Tag: Paul Krugman

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Economics Financial Crisis Politics

Commenting on Paul Krugman

Daniel Drezner over at Foreign Policy on Paul Krugman:

 

I’m 50% convinced that Paul Krugman’s op-ed today is correct, and the moderates wound up damaging the stimulus more than they improved it. 

The thing is, I’m also 50% convinced that Krugman is to Keynesians as Richard Perle is to neoconservatives.  When an embittered ideologue derides his political leader for demonstrating a willingness to compromise and “negotiating with yourself,” well, one does get the sense of deja vu.

 

Will Wilkinson on Krugman:

Perhaps more than any economist of his caliber, Krugman understands that policy is largely determined by the outcome of the public opinion shoutfest. Yet this recognition seems to have no effect on Krugman’s ideas. Rather than bring inside his models disagreement over economic theory and the lack of political incentive to faithfully apply them, which would lead him to radically revise his prescriptions, Krugman leaves his textbook theory untouched and simply tries to win the shoutfest. Krugman’s often unbearable stridency seems to reflect an attempt to overcome the problems of democratic disagreement and incentive compatibility through sheer force of will–as if the deep reality of politics is no match for the rhetorical gifts and gold-plated reputation of Paul Freaking Krugman.

This is certainly my sense of Krugman as well. He lets his partisanship overcome his scholarship – but fails to account for partisanship in his scholarship.

Like Glenn Greenwald, he is a voice I hope those in power listen to – so long as they do not follow his advice too closely.

As I wrote during the earlier days of the 2008 campaign as Krugman railed biweekly against Obama:

I fear Paul Krugman is becoming the left-wing’s William Kristol in his single-minded partisan fervor, indifferent to political realities on the ground but true to the vision that shaped him years ago.  He remains interesting – much as Kristol has – but he seems to be somewhat disconnected from reality.

I drew a distinction then between Krugman’s approach to politics and Obama’s:

Paul Krugman illustrates as well as anyone the value of partisanship. For a political minority, partisanship is the key to survival, and the only means of blocking change. Partisanship is, in essence, a defense. The problem with the Democrats from 1994 to 2005, and even with some Democrats today, is that they were trying to be non-partisan in an environment that demands steadfast opposition – that demands partisanship…[But if] partisanship is the best strategy for a minority party, because, by it’s nature it is biased and divides the population; it is not the best strategy for a majority party…

Partisanship can only take us so far. In 2008, we need Barack Obama.

It is not surprising the Krugman now seeks to push Obama to abandon the politics that worked so well for Obama during his campaign – defeating the partisan fervor whipped up by Hillary Clinton and John Edwards, and then John McCain. Because – for Krugman, radicalized by the Bush years – partisanship is the only approach to politics he knows.

Categories
Economics Financial Crisis

The Proper Proportion of the Finance Sector to the Real Economy

Paul Krugman:

In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier.

This data point taken in isolation seems to suggest an idea I’ve been toying with for a few months now – perhaps there is a correct proportion of the financial sector to the real economy. This might not be original – and it seems related to the initial explanation of the Great Depression as a misdistribution of purchasing power due to income inequality. But I think the distinction is important – as my knowledge of history suggests that increasing inequality and a booming financial sector often precede serious economic crises.

Categories
Economics Financial Crisis

The Public Purpose of Bailouts

[digg-reddit-me]As in the financial crisis generally, the executive branch, the media, and the Congress have all focused on the corporations whose brands are at stake rather than the people affected. This is understandable. Stalin’s famous aphorism that a million deaths are merely a statistic, while a single death is a tragedy, can be adapted to economic hardship as well. A million bankruptcies by individuals are a mere statistics, while the bankruptcy of a famous brand such as Chrysler or Citibank is a tragedy, affecting each of our lives – as signs come down, commercials stop airing, and the products and services we receive now have a different branding.

But saving a brand name should never be the business of our government. In a government intervention into the market, a brand name might be saved – but this should never be a policy goal. Yet, this is precisely the manner in which this question is presented to the public: Should the government bail out Citibank? Or Chrysler? Or Starbucks? Framed in this manner, the answer should always be, “No.”

The real issue concerns the proper role of government in a market economy.

