Wednesday, May 1, 2013

Austerity is not a strategy...

In his New York Times article The Ignoramus Strategy Paul Krugman states "what's really going on in the economy" as follows. Each followed by my take: 
1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

The economy is a tad bit more than your spending and my spending. Oh, and by the way, you and me have been spending aplenty while the recovery proceeds at a snail's pace. The economy is, in fact, like an individual family that earns a certain amount---by producing something---then spends that income. If the family doesn't spend it all---that is, if it acts responsibly---and invests the difference, it provides capital for the production of new and improved goods and services, creating jobs in the process.
2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

Nope; consumer spending has held up just fine. Business investment, on the other hand, hasn't of late
3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

Government purchases must be paid for. And if government is to borrow, lenders must be willingly to supply it with, yes, their idle funds --- in return for a presently very low interest payment. Investors haven't always been so willing to lend money for such a measly return --- in fact they've never been so willing (rates are at record lows). Of course, one investor, the Fed, has never before committed to purchasing so much government-issued debt. Oh, and those funds from the Fed weren't previously idle, they're brand spanking new. As for government borrowing, well, the private sector will ultimately have to curtail productive activities in order to pay back the debt incurred to finance current "investments".

Now Krugman's response to that last sentence---after calling me an idiot (or an ignoramus)---would be that the private sector will be paying itself back ("we owe it to ourselves"), and that somehow makes it a-okay. I think, in fact, the number---that we've bought of our nation's debt---is somewhere around 66%. So simple math alone suggests that Krugman's own argument should be sliced by about a third. That is, we (our kids/grand kids that is) will be paying two-thirds to "ourselves" and the remaining third to other individuals/entities with whom we share this planet --- who just happen to live on the other side of lines drawn on maps. But, frankly, that's not the least bit the issue --- the domicile of the lender is of little consequence. The basic issue should be intuitive: if I borrow from my brother and spend (God forbid like a government), I'll be paying him back (with funds I borrow from someone else, if I'm like a government). It's in the family, but I'm still out the money. (Please read this open letter to Paul Krugman for a more in depth view of why his argument---which, by the way isn't his, it's a centuries-old fallacy---is the definition of nonsensical)  And if I spend (or "invest" if you prefer) like a government, the odds that I'll be doing more than wasting scarce resources that would have been better utilized by the profit-seeking private sector ("crowding out"  by definition), are very slim indeed. I.e., I will not have produced, or preserved, enough with the borrowed money to pay my brother back. You see there's a reason I (like the government) keep having to hit up the family.
4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

Correct; the past four years of budget deficits haven't led to soaring interest rates (not yet anyway), not while the Fed stands "prints" in support. And the Fed's "money-printing" hasn't led to inflation, not while the "printed money" sits idle in banks' excess reserve accounts left on deposit (earning .25%) at the Fed. Austerity policies, by definition, inflict the kind of pain a debt-ridden country (just like a debt-ridden individual family) must ultimately endure while it gets its act together. Austerity is not a growth strategy, it's not something you try, it's a necessity anytime expenditures exceed revenues and there's no credible moment on the horizon when previous investments will yield enough to offset the deficit.
5. Yes, the government must pay its bills in the long run. But spending cuts and/or tax increases should wait until the economy is no longer depressed, and the private sector is willing to spend enough to produce full employment.

Oh sure, spending cuts can wait until future politicians are in a position to cut the federal budget --- that is, to disappoint their supporters. Never happens!! As for tax increases, I concede, it would be a very bad idea to suck more from the private sector to fund yet more government spending, weak economy or not.

Here's his last paragraph (earlier in the article he referred to Ken Langone as an ignorant simpleton):
Is this impossibly complicated? I don’t think so. Now, I suppose that someone like Langone will just respond that it’s all gibberish he can’t understand. But unless he really is stupid, which as I said I doubt, that’s only because he doesn’t want to understand.

Are my followups to his 5 points impossibly complicated? Or do they possibly offer a more sensible, yet more in depth, view of the world? Now, I suppose that someone like Krugman will just respond with name-calling and more of the same one-side-of-the-coin analyses. But unless he really is stupid, which I doubt, that's only because he is, pardon my stooping to name-calling, the absolute worst of partisan hacks.

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