When Paul Krugman was Naïve

This defies all sensibility:

Myths of Austerity

I would ask readers to read this Krugman piece and then tell me what is wrong with this picture. I'll offer my opinion in a day or so.

Comments

[George]

I liked the introduction.

"Much of what Serious People believe rests on prejudices, not analysis. And these prejudices are subject to fads and fashions."

Unfortunately he fails to apply this to his own analysis which is based on a view that the financial system has a future in the form it has taken in the last few years.

One point worthy of consideration is we should look at where those demanding austerity are coming from. Equal shares of pain for all or another opportunity to grab resources and cash.

[David]

Even a person with conventional economic views would not be convinced by this article. First, the 'bond vigilante' threat is a straw man argument; there are many other reasons why 'austerity' is necessary. Second, no one expects an austerity package to cause immediate growth. In fact, anyone with any perceptiveness knows that it will cause 'pain' in the short term, but the idea is that it provides a launch pad for sustainable growth in the future.

Personally, I don't have conventional economic views, and I think that 'austerity' is inevitable whether we attempt to introduce it in as controlled a way as possible, or whether it is imposed on us chaotically. I don't believe there will ever be sustained economic growth again, and I question why it was pursued so vigorously in the first place.

[Phil Henshaw]

Well, Krugman is entirely correct,... except that he exposes his own prejudicial thinking by failing to then ask where the money is supposed to come from. If the lenders of the world can't be promised secure returns from lending to governments any more... is it because the economies seem to not be making enough money to feasibly secure the loans...??

Who is then naturally the "spender of last resort" with the fiduciary responsibility to step to the plate when all the borrowers are broke anyway??

[Florifulgurator]

With exponential growths hitting the limits we can now no longer all be Keynesians.

[Icarus]

I think commenters above are correct - Krugman's piece assumes that future long-term growth is (a) possible, and (b) desirable. Both of these assumptions are probably false... but my admittedly very basic understanding is that modern economics cannot function without growth. Since the economy is based on debt, and it's assumed that debt will be paid off by future growth, an end to growth means that the economy cannot function any more (not without some kind of fundamental change in how it works). If that's the case then Krugman's article makes sense in the context of his assumptions but probably doesn't make sense in the real world situation we find ourselves in. Having said that, I don't see any governments coming out and saying that growth needs to end and economies need to be redesigned from the ground up - they're all still talking about growth as being essential and what they're all aiming for. I think austerity is necessary but it's only going to be of limited help if it's seen as a bit of necessary pain before a return to growth.

[GaryA]

Journalistic formulic drivel.

[cynical mode engaged]

What are we really dealing with here? The idea, sorry ideology, that imposed austerity/poverty now will bring future prosperity and this is a desirable thing....
Ehm hasnt this been tried for the last 50 years in the failed IMF austerity packages imposed on hapless third World debtors?.... surely this should have blown the myth apart-that the way to prosperity is via austerity?

I see it as the next stage of financial movers and shakers plot; to provide the capacity for renewed government funding which is now now needed to compensate the financial sector for what is looking like years or decades of losses as loans go bad in economies that are all loaned up to the hilt and sinking into negative equity.

[Molly Radke]

OK, without reading the above posts....which perhaps I'm repeating....here's my take on the problems with Krugman's analysis. As nearly as I can recall the fine points of his reasoning, which, alas, I did not print out so that I could refer to them as I write, it was my sense that he was arguing from a largely Keynesian perspective - i.e. that government deficit spending will trigger economic growth and enable a repayment of the deficit. Thus "we" do not have to worry about the size of deficits as they are self-correcting. While that may have been more or less "true" in a world where resources could still be, alas ignorantly, perceived as limitless, it simply is NOT true in a world where resource plenitude can only be assumed by the WILLFULLY ignorant. I believe that deficits DO matter, and that the huge and growing size of the current deficit IS problematic. I suspect, tho I have not checked out the stats on this, that the current deficit's size represents a much larger percentage of GDP that did the new deal deficit..... and our current deficit exists in an environment in which future economic growth is MUCH more limited than it was back then. And much of the current deficit spending has gone to further enrich the already wealthy and to prop up a seriously flawed, largely unregulated, banking system. Moreover while I personally do support spending for unemployed support and for new, modern infrastructure (in keeping with future definitely DIFFERENT realities), I firmly believe that such spending must be made in the context of SERIOUS cuts in other, non-essential, essentially foolish government spending such as two EXPENSIVE wars, each of which has NO clear, achievable goals, multi-billion subsidies for oil companies, etc. etc. etc.. While there does seem not be be TODAY a refusal of international investors to buy US bonds, I find it difficult to believe that that entire system of "high finance" - bond trading, derivative trading, etc., will survive the coming scarce resource- based economic contraction that is not only on the near horizon, but probably is actually fueling the current contraction. So - there's my off the top of my head response to dear Paul's writing, which would probably be better informed if I had printed his piece out so that I could make specific references to what he says!

