Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘Krugman

Krugman – one unflinching Keynesian economist

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Today employment in the US is lower than it was ten years ago, the stock market is lower than it was ten years ago. Keynesian economics has created a two tier society, with the investor-ownership class on one side and the working poor on the other.

Keynesianism has brought an end to the democratization of capital markets and helped to foster a politically inept society with less opportunities for fewer people. Before the advent of Keynesianism bubble economics occurred rarely and if it did it was linked to natural product cycles. Today bubble economics are part of the intricate mechanism of capital flows almost unhinged from natural product cycles and rather dependent on artificial and corrupt political initiatives.

US economist and Nobel laureate professor Krugman is a very outspoken representative of governement-spending-saved-the-world defenders of Keynesianism. In times he is so convinced by his ideas that he does not shy away from indulging policy makers with his nuggets of knowledge.

A good example for how far Mr. Krugman was willing to go, was his fierce attack of Germany finance minister Steinbrueck in December of last year. Steinbrueck warning of crass Keynesianism, in the midst of the largest government economic rescue effort in history, caught Mr. Krugman’s anger and earned Germany a collective boneheadedness from the professor.

Of course in the meantime more and more green-shoots are becoming evident and most national economies have stopped their abysmal plunge, with some even showing humble signs of growth in the second quarter. Mr. Krugman and other Keynesian economists find themselves now in a somewhat awkward position having to defend themselves over their radical support for stimulus.

Professor Krugman ventures deep into wonkish territory in his defense for deficit spending and why we should not fear it in the context of higher interest rates. Interest rates are of course important because as a discount to future earnings they are the most important factor in determining our wealth. Deficits and interest rates are the topic of one of his most wonkish blog posts in the New York Times to date.

The core of professor Krugman’s post is a positive correlation between GDP and interest rates and a negative correlation between interest rates and deficits. The core fallacy of Keynesians is what follows, lower GDP merits higher deficit spending and nobody needs to fear high interest rates because they are inversely correlated and therefore lower with higher deficits. This is despite the fact that most would acknowledge that deficit spending is inflationary.

deficits-interestchart shows neg. correlation btw. T-Note interest rates and government deficit spending

Most economic formulas (S-I = G-T is the one Professor Krugman is using), to the contrary what economist want you to believe, are not universally true laws of nature like a physical law or even most scientific laws. Economists of course believe that the only true science is economics.

In mathematics a formula about events at some future time-horizon always acknowledges uncertainty of a predicted outcome inherent in its logical argument. Economists though using mathematics merely extrapolate a present situation into some future time-horizon rather than acknowledging uncertainty. In other words they think what is true now has to be true also in the future. It seems to me that Keynesians are the world’s champion in extrapolating the facts ad infinitum.

The problem is not i.f., deficit spending. The problem is rather not knowing when its enough and when to withdraw, not knowing when to hold ’em and when to fold ’em is the real problem. It is this uncertainty that’s inherent in their economic formulas and yet they do not account for it. Keynesians live for the here and now, they completely discount the future. The crisis of 2007,08,09 should be proof enough that it can’t be done.

Economists are wrong about the economy nine out of ten times. Some Keynesians think they are right because they have not been wrong so far. I got news for ya, not being caught with a lie is not the same thing as telling the truth.

The myth that keeps Keynesians going

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– it is never quite the cigarette butt.

US economist and noble price winner, Paul Krugman, writes in his newest Times’ column about the "origins of the current disaster". In short lack of financial regulation that started during the Reagan administration turned us in and caused the current financial and economic crisis. The Reagan mantra and later neoconservative mantra ‘government is the problem’ becomes the focus point of criticism in the pre/post- prevention discussion.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years.

The world class economist is in trouble. Krugman is a declared disciple of Keynes and his hand is leading the cavalry of government interference against "the worst economic crisis since the Great Depression". This is Keynesianism in its purest, something German Finance Minister Steinbrück and declared Krugman villain called “crass Keynesianism”. Why is the professor in trouble, well not really in trouble but lets say academically challenged?

The followers of Keynes like Milton Friedman, Alan Greenspan, Ben Bernanke, Paul Krugmann etc. believe in the almighty power of money that flows through the pipes of the economy. It is according to their believes, that manipulation of total amount of money available in an economy determines its direction. It is mainly in this context that the Federal Reserve finds the appropriate level of interest rates. A Keynesian will always believe in the dogma of inflating one’s way out of every macroeconomic problem by lowering interest rates and devaluing the nations currency.

Why not? It worked at least till now. Though the current crisis clearly shows the limitations and flaws of this philosophy. If Keynes was right how can he explain the current economic disaster? He can’t. In the words of past time guru, Alan Greenspan, ”shocked disbelieve” takes hold among Keynesians these days.

Since Keynesians cannot understand they try even harder to explain it. Krugman’s column in the NYT goes to the point. He writes about regulation and the lack thereof, taking hold during the Reagan administration. He even identifies the Garn-St. Germain Depository Institutions Act, that Ronald Reagan introduced into law in 1982, as the bill that "did it".

When Krugman blames the Reagan administration for scrapping "precautionary rules" he is absolutely right. It is just not the complete picture. To pinpoint our current problems to mortgage deregulation is part of the truth but not all of it. It is like pinpointing a bush fire to a single carelessly dropped cigarette butt when the real cause is climate change. Finding it and neglecting climate change will not prevent another fire down the road.

The idea that mere lack of regulation causes an economy and its financial infrastructure to overheat is not seeing the big picture because no matter what regulation always comes second to macroeconomic events. To Krugman’s second point, higher interest rates would have helped to improve the low savings rate of the private sector. How could regulation have helped to do the job?

At the height of the real estate bubble the whole mortgage market in the US was about 11 trillion dollar and subprime, the unregulated part Krugman writes about, was only 1.3 trillion dollar. At a delinquency rate of 40 percent and a recovery rate of 50 percent the cumulative losses should be about 200 to 300 billion dollar.

The US economy produces services and goods worth about 14 trillion dollar every year. The budget for military and defense in the US is about 500 billion dollar and that does not include the spending on the wars in Iraq and Afghanistan. The ensuing economic disruption caused by ‘mere’ lack of regulation is hard to grasp even after taking into account leverage and the Ponzi scheme of the securtitsation market in the financial industry.

In conclusion the Federal Reserve and its rate setting policies, that were guided to no small part by the ideas of Keynes, contributed substantially to the current crisis. It seems though that Krugman and his Keynesian friends are not ready to acknowledge it. How can we learn and get better, and at this point this is the best we can hope for, if our brightest do not strive to identify the root cause of the problem?