Paul Krugman: third depression

[autumn1971]

But have you seen Stephen Hawking? He looks terrible. The British NHS should be ashamed of themselves, ruining that poor young man's health like that...

Another bit of funniness is that Hawking mentioned in A Brief History of Time that the one annoyance he had with his first voice synthesizer was that it forced upon him an American accent.

 

[stilicho]

It's an argument of convenience. Krugman wants a lot more spending in the public sector. IMHO, he's playing the opposite game to what some Reagan acolytes in the 1980s were at with tax cuts. Yes, yes, they believed that tax cuts would stimulate the economy. But they also believed that they would hamstring efforts to raise spending significantly. Krugman's saying "increase spending, increase spending," partly in the hope that this will stimulate the economy, but also party in the belief that this will make it harder for Republicans to cut taxes when they take control again.

Having seen the double-dip recession arguments from Krugman earlier in the decade, I am hardly disposed to buy them this time around. Really, the liberals on JREF should be rooting against Krugman, because if he's right, Obama will be toast in 2012.

With all due respect, Brainster, the correct antidote right now is far more public spending. In fact, if they do that, Obama's team just might be able to unelect him in 2012.

Quite simply, the private sector is not providing employment and isn't concentrating capital thoroughly. I don't know what your experience is but, as a Canadian working for a US-based multi-national, I've endured the PPT presentations showing the deaths of 130+ year old companies and subsequent closures and lay-offs that come with this sort of vision. And our vision, as a publicly traded corporation, is to maintain shareholder value in the face of a severe contraction. It's worked for us, so far, and we only lost about 15% of our employees and locations. We were also able to reduce our debt obligations. On the downside, we wound up being flush with cash at the last three quarter ends and our shareholders want to know why. It's basically because there's nothing else worth acquiring out there in our sector and we scotched two prospects a couple years ago.

The private sector cannot just create something out of nothing. If our competitors are failing and potential buyout targets, we have to consider the value of our investment against the possibility that we're throwing good money after bad.

I still trust so-called hybrid solutions. I'd bet if you went onto the Science & Technology or Medical threads and asked them what five major projects they think are worthwhile but lacking capital, you'd find over a thousand in a very short time. And that's only from self-proclaimed medical and science professionals who have plenty of time to contribute to this obscure internet forum rather than inventing, producing, and selling the "next big thing". In the real world, there are real needs that are not being supplied by the private sector because the opportunity and investment capital simply isn't there.

Investors are a lot more excited about the marriage of public policy with private enterprise than we old-time conservatives are willing to admit. And once the gears are oiled we get to vote in economists and accountants instead of lawyers and movie stars.

 

[Tippit]

That strikes me as a trite recapitulation of self-serving conventional wisdom backed with hilariously misguided claims about the Great Depression.

It's an accurate and somewhat kind assessment of Krugman.

Right now several European countries are undergoing severe economic problems. Greece immediately embraced austerity measures. Spain very reluctantly imposed significantly milder measures. Guess which nation is more attractive to investors...

The value of Greek vs. Spanish debt is about the specific risks associated with lending to either country, not about lip service from politicians about what they claim they will do in the future. Spanish debt is more attractive because, quite frankly, Greece is in a far less tenable position. This should be obvious.

But the claims in the article are fascinating. Stimulus measures freeze out private investment. We hear this wail by right wingers all the time. Last month, however, this nation would have created about 20,000 jobs if it wasn't for the Census. What private growth was frozen out by Census hiring?

Census hiring is funded by direct taxation, monetary inflation, or yet more debt. This is at the direct expense of taxpayers, currency holders, or lenders. This represents money or purchasing power they cannot spend, or in the case of lenders, a crowding out of private credit.

It's just 100% BS. Private spending, lending, and growth are either nonexistant or irrelevant.

Really? This would make Karl Marx blush. Nothing like a banker/politician contrived economic crisis to further the march of an all-encompassing government.

Interest rates cannot be lowered, because they're at the zero bound, to try and generate private growth. The only entity that can borrow money, at 3% interest right now--basically for free considering growth, is the US government.

More eloquently, if people realize that they correctly need to save money to invest, the government and/or the central bank will quickly disabuse them of that notion, and either borrow in their name, or simply steal their purchasing power - in the name of saving the economy, of course.

Where are all these jobs being frozen by the meek stimulus measures?