[George Mobus]

Short responses from me today. I just posted (few hours ago) my overall assessment of why neither Keneysians nor their counterparts are right. Hope you will get a chance to critique that soon. Meanwhile...

George,

That was precisely my reaction.

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David,

Would there be a better name for involuntary austerity? I agree with you that we will do less and have less, and not by choice.

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Phil,

Good point. I think his biggest prejudice is that he believes, without questioning his own assumptions, that growth represents a healthy economy.

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Flor,

Not even one of us can be a Keynesian!

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Icarus,

A small semantics adjustment. Economics doesn't depend on growth. It is only the "science" describing how the economy works (or bills itself that way). What depends on growth is the capitalistic/debt-financing-based system we use today. Some economic models based on this description will, of course, fail. But others like supply and demand have been shown to be pretty astute. The monied interests that seek more profit drive the capitalistic system. They depend on growth to constantly build their wealth.

But otherwise I agree with your assessment of Krugman's rationality under the assumptions.

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GaryA,

My thought to Icarus above seems to fit here as well. Capitalism has been hailed as the great bringer of wealth. And to a few it has certainly done so. But at what cost to the majority?

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Molly,

I'm going to take the position that it doesn't matter which position one takes -- they are both wrong given that the assumption is that once whatever pain (austerity) or relief (stimulus and debt) is over we will have our good old economy back again. We won't, for reasons I put in today's new posting.

Regards All

George

[t0wnp1ann3r]

Krugman is decrying the Bandwagon effect ( http://en.wikipedia.org/wiki/Bandwagon_effect ) claiming that a self-reinforcing availability cascade (http://en.wikipedia.org/wiki/Availability_cascade ) is creating a consensus.

Maybe he’s right, but he’s caught in the same trap as many who are rearranging deck chairs on the Titanic. They refuse to allow that overpopulation and peak oil might cause a problem so severe that the species doesn’t recover. They’re falling victim to an availability heuristic ( http://en.wikipedia.org/wiki/Availability_heuristic ) and allowing their status quo bias (http://en.wikipedia.org/wiki/Status_quo_bias ) to anchor (http://en.wikipedia.org/wiki/Anchoring ) them to their own Bias blind spot ( http://en.wikipedia.org/wiki/Bias_blind_spot ), their selective perception (http://en.wikipedia.org/wiki/Selective_perception ) never allowing them to accept that things like overpopulation might make all this discussion of the economy a moot point. Or that the “economy” that they talk about might be some complex show that they can’t see all of the strings of, and therefore will never be able to truly control, no matter how many laws and policies they pass, because it’s all ethereal and mass-produced willing suspension of disbelief, coupled together to form fiat.

I myself am most likely falling victim to the impact bias (http://en.wikipedia.org/wiki/Impact_bias ) and underestimating the resiliency of this species to respond to the impending doom caused by climate change, peak oil, peak water, peak soil, overpopulation, and lack of sapience.

[George Mobus]

T0wnp1ann3r,

Wow. Those links are going to keep me busy for a while!

I like your last point and share that concern for myself. I keep asking myself if things are really so bleak. But then something like the Gulf oil thing happens and...

In general though, in the perspective of on-going evolution, I tend to now think of the doom scenario as an opportunity in disguise (a feel that will most surely not be shared by a majority of the populace). It is an opportunity for humans to further evolve that missing sapience, if we know how to position ourselves as a species going into a bottleneck.

George

[Florifulgurator]

George,
yeah, the doom scenario is indeed an opportunity, and an evolutionary inevitability, and it can give meaning and purpose to human life like nothing anytime before...

Still I'm a bit pessimistic on the outlook of "runaway doom" co-evolving with runaway climate disaster. Will the small final bottleneck population somewhere in the high artic have any evolutionary incentive to grow sapience? I doubt. The old hominid traits suffice for survival...

Somehow we need to make sure today that some eusapients survive tomorrow. At least make sure the survivors have some memory of what their ancestors have done. And not only for the sake of humanity, but also to give the Gaia system a chance to recover...

Oooomph, one need be a very coldblooded scientist to ponder all this and not despair.

[George Mobus]

Hi Flor,

Will the small final bottleneck population somewhere in the high artic have any evolutionary incentive to grow sapience?

I would contend that the more sapient will be in the right place at the right time. The subject of your next paragraph is what I conceived of this blog as all about!

Not so much coldblooded as having the sapience to down modulate one's limbic centers appropriately. The scientist part comes in in the sense of observing and interpreting reality. I personally lament, but do not despair.

George