Friday, February 5, 2010

Proof that a Nobel Prize Does not Save One from Spouting Establishment Nonsense

In today's NYT column Fiscal Scare Tactics, Paul Krugman attacks the Obama Federal deficits as being too small. Now that Dr. Krugman is a member of the elite G30 group, he's worth paying increased attention to. Let's dissect his column.starting with the second paragraph:

Many economists take a much calmer view of budget deficits than anything you’ll see on TV. Nor do investors seem unduly concerned: U.S. government bonds continue to find ready buyers, even at historically low interest rates. The long-run budget outlook is problematic, but short-term deficits aren’t — and even the long-term outlook is much less frightening than the public is being led to believe.

First, notice the rhetorical device: "many economists". What does that mean? Not much. Many people believe in astrology. There are "many" Wiccans. Next: yes, Govvies find ready buyers. What of it? So did subprime mortgages, only months before there were no buyers except at sharply discounted prices. He differentiates between short-term deficits and some other type. What does that time frame mean to him? Farther down the column, he lets us have the details:

But there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush.

Dr. Krugman would have us believe in official predictions a decade out! Not just that, he tilts toward yet larger deficits:

. . . deficits should be bigger than they are because the government should be doing more than it is to create jobs.

He blames all this on a vast right-wing conspiracy of hysterics:

Why, then, all the hysteria? The answer is politics.

In one column, he multiple times uses such terms as "hysteria", "panic", and "groupthink" to describe those who oppose the deficits he fears are just too small.

Presumably he forgets that Bush I's deficits (related to the S&L bailout) led directly to the Perot movement, the Bush I and Clinton tax increases, failure of an expensive healthcare reform proposal (which of course failed politically for many other reasons), and the famous alleged budget surplus with which Democrats vigorously criticized the deficits of Bush II. Now let's see. After the famous "jobless recovery" which allowed Bill Clinton to win in 1992 by running on the economy even though the recession technically had ended about 18 months before the election, Congress and the President responded to public "hysteria" about deficits by shrinking them. How did the economy do in the Clinton era? Did it create jobs?

You bet it did.

Were these Government jobs?

For the most part, no.

Beware economists saying that those who disagree with them are playing politics. That's one of the rallying cries of political partisans.

Is worry about Federal deficits hysteria? No.

Is worry about excessive debt in all sectors of the economy--public and private together--misplaced. I think not.

Is (say) 4% of GDP going to Federal interest payments affordable? Yes.

But if Federal revenue is 20% of GDP (larger than its average over the past 20 years), then a gigantic 20% of such revenues go to interest payments. And that number excludes state and local debt payments, plus all private sector debt payments.
And it excludes the much larger rolling-over of principal if Federal debt continues to be short-term for the most part.

The existence of Federal debt with heavy repayments is potentially deflationary. The usual means of paying it is to debase the currency.

Right now, the financial markets are "correcting" by gunning for those who have been short the U. S. currency and long alternatives such as the Aussie dollar and gold, general commodities, and stocks (especially speculative ones). One gets the anomaly of reading that worries about sovereign debt are moving these markets.

But in normal times, worries about sovereign debt imply a move to gold, not selling thereof to buy increasingly abundant U. S. government debt.

While gold may or may not look to have been overpriced from some future time frame, it will not be said to have been in a bubble unless India suddenly casts away thousands of years of tradition and decides that gold is worthless, but paper money and electronic promises to pay are durable, reliable forms of wealth to pass down from generation to generation.

Gold owners and traders may enjoy the following column, which shows the several sharp corrections in the price of gold with the past decade's bull market:

While public spending advocates such as Dr. Krugman ignore the fifty or sixty trillion dollars of unfunded Federal liabilities for Social Security and Medicare alone, and while his friends in the White House carefully exclude hundreds of billions of current expenditures on Fannie Mae and Freddie Mac from budget calculations, the people of the world are not so easily fooled. They know wheat is for eating, chaff is for discarding, gold is forever, and that Dr. Krugman, one of the anointed G30 members (I remind you) is ultimately just an apologist for Big Finance and the quiet coup of Simon Johnson. Why do I say that?

Back to the column:

. . . well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.

Here's the Big Lie that is slipped into all this sort of mainstream commentary. No, the financial crisis did NOT require bailouts. The bailouts were a choice. A bad choice. The better choice was to require bondholders of the weak companies to come to the aid of their investments, such as by converting bonds to stock (as was proposed for GM and I believe CIT, though memory has become hazy about the details of those disasters). The bailout of the bondholders is a scandal of historic proportions.

The Small Lie in the above statement is that deficit spending really does "stimulate growth". Not so. Look at the miserable employment picture since the deficits exploded, and contrast that with the growth of the 1990s (and 1950s under Eisenhower).

I'll take Tall Paul over Short Paul any day.

Deficits do matter. Borrowed money had better be used well (such as to win a world war). And the private sector really can provide jobs. Paul Krugman shoud channel the '90s, not the '30s. And so should Barack Obama. That would be a change most Americans could believe in.

Copyright (C) Long Lake LLC 2010

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