Paul Krugman 101: Paul Krugman Explains America’s Catch-22 Economy

Now that the Republicans have won the House of Representatives, Paul Krugman predicts their next moves:

They’ll refuse to do anything to boost the economy now, claiming to be worried about the deficit, while simultaneously increasing long-run deficits with irresponsible tax cuts — cuts they have already announced won’t have to be offset with spending cuts.

Krugman also sees these things coming:

The resurgent Republicans have learned nothing from the economic crisis, except that doing everything they can to undermine Mr. Obama is a winning political strategy. Tax cuts and deregulation are still the alpha and omega of their economic vision. . . . [A] cutoff of desperately needed aid to the unemployed and a freeze on further help for state and local governments — is a given. The only question is whether we’ll have political chaos as well, with Republicans’ shutting down the government at some point over the next two years. And the odds are that we will.

And such moves by the Republicans, according to Krugman, will simply exacerbate our current economic sluggishness. He explains why he thinks this with admirable clarity:

[B]orrowing [during the Bush years] made the world as a whole neither richer nor poorer: one person’s debt is another person’s asset. . . . The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall. Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending. Corporations are flush with cash — but why expand when so much of the capacity they already have is sitting idle? Consumers who didn’t overborrow can get loans at low rates — but that incentive to spend is more than outweighed by worries about a weak job market. Nobody in the private sector is willing to fill the hole created by the debt overhang. So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang. But the moralizers will have none of it. They denounce deficit spending, declaring that you can’t solve debt problems with more debt. They denounce debt relief, calling it a reward for the undeserving. And if you point out that their arguments don’t add up, they fly into a rage. Try to explain that when debtors spend less, the economy will be depressed unless somebody else spends more, and they call you a socialist.

The last sentence immediately above contains Krugman’s Economics 101 lesson in a nutshell: 

[W]hen debtors spend less, the economy will be depressed unless somebody else spends more.

It seems to me that this makes perfect sense, and is actually an iron law of economics that the right-wing politics of our time so easily demagogues: you are a socialist and driving the country to ruin if you promote government spending in a time of slack demand for goods and services. But Krugman is arguing (and it sounds right to me) that when private individuals are trying to pay down debt, corporations and banks will cautiously sit on their cash if demand isn’t coming from somewhere. Thus the government can keep people working by deficit spending on worthy causes (infrastructure, etc) until individual debt levels come down and consumers start spending again. But this solution seems counterintuitive, and even immoral, and so Krugman observes:

More and more voters, both here and in Europe, are convinced that what we need is not more stimulus but more punishment. Governments must tighten their belts; debtors must pay what they owe. The irony is that in their determination to punish the undeserving, voters are punishing themselves: by rejecting fiscal stimulus and debt relief, they’re perpetuating high unemployment. They are, in effect, cutting off their own jobs to spite their neighbors.

Another way to put this is that the American economy has a lot of potential and capacity that is not being utilized, and we could rationally choose to put people to work on worthy projects, but we’re not. And we’re not because we do not agree about what constitutes worthy projects, it’s socialist to do so in any case, and those individuals who got themselves into debt must be held accountable. And so we’re stuck in an economy where all the major actors—banks, corporations, individuals, and the government—are waiting for one another to “go first,” and start spending again. But economies only grow when people rationally move around (that is, work), and yet people won’t move around unless there’s money to chase. That’s Krugman’s (and, I think, America’s) catch-22.

And what was President Barack Obama’s role in America reaching this point? President Obama, in Krugman’s view, failed in nerve; failed (ironically) in audacity:

Mr. Obama’s problem wasn’t lack of focus; it was lack of audacity. At the start of his administration he settled for an economic plan that was far too weak. He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies. The aftermath of major financial crises is almost always terrible: severe crises are typically followed by multiple years of very high unemployment. And when Mr. Obama took office, America had just suffered its worst financial crisis since the 1930s. What the nation needed, given this grim prospect, was a really ambitious recovery plan. Could Mr. Obama actually have offered such a plan? He might not have been able to get a big plan through Congress, or at least not without using extraordinary political tactics. Still, he could have chosen to be bold — to make Plan A the passage of a truly adequate economic plan, with Plan B being to place blame for the economy’s troubles on Republicans if they succeeded in blocking such a plan. But he chose a seemingly safer course: a medium-size stimulus package that was clearly not up to the task.