In this crisis, the issue of how involved the government should be in the economy has largely been resolved. “Do nothing,” doesn’t seem to be a realistic option in the midst of a crisis. In times of panic, we are all Keynesians. The unwinding after the crisis promises to re-ignite a fight about the proper role of government in the economy.

The real issue at the moment then, is the follow-up question: how to balance market forces and stability in a market economy – and specifically, in the midst of this crisis. Mitt Romney, in a New York Times editorial that proved especially influential, made the case for why our current system can effectively deal with the bankruptcies of the Big Three Automakers. Paul Krugman took what has become the consensus liberal view: if only we weren’t already in a credit crisis, bankruptcy would be a good option.

For the past year, this has been the argument – with the same people sometimes switching sides depending on the particular company. Capitalism inevitably involves creative destruction – but in the midst of a crisis of confidence, any destruction becomes seen as potentially catastrophic, as the collapse of Lehman Brothers demonstrated.

But government intervention should avoid saving corporations. The government should, when it intervenes in the market, strive to change the forces at work rather than to inject money into corporations themselves.

Corporations, whose primary purpose is to amass wealth by any means available for their owners, and who always manage to simultaneously amass wealth for the managers, cannot be trusted with public money. There is no public purpose to such profit-making. The public value of a corporation comes from it’s incidental activities – the means by which it is able to amass it’s profits. By bailing out General Motors, the government would be giving it’s money away for no public purpose. But the government does serve a public purpose by keeping General Motors’ factories churning out cars.

Within that distinction lies the difference between outrageous abuse of taxpayer funds and a valid public purpose. The more difficult question is how to avoid the abuse while serving the purpose.

The Bush administration has failed to do this – which is why there is fresh outrage at every million dollar junket by AIG executives or private jet ride by auto executives.

Continue reading “The Public Purpose of Bailouts”
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Economics

Are We Entering Another Great Depression?

[digg-reddit-me]Question: Are we entering another Great Depression?

Answer: I don’t think so, but I’m not an economist. (Though I did write a very popular piece on 11 Things I Learned While Trying to Figure Out the Financial Crisis a few weeks ago – which makes me a certified internet expert.)

Here’s why I don’t think we’re entering another Great Depression.

First, my understanding of the Great Depression is that it was – in essence – a crisis in the financial markets caused widespread fear and panic unchecked by the government. And as people lost faith in the financial system, it led to a paralysis of the entire economic system. The problem was not as much in the “real economy” – the economy whose primary purpose is to create products and services for uses other than creating profit – but in the financial economy – the part of the economy whose primary purpose is to redistribute excess wealth to create profits. The Great Depression was also worsed by the physical calamaties that hit America at the same time – most especially the Dust Bowl which devestated America’s farming belt – but at it’s core, the Great Depression was a matter of a broken financial system.

Since that time, a few factors have changed financial markets:

  • there has been a dramatic increase in liquidity, as money is able to be transferred almost instantaneously anywhere in the world;
  • the entire financial system has become remarkably interdependent and interconnected – so much so that the failure of one relatively small company directly effects most of the world’s financial institutions;
  • enormous amounts of data are collected and analyzed about the economies of the world and each particular company – including often by the companies themselves;
  • an implicit government guarantee backs large portions of the financial system.

The first three items on that list seem to demand a corollary to the Feiler Faster Thesis – promoted by Mickey Kaus – which explained how “political trends that used to last for weeks now last for hours.” This thesis was used recently to explain in part why Barack Obama’s and Hillary Clinton’s big moments in the campaign never seemed to give them any momentum – or more precisely why their momentum in the press and in public polls lasted for days rather than weeks as political reporters had come to expect. The corollary related to the current financial situation would be that as players in financial markets are bombarded with increasing amounts of data and are able to make trades and move money faster, the markets themselves speed up. This helps explain the dramatic ups and downs of Wall Street in the past few months – as the indices swung from positive to negative and back to positive in an unprecedented manner. The Feiler Faster thesis also could be said to have speeded up the real economy – as computerized inventory, logistical innovations, and more precise estimates of needed supplies have made many retailers and suppliers more responsive to economic conditions. But it seems clear that though these effects have speeded up the real economy at the margins, the financial markets have begun to move exponentially faster. The Great Depression – which lasted for over a decade – could be considerably shortened by this speeding up of the financial markets relative to the real economy – and to the extent that the effect of this volatility in the financial markets on the real economy could be mitigated, the results of this crisis would be minimized. The crisis will and already has effected the real economy – but so far, while the financial markets have fallen almost 30% from their relatively stable position in August, the real economy has only marginally slowed down.

