Sunday, November 17, 2013

How Many Have to Suffer?

Nobel Laureate economist Paul Krugman writes in his recent blog post on the New York Times (see Summers' Speech) regarding a presentation that former Fed Chair candidate Larry Summers recently gave before the IMF Research Conference. It seems that Summers had a unique take on current economic conditions. Quoting Krugman,

"     ...he [Larry Summers] works from the understanding that we are an economy in which monetary policy is de facto constrained by the zero lower bound [to interest rates] ..., and that this corresponds to a situation in which the “natural” rate of interest – the rate at which desired savings and desired investment would be equal at full employment – is negative.
"     And as he [Larry Summers] also notes, in this situation the normal rules of economic policy don’t apply. As I [Paul Krugman] like to put it, virtue becomes vice and prudence becomes folly. Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift. Fixating on debt and deficits deepens the depression. And so on down the line."

Krugman goes on to say that under these conditions, any kind of spending is better than none. Productive spending or wasteful spending. However, he says, "... a lot of people hate, just hate, this kind of logic – they want economics to be a morality play, and they don’t care how many people have to suffer in the process."

This comment is a bit rich coming from a man who modestly titled his blog The Conscience of a Liberal. He is nothing in his blog if he is not all about making economics into a morality play rather than a science, so what is the real difference between him and those he disparages? Presumably that his conscience and his morality are superior to theirs. He cares how many have to suffer while they do not.

We bring this up not so much to ding Krugman but to use him as an example of what happens when one is firmly stuck on the the "wrong" side of capitalism, as we believe Krugman is. What happens is that one's proposed solutions become more and more peculiar because, as has pointed out, there are no solutions on the "wrong" side of capitalism. There are only temporary and ultimately unsatisfactory policies that just "kick the can down the road." As a result, Krugman's suggestions are very peculiar indeed, as we shall see in a moment. (And if you need another example, google the phrase 'krugman trillion dollar coin'.)

Krugman has a lot of sympathy for Summers' point of view regarding the possibility that we are in a permanent state of secular stagnation. does, too, but we see it very differently than Krugman or Summers. Before we get into that, however, let us continue with how Krugman would approach permanent secular stagnation. Despite his dislike of austerity policies and concern for suffering, Krugman suggests a form of austerity. (At, we always translate "austerity" as "poverty" or "increased poverty," because that is what it means for the poor.) Krugman says,

"     One way to get there [to the potential salvation of strongly negative interest rates] would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. ...
"     Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? ...
"     But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers."

With this Krugman has entered a topsy-turvy, head-in-the-clouds academic world where virtue becomes vice and right becomes wrong. If virtue is variable, what meaning is there to it? If virtue is variable, there is really no such thing as virtue. There is really only cold, calculated policy that is adjusted moment-by-moment. The negative interest rate policy is one that would cause suffering because it would take money away from the poor as well as the rich. This is really what makes the suggestion peculiar, coming from Krugman.

Krugman's problem, as sees it, is that he is stuck with trying to implement policies through only one currency. For example, he suggests negative interest rates and inflation in order to encourage corporations to put their "hoards" of money to work. (Presumably hiring more people at the same time.) Unfortunately, because there is only one currency, he cannot take from the rich without also taking from the poor. There can be only one interest rate policy for one currency, and it affects everyone who uses that currency. This applies to inflation, too. Inflation for the rich would also impose inflation on the poor.

The better alternative, of course, is's multiple exclusive currencies and markets. Our original blog post On the Other Side of Capitalism is probably still the best single introduction to these ideas. With separate currencies and markets for the poor, Krugman's plan could be implemented in the wealthy markets without making the poor suffer, too. The way we see it, Krugman's suggestion only makes sense in a world.

It is worth noting that it is one thing to have austerity suggested by laissez faire, Ayn-Randian types like Harry Binswanger (see our post Thanking the One Percent). It is quite another for a pedigreed liberal like Paul Krugman to do so. Krugman's covert defection to a form of austerity is why is concerned that perhaps all sides now seem to agree that some form of poverty is in our future. Granted, Krugman might deny that any significant poverty would result from his plan because of full employment and because he would make up any losses to the poor with tax credits and handouts. This ignores the time difference between losing the money (immediately) and getting a check from the government (pie in the sky bye and bye, with a ton of paperwork). First you hurt them and then you fix it? Why not just keep from hurting them in the first place? Also, if Krugman's form of capitalism is so great, why would it need permanent government policy patches to make up the money taken from the poor? A truly excellent implementation of capitalism would not need all that government fiddling to make it work.

Under the system, full employment plus protection and support for the poor is not a patch, it is built in. But despite his liberal conscience, it is not built into Paul Krugman's economic models. He is a one-percenter, after all, and his supply/demand curves, IS curves, and equilibria do not tell him how to protect the poor. In his world, no matter how important it is, morality is still an afterthought. We would rather have it built in.

Finally, finds it disturbing that our world economic system is so fragile that it could be brought to its knees by the failure of one firm, Lehman Brothers. Would we truly have crashed the system and starved perhaps billions of people just because banks stopped trusting each other and credit froze up? Are we so perverse that we would stop doing the things that we all know we need to do to survive just because of the numbers on bank balance sheets? As it turned out, we did not starve, but the price charged by the rich was high. Take the Great Recession as a warning. We need a system that is reliable and robust so that we are not put in that position again. Support

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

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