They're the ones that will never be created due to the massive transfer of wealth that is occuring from productive to non-productive hands. The Census workers, far from doing anything truly productive, have certainly succeeded in annoying a great many of us.

 

[Tippit]

I will simply note two things:

First, Krugman did not say, as the editorial claims, that the U.S. is in the "early stages of a third Great Depression." Rather, he said, as quoted in the OP (relevant portion bolded): "We are now, I fear, in the early stages of a third depression." Those two little words make an important difference in the context of the statement. I fear the Toronto Blue Jays will lose their game in Cleveland tonight. That does not mean I am saying that they will definitely lose, only that I fear that might be the outcome.

The words "I fear" represent Krugman hedging his bet. If such a renowned and respected economist like Krugman needs to hedge important predictions like this, then I submit that his hedged opinion is as worthless as the blog it's written on. Be bold, Dr. Krugman, we're not interested in your fears, we're interested in your expert opinion.

For making bold and accurate predictions, you may want to take some lessons from Peter Schiff.

 

[Random]

More eloquently, if people realize that they correctly need to save money to invest, the government and/or the central bank will quickly disabuse them of that notion, and either borrow in their name, or simply steal their purchasing power - in the name of saving the economy, of course.

Save money to invest in what? Nobody is doing anything!

In a downturn, the logical thing for individuals, families, and companies to do is to cut expenses, hunker down, and try to save money to ride out the recession. If an individual does decide to spend money to stimulate the economy, the stimulative effect of this money gets distributed across the economy and the individual will get virtually nothing back himself. So there is no benefit to an individual spending money unless they absolutely have to. But if everybody saves as much as they can, then the recession will last much longer. That’s the Paradox of Thrift. Everyone trying to save money leads to an economy where there is much less money flowing around and everyone is worse off. Rational individual behavior leads to an irrational collective outcome.

The basic principle of Keynesian economic policy is that when a situation like this arises, the government should step in to artificially generate demand and spur economic growth because it’s not in anybody else’s interest to do so. Once the economy is moving again, the government should step back and start saving up money and resources for the next recession.

 

[TraneWreck]

...
The basic principle of Keynesian economic policy is that when a situation like this arises, the government should step in to artificially generate demand and spur economic growth because it’s not in anybody else’s interest to do so. Once the economy is moving again, the government should step back and start saving up money and resources for the next recession.

That was an excellent post, but I just want to add one point about the Keynesian prescription:

It's not every economic downturn that requires government stimulus. It's specific fiscal crises, like the one happening now. Your point about individual spending is the crux of the issue. If interest rates weren't at the zero bound, the point at which they cannot be lowered, the economy could be moved out of recession by lowering rates to promote private lending and spending. That cannot happen now. And just demanding austerity will make things worse--heal pain by increasing pain.

This strawman attack on Keynes, pretending like somehow people are arguing that the deficit be raised infinitely (FREE MONEY FOR EVERYONE!!) is just silly.

 

[TraneWreck]

The value of Greek vs. Spanish debt is about the specific risks associated with lending to either country, not about lip service from politicians about what they claim they will do in the future. Spanish debt is more attractive because, quite frankly, Greece is in a far less tenable position. This should be obvious.

That was meaningless. Why is Greece less attractive? They've adopted the austerity measures beloved by "conventional wisdom" everywhere.

In the least it shows that austerity measures are inadequate to deal with a crisis.

Census hiring is funded by direct taxation, monetary inflation, or yet more debt. This is at the direct expense of taxpayers, currency holders, or lenders. This represents money or purchasing power they cannot spend, or in the case of lenders, a crowding out of private credit.

This is just BS. Where's the private credit being frozen out? You're just making assertions with no support. Find me some evidence that, for instance, the stimulus crowded out private spending.

Really? This would make Karl Marx blush. Nothing like a banker/politician contrived economic crisis to further the march of an all-encompassing government.

Again, contentless bluster. Find me the evidence. That's actual data, not the rambling speech of some other nut on the internet. I want to see the indicators.

More eloquently, if people realize that they correctly need to save money to invest, the government and/or the central bank will quickly disabuse them of that notion, and either borrow in their name, or simply steal their purchasing power - in the name of saving the economy, of course.

Eloquently? Such humility...and accuracy.

But again, in a liquidity trap, saving money actually deepens the crisis.