The final item on the list should also give hope to those who fear we are entering another Great Depression. Unlike in 1929, we have a government willing to act and experiment in order to jumpstart the economy. And we will soon have a government led by Barack Obama that is more pragmatic and less ideological in proposing solutions. At the same time, various national and internationals reforms instituted by governments to protect against the kind of instability that caused the Great Depression have proved their worth in the past few months – as deposit insurance, regulation, coordination between central banks, a social safety net, and prompt government action have all contributed to mitigate the crisis.

Right now, the various governments’ decisions to act as a backstop against financial instability have helped begin to rationalize the markets – and prevented fear from entirely dominating. It has been argued that if Lehman Brothers had not been allowed to fail, this fear and sense of distrust pervading the financial markets could have been contained. Of course, few would have predicted the collapse of Lehman Brothers would have such a cascading effect – except now, after the fact, as it seems obvious.

It seems likely to me that the next Great Depression will likely be catalyzed not by a market collapse – but by the collapse of a nation, especially America. As long as governments are willing to place themselves as backstops against financial instability, the markets will go up and down – but the system will hold. It may be reformed. It may evolve. But the key characteristic of the Great Depression was the hoarding of financial resources caused by a lack of trust in the market. As long as the market is able to be backed by the government, it cannot truly fail – unless the government goes first. The paradox is that a government is only as strong as it’s economy is – which brings us back to trust.

Which is why – as Paul Krugman argues – Obama must act dramatically and quickly, while he still can.

Of course, as an alternative to all this – one might propose an effective tax on hoarding, inspired by the Austrian town of Worgl’s actions during the Great Depression – perhaps with exemptions for the first $100,000 of savings per person so as not to discourage saving.

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Barack Obama Economics The Opinionsphere

Krugman’s Hope: Franklin Delano Obama

Not being an economist, I find it a lot harder to argue with Paul Krugman now that he has been awarded the Nobel Prize for Economics. That makes him a certified top expect – and I am a mere amateur. And while the other Nobel prizes have made some real boners (Yassir Arafat and the Nobel Peace Prize?), the economics prize doesn’t have the same reputation. (Although the award given to Myron Scholes and Robert Merton, the inventors of the “financial weapons of mass destruction” – derivatives –  in 1997, the same year the hedge fund they had helped create went spectacularly bankrupt – seems quite the bad decision today.)

Regardless of prizes though, Krugman’s piece today makes some important counter-points I had not heard regarding the lack of efficacy of FDR’s New Deal. Certainly, my reading of history made it clear that the New Deal had not lifted America out of the Great Depression – but I had never found convincing the traditional conservative explanation that the problem was FDR’s expansion of government. After all, Hoover’s refusal to expand the government had not reigned in the Depression – and it was the massive government expansion called World War II that finally broke America out of the Depression. I’m willing to concede the conservative point that some of FDR’s government interventions may have backfired – such as interference in wages and prices – but as Krugman points out in his column, many of FDR’s reforms have lasted to this day and helped mitigate the effects of the current financial crisis – from Social Security to federal deposit insurance.

Krugman posits that FDR failed to get us out of the Depression because he did too little rather than too much. He points out that overall government spending did not increase as much as is commonly understood:

The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

Which leads Krugman to the conclusion that:

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

Krugman has me convinced of his thesis for now. It certainly makes more sense than the alternative explanations I have heard about the New Deal and the Great Depression. But the last word – and the final prescription – should come from Franklin Delano Roosevelt himself:

It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.

This is my hope for an Obama presidency – one that I saw as far back as December when I posted this quote – and one that his campaign has born out.

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Economics Election 2008 McCain Obama Politics The Opinionsphere

Fuming Over Their Own Confusions

It’s become a minor meme on the right that Obama keeps changing his tax plan – which is their way of suggesting that YOU(!!) could be the next person he taxes.

McCain said on Sunday on Meet the Press that under Obama’s plan those who are exempt keeps changing:

…now it’s $200,000.  I guess last week it was $250,000. It changes with ever – whatever the polling data tells him and his advisers.