And President Obama’s failure of nerve has continued. He has even adopted the rhetoric of his enemies:

I felt a sense of despair during Mr. Obama’s first State of the Union address, in which he declared that “families across the country are tightening their belts and making tough decisions. The federal government should do the same.” Not only was this bad economics — right now the government must spend, because the private sector can’t or won’t — it was almost a verbatim repeat of what John Boehner . . . said when attacking the original stimulus.

So this is Paul Krugman’s take on the world, and the way he frames the situation sounds more than plausible to me. But I wonder. Who is the smartest economist around making the intellectual counterargument to Krugman? Does anybody have an opinion about this? Who should I be reading to get the other side?

About Santi Tafarella

I teach writing and literature at Antelope Valley College in California.
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15 Responses to Paul Krugman 101: Paul Krugman Explains America’s Catch-22 Economy

  1. brenda says:

    This mirrors my thoughts about what’s going on today. I don’t know who would be on the other side, Sarah Palin? I mean, if someone is right does it make sense to even ask what those who are wrong think?

  2. santitafarella says:

    Brenda:

    It does make sense to listen to those who you think are wrong, and it makes sense because it is only in very rare instances that the wrong are totally wrong. In other words, error is rarely wholly error, but mixed with some truths that you might otherwise miss or downplay if you are not paying attention. I’m against epistemic closure as a matter of principle; it’s not a characteristic of wisdom. Dialogue, not insularity, is what I favor.

    Also, there is something obviously flawed in Krugman’s solution to this problem: “[W]hen debtors spend less, the economy will be depressed unless somebody else spends more.” By Krugman’s logic, a two trillion dollar stimulus is better than a one trillion dollar stimulus. But there has to be a limit, or else a, say, four trillion dollar stimulus is twice as good as a two trillion dollar one, and an eight trillion dollar stimulus is twice as good as a four trillion dollar one, and so on.

    Obviously, the bond market is going to conclude, at some point, that the United States will not meet its debts (as happened with Greece). There may be economists who argue that we are at a threshold already and need to be careful. I want to know who is making that intellectual argument and why they say what they say. I want to know what their claims are and why they are making them.

    —Santi

  3. brenda says:

    “It does make sense to listen to those who you think are wrong, and it makes sense because it is only in very rare instances that the wrong are totally wrong.”

    Sure, but I think you over estimate the levels of sanity out there today and the numbers of those who are totally wrong. Entire nations can go insane or hold to delusional beliefs. I worry that the US is on the brink of just that. Of course we should pay attention to what people say even when they are wrong but if we know that what they say is objectively wrong we would be fools to take their advice.

    In the building where I live there is a guy who *knows* that fluoride in the water is part of a government plot by the Illuminati to control us. There is also another guy who *knows* that the government has back engineered alien technology and is suppressing free energy. I don’t listen to these people, I don’t take their ideas seriously, but I do listen in that I take it seriously *that* they hold these views.

    “I’m against epistemic closure as a matter of principle; it’s not a characteristic of wisdom.”

    If there are objective truths of the world then we can say what they are and such statements will be true. I think that perhaps some people mistake *any* truth claim as epistemic closure. They do this, I believe, out of a sense of will to power. It just offends them that the world is not subject to their beliefs and that, horrors, they could be wrong.

    “There may be economists who argue that we are at a threshold already and need to be careful.”

    I don’t think that economics is a science, it probably has more in common with astrology than any science. Krugman and Brad DeLong seem to be more right than not but who knows, that could change. I don’t think the fear that we’ll become like Greece is realistic. That’s just GOP propaganda. There’s a lot of that out there.