But this statement of yours is incoherent. If they're saving money, it doesn't have any purchasing power anyway, save in some theoretical sense. They're not buying anything, they're stashing it away. I have no idea what point you think you're making, but I'm sure it has something to do with inflation destroying everything.

They're the ones that will never be created due to the massive transfer of wealth that is occuring from productive to non-productive hands. The Census workers, far from doing anything truly productive, have certainly succeeded in annoying a great many of us.

So you're a misanthrope as well. How charming.

But again, what the hell are you talking about? Where are all these jobs that were going to be created but Obama swooped in and spent money to repair highways in Florida?

 

[drkitten]

The words "I fear" represent Krugman hedging his bet. If such a renowned and respected economist like Krugman needs to hedge important predictions like this, then I submit that his hedged opinion is as worthless as the blog it's written on.

And yet more evidence of Tippit's complete lack of understanding of economics. This type of fatalism -- whatever the future holds, will be -- is typical of people who don't understand that the economy is controllable.

In this case, public policy controls a significant amount of the economy --- austerity measures will almost certainly result in an economic slowdown, which given the fragility of the recovery we're in probably means a double-dip recession. But whether or not austerity measures are enacted is not an economic question, but a political one. It's in the hands largely of the Senate and the coalition of Blue Dog Democrats that are in a position to broker or torpedo any policy deals.

So his "fears" are that that coalition will take a foolish decision, which will have bad consequences.

Be bold, Dr. Krugman, we're not interested in your fears, we're interested in your expert opinion.

He's given you his expert opinion. It's a pity you lack the reading skills to understand it.

 

[drkitten]

You could say this about any financial prediction ever made really. When someone does X, there are three things that can happen:

1- Things get better
2- Things stay the same
3- Things get worse

To which the responses are:

1- X worked
2- X kept things from getting worse
3- Things are worse than we feared, we should do X more!

There is no way to know if the housing bubble prevented a double dip recession and there never will be.

The only problem is that no one says things like that unless they've already decided ideologically to disregard the prediction.

When your teacher says to you "if you don't study harder, you'll fail the class and have to repeat it," are you going to say to yourself, "well, there is no way to know that my studying harder will actually prevent my failure and there never will be, so why bother to study"?

If your dentist tells you "You're starting to get gingivitis; you need to start flossing more, or else you'll probably need a root canal in two years" are you going to say "well, there is no way to know if my flossing prevented a root canal"?

Of course not.

 

[YoPopa]

.....This type of fatalism -- whatever the future holds, will be -- is typical of people who don't understand that the economy is controllable.

...

, Yeah, central planning has been shown to work so well.

...
If your dentist tells you "You're starting to get gingivitis; you need to start flossing more, or else you'll probably need a root canal in two years" are you going to say "well, there is no way to know if my flossing prevented a root canal"?

Of course not.

If my dentist was so ill informed as to connect gingivitis with the need for a root canal I would find a new dentist.

 

[Tippit]

Save money to invest in what? Nobody is doing anything!

To do anything other than speculating on the Federal Reserve's monetary inflation and the asset bubbles which it caused by its reckless actions over the past few decades, that is, anything other than flipping homes and stocks. Nobody is doing anything because our manufacturing base has been gutted and our jobs shipped overseas, yet we've been fed the mantra that if we merely spend more our prosperity will continue in perpetuity. Those chickens are coming home to roost, and it won't be pretty.

In a downturn, the logical thing for individuals, families, and companies to do is to cut expenses, hunker down, and try to save money to ride out the recession.

There hasn't been a downturn so much as a collapse in credit. The consumer cannot use her home as an ATM anymore, and is running out of lenders to finance her consumption. While subsidized public sector interest rates are low, credit-worthy borrowers in the private sector can't get loans to do business. The involuntary response to this credit collapse, is for the consumer to spend a lot less, whether you like it or not.

If an individual does decide to spend money to stimulate the economy, the stimulative effect of this money gets distributed across the economy and the individual will get virtually nothing back himself. So there is no benefit to an individual spending money unless they absolutely have to.

What? Since when do individuals spend money to "stimulate the economy"? They spend because their purchases are worth more to them than that portion of their savings, or the cost of the credit required to make the purchase. At the risk of stating the obvious, the benefit of spending is what you receive in exchange.