And now, over at The Corner, Mark Hemingway steams:

Wait, we’ve been hearing endlessly that Obama will never raise taxes on anyone making less than $250,000!

But that Krugman is saying it is for those heads of household with:

an income, after deductions, of $182,400 a year.

Of course, Hemingway’s source on this change in the Obama plan is Paul Krugman – who doesn’t describe it as a change, and who certainly isn’t someone who speaks for Obama’s campaign.

But the easier explanation is that either Hemingway and McCain are confused or they are being deliberately misleading. Obama’s tax plan calls for those individuals making under $200,000 to be exempt, and those married couples making under $250,000 to be exempt. Hence what McCain claims is inconsistency is in fact a consistent plan. As for Hemingway, he’s just a dumbass who read what he wanted into Krugman’s description.

I’m guessing that $182,400 after deductions is about $250,000 or more before deductions – as the difference is about 26% – lower than the average tax rate.

The question becomes – are these people deliberately trying to confuse others – or have they confused themselves by attempting to look for changes without understanding the underlying plan?

Update: Missed Byron York chiming in. He has the same issue – in an ad, Obama claims that he will cut taxes for any family making less than $200,000. York cries foul – he said $250,000 before. But again – the problem is he never looked at the plan which calls for a tax cut for those making below $200,000 with no additional taxes for those making between $200,000 and $250,000. Again – the plan is consistent. The descriptions of different parts of it vary – depending on whether you are saying whose taxes will be raised versus whose taxes will be cut, and other distinctions.

Updated again: Marc Ambinder of The Atlantic points out the same things I have.

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Domestic issues Economics Politics The Opinionsphere

The Price of Panic

[digg-reddit-me]

Seeing this headline in the New York Post made me furious. The Democrats – and a number of Republicans – are insisting on some basic accountability measures and a pledge that they will be able to pass some sort of relief for those affected by the crisis who aren’t millionaires. Each of these requests is reasonable. The first request is absolutely essential. The Post‘s attempts to “stampede the herd” into accepting whatever it is Paulson wants are dangerous.

Everyone from Newt Gingrich to Paul Krugman to William Kristol to Matt Yglesias to NRO’s Yuval Levin has urged caution and some sort of oversight mechanism as the least.

The proposed bill would give Secretary Paulson authority to “take such actions as the Secretary deems necessary to carry out the authorities in this Act,” giving him extremely broad powers to unilaterally control the market in addition to the $700 billion. In addition to these dictatorial powers, Paulson would be granted legal immunity for all of his actions:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Although I doubt Paulson would use this crisis to personally profit – nothing in the law would prevent him. And if he did, no action could be taken against him. This is incredibly reckless.

This law would remain in effect for two years – which would allow Obama’s Secretary of the Treasury as well as Paulson to, in exercising authority under this law, do virtually anything and be immune from any consequences.

This is how the Patriot Act was pushed through Congress in the dead of night, with no one reading the weighty tome. This is how democracies are given away in a moment of crisis, in that Roman tradition of granting a temporary dictatorship over Rome until a crisis passes. Power is never given away easily – and so, in the end, the democracy with temporary dictators became a permanent dictatorship. In this age of terrorism and globalization, the crisis is never fully past us; and a new one is always on the horizon.

I don’t think anyone has any definite idea about what will work in this situation. And this is a time for pragmatism, not ideology. But even – and especially – in a crisis, there must be accountability and limits. This fear-mongering by the Post and other Republican puppets represents the worst impulse we can have at this time. We must act quickly but deliberately – because in our understandable haste, we might accidentally give away more than we intend.

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Economics Election 2008 McCain Obama Politics The Opinionsphere

Brooks and Krugman on the State of the Campaign

The New York Times had two useful columns this morning – one by  Paul Krugman explaining how McCain’s lies about Obama are even worse than Bush’s lies about Kerry or Gore:

[T]he muck being hurled by the McCain campaign is preventing a debate on real issues — on whether the country really wants, for example, to continue the economic policies of the last eight years.

But there’s another answer, which may be even more important: how a politician campaigns tells you a lot about how he or she would govern…

I’m talking…about the relationship between the character of a campaign and that of the administration that follows. Thus, the deceptive and dishonest 2000 Bush-Cheney campaign provided an all-too-revealing preview of things to come. In fact, my early suspicion that we were being misled about the threat from Iraq came from the way the political tactics being used to sell the war resembled the tactics that had earlier been used to sell the Bush tax cuts.

