make this statement.

First, it’s not a trade off.

Second, tax cuts not spent indicate the tax had no value in reducing demand in the first place.

Third, a tax cut that goes unspent is not ‘squandered’. Government squandering would take the form of wasting real goods and services (which does happen too often but that’s another story), not the funds spent per se.

There is not a finite pot of funds that government can spend. The limits of government spending are inflation tolerance, not any specific quantity. Government can do both tax cuts and relief payments if the political will is there, and if the tax cuts are ‘ineffective’ all the better as other government spending can be higher than otherwise without any extra movement of the inflation needle.

And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?

Krugman is contributing to more real damage than the dynamite that funded his nobel prize.

If anyone reading this knows him, please forward, thanks!


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Krugman on deficits


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Deficits and the Future

By Paul Krugman

Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall.

Sounds good.

Others, however, worry about the burden that large budget deficits will place on future generations.

OK.

But the deficit worriers have it all wrong. Under current conditions, there’s no trade-off between what’s good in the short run and what’s good for the long run; strong fiscal expansion would actually enhance the economy’s long-run prospects.

No, under any conditions coincident with a shortage of aggregate demand.

The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy’s long-run rate of growth. Under normal circumstances there’s a lot to this argument.

Not true. There is never anything to this argument.

But circumstances right now are anything but normal. Consider what would happen next year if the Obama administration gave in to the deficit hawks and scaled back its fiscal plans.

Would this lead to lower interest rates? It certainly wouldn’t lead to a reduction in short-term interest rates, which are more or less controlled by the Federal Reserve. The Fed is already keeping those rates as low as it can — virtually at zero — and won’t change that policy unless it sees signs that the economy is threatening to overheat. And that doesn’t seem like a realistic prospect any time soon.

What about longer-term rates? These rates, which are already at a half-century low, mainly reflect expected future short-term rates. Fiscal austerity could push them even lower — but only by creating expectations that the economy would remain deeply depressed for a long time, which would reduce, not increase, private investment.

Both true.

The idea that tight fiscal policy when the economy is depressed actually reduces private investment isn’t just a hypothetical argument: it’s exactly what happened in two important episodes in history.

The first took place in 1937, when Franklin Roosevelt mistakenly heeded the advice of his own era’s deficit worriers. He sharply reduced government spending, among other things cutting the Works Progress Administration in half, and also raised taxes. The result was a severe recession, and a steep fall in private investment.

Yes, taxes were raised to pay for the new social security program and kept off budget. After the immediate economic setback they changed the accounting and put social security taxes on budget where they remain today. The lesson of public accounting for the government was and is that it best serves public purpose when it’s on a ‘cash basis’.

The second episode took place 60 years later, in Japan. In 1996-97 the Japanese government tried to balance its budget, cutting spending and raising taxes. And again the recession that followed led to a steep fall in private investment.

Yes, they kept pushing consumption taxes that set them back.

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.

No you can’t. The deficits of the early 90’s recession fueled the subsequent expansion, and the resulting surplus killed it, and we are still feeling the effects of those surplus years today.

What made fiscal austerity such a bad idea both in Roosevelt’s America and in 1990s Japan.

And the US in the late 90s- he conveniently bypasses that one?

were special circumstances:

No, fiscal austerity necessarily reduces aggregate demand.

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.

Yes, because monetary policy- changing interest rates- doesn’t actually work as theorized by the mainstream.

And note that in the last year interest for savers has come down about 4% while interest charges for borrowers are about unchanged, or, in many cases, higher, as the spreads widened as the Fed cut rates. And in any case the non government is a net saver/net receiver of interest payments to the tune of the government’s outstanding treasury securities. So the largest consequence of last year’s rate cuts has been a cut in private sector interest income.

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

At least he gets to the right place, even if it is via faulty logic.

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.

Yes.

Should the government have a permanent policy of running large budget deficits? Of course not.

Why not, if demand is chronically weak, which it has been for a long time.

Although public debt isn’t as bad a thing as many people believe —

True!

it’s basically money we owe to ourselves —

Wrong reason :(

in the long run the government, like private individuals, has to match its spending to its income.

Wrong. He misses the difference between issuers of non convertible currencies with uses of those currencies.

The funds for us to pay taxes to come from government spending (or government lending). So government is best thought of as spending first and then collecting taxes or borrowing.

And every dollar of cash in circulation has to be from government deficit spending- funds spent but not yet collected for payment of taxes.

Etc.

Rookie mistake for a Nobel Prize winner not to see the difference between issuer and user of anything.

But right now we have a fundamental shortfall in private spending: consumers are rediscovering the virtues of saving at the same moment that businesses, burned by past excesses and hamstrung by the troubles of the financial system, are cutting back on investment.

Yes!

That gap will eventually close,

Not without sufficient deficit spending.

but until it does, government spending must take up the slack. Otherwise, private investment, and the economy as a whole, will plunge even more.

Yes!

How about a payroll tax holiday where the treasury makes the FICA payments for employees and employers, along with maybe $300 billion to the states for operations and infrastructure projects?

he bottom line, then, is that people who think that fiscal expansion today is bad for future generations have got it exactly wrong. The best course of action, both for today’s workers and for their children, is to do whatever it takes to get this economy on the road to recovery.

And keep it there.

Doesn’t he know about the ongoing ‘demand leakages’ taught in the text books? Tax advantaged pension funds, IRAs. insurance, and other corp reserves, etc. That grow geometrically (most years)?

And that’s why the full employment deficit is something like 5% of GDP, etc?

(If anyone knows Professor Krugman feel free to email this to him, thanks)


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