    • santitafarella says:

      Brenda,

      I’m not talking about taking Flouride Illuminati Man or Sarah Palin seriously. When such people are correct about something, it is typically accidental. But I do think you underestimate intellectual conservatism.

      And I don’t think that economics is at all akin to astrology. As with any intellectual position, smart people must be out there who disagree. There must be another side to Krugman’s viewpoint. I’m just curious who is the conservative version of Krugman out there (since I don’t know). Who is that articulate, highly esteemed by his economics colleagues, academic that might take a view opposite of Krugman’s? Maybe there is no such creature. Maybe the discipline, within elite universities, is unified on what needs to be done, but the politics cannot be won to do it. I don’t know.

      And why do you think the Greek parallel is silly? Does no academic out there take it seriously?

      —Santi

      • brenda says:

        “I do think you underestimate intellectual conservatism.”

        I think that’s an oxymoron. I don’t know what intellectual conservatism would look like. Who would be a leading neoconservative today, John Podhoretz? William Kristol? Maybe Francis Fukuyama once upon a time but he now rejects the neoconservatives and likens them to Leninism.

        “As with any intellectual position, smart people must be out there who disagree.”

        That people disagree doesn’t imply they are correct.

        “There must be another side to Krugman’s viewpoint.”

        Eugene Volokh maybe? The dominant macroeconomic theory for many years in the US at the federal level has been based on the delusional rantings of Ayn Rand. Both Alan Greenspan and Paul Volcker were Randian nutcases. There is no pony at the bottom of that manure pile.

        “Maybe there is no such creature.”

        Economists are the lapdogs of the powerful. At the upper levels they only exist to rationalize the policies of their sociopathic masters. In this economics is *exactly* like astrology. It is based on delusional models of human nature and rationality and only serves to justify the rapacious greed and self serving narcissism of the robber baron kings of our plutocracy. Which is the exact same role that astrology served for the kings of the past.

        Conservative: An authoritarian follower.
        Libertarian: An authoritarian follower who thinks he’s a leader.

        Authoritarianism is an anti-intellectual ideology. That is why there are no intellectual conservatives.

        “And why do you think the Greek parallel is silly?”

        Because concerns that the US would follow Greece into complete economic collapse was nothing more than GOP propaganda intended to frighten people into voting against their self interest.

        “Does no academic out there take it seriously?”

        I am not an academic. I’m a poor person with a good education and enough time to roam the intertubes far and wide. I noticed that the “ZMG! Obama’s gonna turn us into Greece!” meme came out of the great GOP Wurlitzer machine prior to the elections to whip up the Teabaggers and then promptly vanished once it served it’s intended purpose. The Tea Party is entirely the astroturfed fabrication of the Koch brothers and their sociopath friends. There is no “there there” to be found inside.

      • andrewclunn says:

        Wow Brenda, where did the attack on Libertarianism come from? Certainly you’re not claiming that Krugman is a libertarian.

  4. andrewclunn says:

    Santi, the limits of stimulus for Krugman’s policies are when another currency displaces the US dollar as the standard for international trade. The Euro came dangerously close before this economic collapse. Thankfully (for the US) the Europeans had done more speculating and have done even more bailing out than we have, and have destroyed the value of their currency in the process. That’s a dangerous road to go down though. And what Krugman offers seems incredibly short sighted.

    • Colin Hutton says:

      Andrew: I’ll be disagreeing, tomorrow, with everyone here – if I can find the time. In the interim I am agreeing with you, but point out that:

      “..have destroyed the value of their currency in the process”

      shows your very US-centric perspective. Around 7 years ago our currency (A$) bought US50c. Today it buys US$1. Has our currency gone up ? Or has yours gone down?

