Paul Krugman’s Economic Blinders

[Po_d Mainiac]

snip

All this is a good idea as far as it goes. But Mr. Krugman stops there – as if that is all that is needed today. So what he has done is basically get into a fight with intellectual pygmies. Thus dumbs down his argument, and actually distracts attention from what is needed to avoid the financial and fiscal depression he is warning about.

Here’s the problem: To focus the argument against “Austerian” advocates of fiscal balance, Mr. Krugman hopes that economists will stop distracting attention by talking about what he deems not necessary. It seems not necessary to write down debts, for example. All that is needed is to reduce interest rates on existing debts, enabling them to be carried.

snip

So it is important to note what Mr. Krugman does not address these issues that once played so important a role in Democratic Party politics, before the Wall Street faction gained control via the campaign financing process – even before the Citizens United case. For over a century, economists have recognized the need for financial and fiscal reform to go together. Failure to proceed with a joint reform has led the banking and financial sector – along with its major client base, the real estate sector – to scale back property taxes and “free” the economy with taxes so that the revenue can be pledged to the banks as interest to carry larger loans. The effect is to load the economy at large down with private and public debt.

http://michael-hudson.com/2012/05/paul-krugmans-economic-blinders/

[Progressive dog]

1. Over a Century of the dismal science

A century ago, no one had heard of Keynesian economics. Malthusian economics and social Darwinism were the fashion of the day.
Krugman is right.

[Tansy_Gold]

2. Krugman's biggest error

is in thinking that the system can be fixed. It can't. The system is DESIGNED to do exactly what it's doing, which is to collapse in on itself. It's a ponzi scheme in the most classic sense: taking in money from the new "investors" to pay the first ones in.

Krugman sometimes has good ideas and sometimes he almost seems to understand, but he's a "liberal" economist in the same way there are "liberal" feminists: they have somewhat progressive ideas but think those ideas can be realized through status quo process. They can't.

Paulie needs to read Atlas Shrugged and understand that it is the bible of the economy as we know it now, and the orchestrated end is the destruction of everything. Rand ended the book with the lights going out and people reverting to covered wagons for transport, and the devoted, loyal, proletarian Eddie Willers left wailing in the desert, because that's what she WANTED. Unfortunately, she didn't know how to take it from there. She had no clue how to rebuild. Neither do the pukes.

And that's where the current system is taking us. We get closer every day and Paulie doesn't see it. He's insulated against the shock waves.

The guy at the paper factory in Indiana, the one who had to help build the stage on which the Bain execs would tell the workers they were all fired, he came to understand the truth. To work in teh system is to build one's own coffin.

[Po_d Mainiac]

3. Keynes called for saving when the times were good

in order to cover the added role of government on the downside. We've crossed the rubicon r/e debt (both public and private)

As for refi's without write-downs; adding time to an underwater note fails to add bouyancy.

But it does bail some fluid from the banksters onto the backs of those already wearing snorkles. I question who Krugman's masters are.

[girl gone mad]

4. Krugman consistently ignores the role of private debt in the crisis.

In doing so, he comes across as a lackey for the banks.

Neoclassical economics needs to be put to pasture. I see that Krugman has adjusted some of his more erroneous positions after considerable pressure was brought to bear by the Post-Keynesians, but Krugman still clings to his bad neo-Keynesian models.

ETA: If Krugman wants to call himself a Minskian now he should defer to Wray and Keen et al, who are not only light years ahead of him in actually understanding Minsky's models and ideas, but have also spent decades crafting Minskian plans for addressing the financial, economic, and employment crises, which they saw coming while Krugman and other orthodox economists did not.

[phantom power]

5. I don't think he's 'ignoring' it - he doesn't think the data show it is important:

A conversation I had earlier today suggested that it might be worth pointing out a fact that isn’t as widely known as it should be: namely, that there has not been an explosion in debt over the past few years. There has been a big rise in federal debt, but this has gone along with a collapse in private borrowing, so that overall debt growth has been lower than it was in the pre-crisis years:

http://krugman.blogs.nytimes.com/2011/08/31/the-debt-non-explosion/

[girl gone mad]

6. It goes much deeper than this.

Krugman and other neoclassical economists essentially ignore banks and treat loans as direct transfers from “savers” to “spenders”.

From a recent Krugman paper:

"In what follows, we begin by setting out a flexible-price endowment model in which “impatient” agents borrow from “patient” agents, but are subject to a debt limit. If this debt limit is, for some reason, suddenly reduced, the impatient agents are forced to cut spending…" (Krugman and Eggertsson 2010, p. 3)

Steve Keen calls this "debt without banks" because in the neoclassical universe a borrower's increase in purchasing power is directly offset by the lender’s (depositor's or "patient agent"'s) decrease in spending power and banks are merely neutral parties.

Neoclassical economists don’t think that the level of private debt matters, not because borrowing is currently restrained, but because they don't believe in endogenous money creation. Krugman's models completely ignored bank debt in the years preceding the crisis, when private debts were exploding.

Krugman calls the idea of endogenous money "Banking Mysticism“:

"For in the end, banks don’t change the basic notion of interest rates as determined by liquidity preference and loanable funds — yes, both, because the message of IS-LM is that both views, properly understood, are correct. Banks don’t create demand out of thin air any more than anyone does by choosing to spend more; and banks are just one channel linking lenders to borrowers."

I believe this is a hugely important issue and it helps explain why neoclassical economists completely failed to see the financial crisis coming while the post-Keynesians (neo-chartalists, etc) saw and understood what was happening. It also explains why neo-Keynesians still promote monetary solutions despite the ongoing lack of success with these policies.

Krugman and other neoclassical economists think that banks are reserve constrained and therefore Fed policies which increase bank reserves will naturally lead to greater lending and growth. In fact, banks are never reserve constrained and loans create deposits, therefore the transfer mechanism Krugman utilizes does not accurately reflect reality. The root cause of our economic crisis was instability in the banking system, something he missed because he believed loans simply represented transmission from depositors to borrowers.

[Po_d Mainiac]

7. I assume the bold highlight in the second quote is your doing?

Excellent choice!

Jamie moves his paw, and Krugman's lips (or fingers on a keyboard) move.

I believe your avitar had a definition of insane which wood fit nicely here.
YMMV

[phantom power]

8. What are some "Minskian plans for addressing the financial, economic, and employment crises"

My understanding of a neo-Keynesian (Krugmanian) prescription is that in a depressionary economy such as the one we're in, you have to re-light the consumer demand ramjet via government spending - to hire people to do things - and "monetary policy" takes the form of printing money to finance it, if necessary. If "monetary policy" so far has been inadequate, it's because it has been (a) too small and (b) aimed directly at banksters, not consumers. Which all sounds about right to me.

But if there's a "Minskian" prescription, I'm interested to learn about how that differs from a neo-Keynesian prescription.