Posted by: CS | June 13, 2012

Clueless Krugman?

Paul Krugman is a Nobel Prize winner, and a Professor or economics at Princeton University. He is also a blogger and, in his book End This Depression Now, the proclivities of the blogger show. The derisive partisanship, the “of course” this and “of course” that, the breezy self-reference to “yours truly”, the typographical emphasis of statements that remain to be demonstrated, and the occasional resort to the one-sentence paragraph all combine to give the work a bloggishness that detracts from an argument that Krugman is perfectly well able to present in plain unaffected English.

But presented in plain English the argument would hardly fill a book, for in essence, all that Krugman is saying is that the Obama administration failed to provide an adequate Keynesian antidote to the contraction in demand that has driven the US economy and that of much of the rest of the Western World into depression.

That antidote is massive government deficits and stimulus spending. The Obama administration did enact the American Recovery and Reinvestment act, a stimulus package of $787 billion, but, says Krugman, this was “far too small.”

So what exactly does Krugman want to End This Depression Now? He wants a multi-trillion-dollar Federal government deficit to be financed by borrowing and money printing, which will deliver cash to the States to enable rehiring of laid off public sector employees, to finance infrastructure such as more and better roads and bridges for the diminishing number of cars actually driven in America, and to provide debt relief to homeowners in the hope, presumably, of restarting house price inflation and all the stimulative economic consequences that could have.

To demonstrate the workability of his scheme for rebooting the economy with a flood of borrowed or printed money, Krugman draws a parallel with the United States following WW2. At that time, returning war vets borrowed to buy houses, cars, etc. and the economy boomed with the growth in consumer debt. But the analogy is absurd. In 1945 America was the workshop of the World supplying the tools and materials that the countries devastated by war needed to restore their shattered economies. At the same time the quantity of private debt in the US was abnormally low.

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Today, the situation is totally different. First, because Americans are laden with an unprecedented quantity of debt, which they are desperately trying to shed and succeeding at the rate of about a trillion dollars a year. Second, because America is no longer industrially supreme. On the contrary, America is losing jobs by the tens of millions as manufacturing, IT and many other services are off-shored and out-sourced to the Third World where wages are small fraction of wages in the US.

So Krugman offers a time when Americans were pre-eminently creditworthy and prosperous due to the abundance of well paid jobs in productive industries as a parallel to today when Americans are mostly not creditworthy, having lost 40% of their net worth since the housing market peaked, and who’s best hope of a job is in the public sector feeling up passengers at the airport or some other occupation adding only very questionably to the real wealth of the nation.

Amazingly, Krugman totally ignores the elephant in the room, which is the tremendous competitive weakness of the West versus the Rest, i.e., four billion Third Worlders earning pennies an hour, which was mandated by the 1994 GATT agreement. For example, the index to Krugman’s book contains no entry for “globalization;” no reference to “trade deficit” only one reference to the “balance of trade” (that concerning the balance of trade among Eurozone nations); and no references to “outsourcing,” “off-shoring,” or mass immigration.

Krugman thus altogether fails to acknowledge the most prominent cause of  the present economic crisis in the West, i.e., the competitive failure of the West against the Rest. Oddly, he does recognize competitive failure of the Southern European states as a cause of financial crisis within the Eurozone and he acknowledges that a solution to the Eurozone crisis can only come from either wages cuts in the failing economies or what would be equivalent in terms of real incomes, a breakup of the Eurozone to allow the non-competitive states to adopt independent currencies that can be devalued until national competitiveness is regained.

But for some reason Krugman is unable to see that the crisis of the Eurozone is precisely analogous to the crisis of the West in competition with the Rest. To maintain that these crises are not comparable because the Western states have their own currencies that can be devalued against currencies of Third World competitors overlooks the fact that the Western currencies are not being devalued against those of the industrializing Third World, or at least not sufficiently rapidly to provide the necessary relief to the Western workforce. And the reason that the US dollar, for example, is not being devalued sufficiently rapidly is that competitor nations are hoarding those currencies. Japan and China, for example, between them hold around $2 trillion in US Treasury bonds.

Those foreign held dollars represent tens of millions of lost US jobs. At minimum wage, those $2 trillion unspent dollars earned through sales of goods and services to the US represent the loss of approximately one hundred million man years of labor at the minimum wage. Enough, in other words, to provide every unemployed American a job for three or four years.

This is the issue that Krugman does not discuss, either because he is clueless, or because he knows that the truth about globalization, which as a liberal he must support, if known to the people would set off a revolution.

But if Krugman’s argument is irrelevant, what then is the way to end the depression now? The answer is exactly that which Krugman offers in the case of the Eurozone crisis. Specifically, he mentions two options. One is an across the board wage cut, undertaken in the manner I outlined here, which would restore competitiveness to the West and make it possible once again for Americans and Italians and people throughout the West to make shoes and shirts and car parts and computers for one another, thereby regaining and enhancing their industrial skills and hence the value of their labor.

The other option is to force a devaluation of Western currencies, which in turn will force China, Japan, the oil states and other nations that have hoarded paper denominated in Western currencies to spend the cash fast before it loses much, say 50 to 90%, of its value.Ultimately, that spending will stimulate demand for goods and services in the West.

In fact, Option 1 is the official but unacknowledged policy. Wages are to be ground down during a long-drawn out depression during which the plight of the Western worker will be greatly exacerbated by a mass influx of Third Worlders with no tradition of civil rights or the rule of law and who are generally more capable than the least competent members of the native workforce. This is the genocidal liberal policy of globalization, which necessitates the destruction of the the nations of the World as racial, cultural or religions entities — Israel apparently excepted. 

To be fair to Krugman, it must be acknowledged that his preferred means of ending the depression would have the combined effects of forcing a devaluation of Western currencies and driving down wages in the West as a result of the price inflation caused by massive government deficit spending and money printing. This is not an efficient solution, however, since the deficit spending would mostly go on more government of which the Western nations already have more than they can afford. The danger in Krugman’s solution is thus that it would lead to massive social unrest while achieving little if anything in the way of increased Western competitiveness.

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Responses

  1. […] My own slightly more jaundiced view of the current economic paradigm can be read here: Clueless Krugman. […]

  2. […] is, an increase in the minimum wage will do much more harm than good, as is the case with Paul Krugman’s demand for super-humungous-ginormus stimulus spending to provide trickle down relief for those at the bottom of the […]


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