      Colin

      • Colin Hutton says:

        And : – 40 years ago I could buy 1oz of gold for US$35, guaranteed by the US Federal Reserve – until Nixon reneged on the promise. Now that 1oz will cost me US$1,300+. Has the price of gold gone up? Or; has the value of the US$gone down?

        Colin

      • andrewclunn says:

        My acknowledgment that “The Euro came dangerously close before this economic collapse,” indicates that the US dollar was greatly weakened over the past few decades. It is only because of the borrow and spend practices of certain member nations of the EU that the Euro has taken a dive recently. I don’t know how my 4 sentence paragraph was being US-centric, but I await your full response tomorrow.

  5. Colin Hutton says:

    Brenda :

    And there was I thinking that *I* had a low opinion of economists. So I enjoyed watching the stomping you administered to them. In that spirit, I agree with your “I don’t think that economics is a science, it probably has more in common with astrology than any science”. However, I think you undermine your thesis when you suggest that some economists, such as Krugman, are more likely to be right than others. I doubt it.

    I think it would be sensible to question Krugman’s suggestions. He is obviously, (“Right now we very much need active policies on the part of the federal government to get us out of our economic trap”) and by his own admission, a Keynesian. Even if it *was* Government spending on public works that brought about a recovery from depression 80 years ago (perhaps the economy would have recovered as quickly anyway – we’ll never really know) there is no reason to presume that history would repeat itself in the very different, (high-tech, globalised) world of today. (If, say, building 1,000 miles of rail-track created jobs for 10 million then, the figure today might only be 1 million. Less spadework!).

    Also, K does not commit to what amount he believes should be spent, while putting the boot into Lawrence Summers for recommending too small a package to Obama (of course Summers is only from Harvard whereas K is from Princeton!) And as Santi points out if, say, $1t is good, why is $2t…$4t…$6t etc. not better.

    K also does not specify how to fund his proposals. Borrowings? US government debt already exceeds $13,000,000,000,000. Increased taxes? Try that one on the voters. Print even more money than has already been done? Banana republic.

    Santi:-

    “Who should I be reading to get the other side?” Don’t bother – see above. However, George Soros has some interesting things to say on global finance and, if you haven’t read any economic history, it can be interesting. (The rise and decline of nations seen through an economic prism should lead to some sobering introspection in all Western economies).

    Krugman doesn’t mention China. It is the elephant in this room. And it holds a sword of Damocles in the form of around 25% of the $13,000,000,000,000 of US government debt, which the US won’t (can’t) ever repay.

    The lesson from the economic history of the 20thC is that Marxist Socialism does not stack up against a capitalist system. The lesson that will be learnt in the 21stC is how democratic capitalist systems stack up against an authoritarian capitalist system. If China can maintain its political stability and current economic trajectory until 2050, I suggest it will by then be the totally dominant economic world power. And economic power is soon followed by military power. Visit Beijing, observe, and, to quote, Krugman, ‘be afraid, very afraid’.

    -Colin

  6. Colin Hutton says:

    Andrew

    “Thankfully” is probably the word I focussed on. It implies that it was fortunate, from a US perspective, that the $US retained its (default)status as the world’s trading currency. There is no particular advantage to that (that I can see) other than the potential to do today the equivalent of what Nixon/USA then did in (if I remember the date correctly) 1971.

    I should say ‘perceived potential’ actually, because geopolitical circumstances today (see my above comments to Santi) would probably mean that the US would not escape unscathed today (as it did in the 70’s)

    -Colin.

  7. santitafarella says:

    What I find interesting in the above thread is that nobody has, as yet, offered a single economist of the same stature as Krugman who disputes the general direction of Krugman’s premises about what to do. Are all elite academic economists at the best schools Keynesians? Is Keynesianism among contemporary economists a bit like Darwinism among biologists—something that all who are in-the-know agree upon? Does no sane, highly trained expert in the field, fundamentally disagree with Krugman?

    Hmm.

    —Santi

  8. Sirrahc says:

    Thomas Sowell is probably your best bet.

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