But if everybody saves as much as they can, then the recession will last much longer. That’s the Paradox of Thrift. Everyone trying to save money leads to an economy where there is much less money flowing around and everyone is worse off. Rational individual behavior leads to an irrational collective outcome.

Economic recession is the liquidation of bad investments. In order for the economy to heal and recover from a multi-decade inflationary credit binge, all of the prior bad investments must be liquidated. The "Paradox of Thrift" presumes that saving is bad, and thus bad investments must be propped up and perpetuated, which is exactly what is happening now. The consumer rightly realizes that their credit line has run out, and that they, unlike Wall Street banks, don't have an unlimited line from the Fed or the Bank of China.

The basic principle of Keynesian economic policy is that when a situation like this arises, the government should step in to artificially generate demand and spur economic growth because it’s not in anybody else’s interest to do so. Once the economy is moving again, the government should step back and start saving up money and resources for the next recession.

Except, it was the Keynesians that caused all of this in the first place with a massive expansion of credit during the boom phase. We don't need artificial demand right now, artificial demand will result in the expropriation of the saver/investor, and the propping up of the fraudulent, the corrupt, and the incompetent. Given the track record of the Keynesians during the boom phase, it's hard to take any future promises of fiscal and monetary restraint seriously.

 

[ideogram]

If an individual does decide to spend money to stimulate the economy, the stimulative effect of this money gets distributed across the economy and the individual will get virtually nothing back himself. So there is no benefit to an individual spending money unless they absolutely have to.

What? Since when do individuals spend money to "stimulate the economy"? They spend because their purchases are worth more to them than that portion of their savings, or the cost of the credit required to make the purchase. At the risk of stating the obvious, the benefit of spending is what you receive in exchange.

I think the two of you are agreeing here.

 

[Puppycow]

More bad numbers

A raft of bad economic data out this morning pushed Wall Street toward its third bad day in a row, though stocks trimmed some of their earlier losses.

A terrible home sales number combined with weak construction spending and manufacturing data paint a picture of an economy that cannot recover without a sustained and substantial infusion of government cash. Not that I'm arguing for that.
. . .
May pending home sales dropped 30 percent compared with April after the government subsidy homebuyer credit expired at the end of that month. Translation: Only government money was propping up the housing market, which cannot recover on its own.
. . .
Finally, May construction spending fell for the fist time in three months, as -- basically -- government money ran out. With the end of the homebuyer credit, homebuilders stopped building homes, understanding that people would stop buying homes. In the public sector, work on infrastructure projects fueled by government stimulus is starting to pull back.

The big takeaway? It's becoming apparent that this recovery, which began in March 2009, was based almost fully on government stimulus. The private sector has failed to kick in because it doesn't trust the future. Without private sector money in this economy, we can do one of two things: deflate and contract, and we know where that leads -- deep recession and possibly depression; or approve billions in new stimulus, which will only explode our already massive public debt and budget deficits, which was dragging states down one after the other.

Glad I'm not making the decisions.

I guess that means the stimulus was working but it wasn't big enough or long enough. Krugman argued from the beginning that it wasn't going to be big enough to offset the huge losses in the private sector.

 

[ServiceSoon]

More bad numbers



I guess that means the stimulus was working but it wasn't big enough or long enough. Krugman argued from the beginning that it wasn't going to be big enough to offset the huge losses in the private sector.

Wasn’t this years government budget (which includes the stimulus) larger than all the previous gov budgets combined?

 

[Puppycow]

Wasn’t this years government budget (which includes the stimulus) larger than all the previous gov budgets combined?

No. America is over 220 years old. It was probably the largest one yet (nominally, not as a ratio to GDP) but not more than all the others combined. No way.

 

[Corsair 115]

Duly noted. Even a broken clock is accurate...and all that.

I'd rather have a clock that works all the time than rely on a broken one that's only right twice a day (assuming a standard 12-hour clock).

Credibility matters. If one blows it up by making monumentally dumb statements in service of a political rant, then one is going to have to work hard to restore that credibility. Better to keep one's credibility intact throughout the process of making a political rant rather than sacrificing it to try and score a quick political point.

 

[Corsair 115]

The words "I fear" represent Krugman hedging his bet.

Precisely. But the IBD editorial phrased its commentary in such a way as to make it seem Krugman was making a positive declaritive statement that the U.S. was actually and already in a third depression.

That was the sole point to which I was drawing attention.

Whether Krugman's fears will be realized or not is another matter entirely.