I give Krugman a lot of grief for his attacks on Obama – which resemble small-minded tantrums. But despite these frustrations with Krugman, I have always acknowledged he can be quite effective. He is simply a polemicist – and he will force the facts to fit into his pre-conceived arguments (except perhaps on economics where he is more subtle.) But when the facts happen to fit his pre-conceived arguments well – then his columns are a thing of beauty, like this past one, making a very important point.

David Brooks, conservative, writes the other column worth reading today. He attempts to explain the next steps the Republican party has to take in order to seriously address the major issues facing the nation:

If there’s a thread running through the gravest current concerns, it is that people lack a secure environment in which they can lead their lives. Wild swings in global capital and energy markets buffet family budgets. Nobody is sure the health care system will be there when they need it. National productivity gains don’t seem to alleviate economic anxiety. Inequality strains national cohesion. In many communities, social norms do not encourage academic achievement, decent values or family stability. These problems straining the social fabric aren’t directly addressed by maximizing individual freedom.

And yet locked in the old framework, the Republican Party [has a] knee-jerk response…

The irony, of course, is that, in pre-Goldwater days, conservatives were incredibly sophisticated about the value of networks, institutions and invisible social bonds. You don’t have to go back to Edmund Burke and Adam Smith (though it helps) to find conservatives who understood that people are socially embedded creatures and that government has a role (though not a dominant one) in nurturing the institutions in which they are embedded.

Brooks is describing here Barack Obama’s economic plans. Although I think he still is prejudiced enough against liberals and Democrats – assuming they will act irresponsibly if they are in power – that he cannot support Obama. And he seems to have a very positive feeling towards McCain that will lead him to hope that McCain will adopt Obama’s economic plan with a slightly more conservative tilt – despite what McCain is promising now – rather than to back the man with the plan he agrees with.

But despite this, it is because he writes columns like this that I truly look to David Brooks as an almost independent-minded thinker – even if he still remains tethered to the Republican party.

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Domestic issues Politics The Opinionsphere

Fannie Mae, Freddie Mac, and Socialism for the Rich

Paul Krugman takes a break from Obama-bashing – including not a single reference to the candidate in an entire column – in order to try to take a sensible position on the current near-collapse of Fannie Mae and Freddie Mac – and with them, potentially, the entire worldwide financial system.  While Krugman comes out in favor of a government bailout, he points out that these two companies are problematic institutions:

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.

Such one-way bets can encourage the taking of bad risks, because the downside is someone else’s problem.

The Financial Times’s Willem Butier takes a similar position, but with more verve:

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican administrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions…

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie Mae. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA.

Many reporters have been using the phrase “too big to fail” to refer to the crisis surrounding Freddie Mac and Fannie Mae – Butier acknowledges this for what it is – a socialism for the rich, in which concentrations of power are protected, profits are privatized, and losses are spread across the social spectrum.

Categories
Domestic issues Election 2008 History Liberalism Obama The Clintons

Krugman throws a tantrum

Paul Krugman, after defending the Clinton legacy for many long months, and trashing Obama for criticizing it, finally decides it is time to agree with Obama’s critique of Clintonism.  Of course, Krugman only does so in order to taunt Obama as Krugman demonstrates an incredibly shallow grasp of politics and recent history.

The problem with Krugman’s little tantrum here is that he confuses politics itself, especially in a two party system, with Clintonism.  It’s not as if Bill Clinton himself invented compromise.  That was invented some time before Pericles.

The problem with Clintonism was not in the fact that the Clintons compromised in order to gain power – it was that they believed the only thing needed to change America was for one of them to be in charge of the system as it was.  So they played the game, campaigned on trivialities and money, and took over, only to realize with the health care debacle and Somalia that they couldn’t force their way.

Obama’s approach is clearly different.  His campaign is less about himself, and more about a movement.  His policies are less about top-down government demands and more about adjustments that will gradually change the way the system works.

Krugman doesn’t see it. Instead, he projects from the mild events of the past week an abrupt turnaround on Obama’s part to embrace the Clintonism he rejected.  The blindness is glaring.

Continue reading “Krugman throws a tantrum”