Mr. Krugman's Science, part 2

Paul Krugman is enormously proud of the "spectacular success" of Keynesian economics as far as its predictions concerning the aftermath of the Great Recession are concerned.  This spectacular success, which Mr. Krugman rushes on each occasion that he writes about it to share, is based upon certain fundamental tenets of the Holy Writ, the General Theory written by John Maynard Keynes during the Great Depression. 

Essentially, these predictions include:

1.  America is stuck in a "liquidity trap," a financial condition in which the Federal Reserve's control over short-term lending rates is ineffective, even after lowering rates practically to zero (zero interest rate policy, or ZIRP).  This is because everybody is broke and doesn't want to borrow money anyway.

2.  In such conditions of a depressed economy, the government can borrow freely at low rates and can print money with abandon without fear of (a) sparking inflation or (b) inciting the "bond vigilantes" to attack the sovereign debt-issuing function; that is, to cause an increase in the borrowing costs of the federal government.

3.  During such depressed times, it is a mistake for the government to engage in austerity; rather, this is the time for the federal government to step in and spend money so as to boost overall demand, which lags because of the broke-ass situation of the American Consumer (Homo consumeris, formerly known as "citizens").

Mr. Krugman has been proven right about everything (not to mention the work of the Great One whose theory he champions), and Mr. Krugman's many detractors and political opponents have been proven wrong.  While others, such as the misguided Bowles-Simpson Committee and the whole of the Republican Party, have urged fiscal restraint on budget cutting, Mr. Krugman believes that the $1 trillion budget deficits we are currently running, which force the government to borrow about 40% of everything it spends, are "too small."  He does not precisely quantify how far off we are in our deficits; we should go deeper in the hole, but Mr. Krugman does not offer precise guidance on how far down.

One must admit that the principles outlined above make some intuitive sense.  The federal government can issue the benchmark ten-year bond at a coupon rate of around 2%, below the rate of inflation; thus, in a way the money the Treasury borrows is essentially free, and can be added to the pile of existing public debt (currently around $11 trillion) while not greatly straining the federal budget's allocation to debt service.  Further, and although this is not a point that Mr. Krugman emphasizes, the Federal Reserve Bank itself actively participates in the Treasury bond market.  This is putting the matter rather modestly, in fact: under the current iteration of Quantitative Easing, the Fed will buy approximately 1/2 trillion more in bonds to add to its existing stash of about $1.4 trillion. Indeed, the Federal Reserve is the largest single holder of U.S. public debt in the world, and will leave the field in the dust over the next 12 months, as its holdings approach $2 trillion.

The Federal Reserve is not permitted, by law, to purchase Treasuries directly at auction.  This would "distort" the market, of course, since one buyer which can print its own money and doesn't care what the return is, would exercise an unfair advantage over other buyers.  However, this is probably a distinction without much difference, because the Fed's purchases on the secondary market are from the Primary Dealers, its own Klaque of Kool Kids who "make the market" in Treasuries at auctions and usually take down about half the issuance.  Since the Primary Dealers know that the Treasuries they purchase can be flipped to the Fed, they are similarly sanguine about their participation; that is, they can keep 'em if they want 'em, but if they don't, Uncle Ben will take them off their hands.

The Federal Reserve operates, thusly, as a sinkhole for U.S. Treasury debt: while the Fed is "credited" with interest payments from the Treasury, in reality this credit is remitted right back to the government, and thus the Treasury makes money on its own debt.  To make this wonderful situation even more perfect, the Fed simply conjured up the money to purchase its Treasuries out of thin air. Thus, the federal government is making money on its debt with money hallucinated out of nothing.

A mind more suspicious than mine or Mr. Krugman's - perhaps your mind, come to think of it - would perhaps at this juncture start wondering whether the interest rate situation, and the failure of the bond vigilantes to appear, might have more to do with this merry-go-round than what you might call "market fundamentals." That is, we're simply buying our own debt with money we create out of thin air.  That's the short form of the situation.  Other purchasers of federal debt, such as the Chinese government, buy Treasuries not so much for yield (which is nonexistent after taking into account inflation) but for currency stabilization purposes.  The Chinese buy Treasuries to boost the value of the dollar against the yuan for trade purposes, and to have some place to stash all those U.S. dollars they receive as the result of shipping stuff to the United States.

As I say, this is not something which Mr. Krugman spends a lot of time on, but it certainly seems worth thinking about as an alternative explanation to that expounded by the great John Maynard Keynes.

Mr. Krugman's Science, Part 1

Paul Krugman occupies a unique place within the intellectual punditry community, and I've often wondered how this came about.  For one thing, I suppose, not many academic economists (Mr. Krugman is a professor at Princeton, from whose stately halls the current Chairman of the Federal Reserve, Ben Bernanke, was emitted) write a regular column in one of the few remaining newspapers of actual national reach, in this case, the New York Times.  Which is to say, America's newspaper of record.  For another, there is the ubiquitous nature of his presence: he's a regular panelist on TV (ABC's "This Week"), he is interviewed frequently on talk shows (Morning Joe, CNBC, Charlie Rose, Bill Moyers), and he blogs perhaps more than any other prominent pundit in the history of the internet.  It appears that he blogs all day long, if you follow the date stamps on his relentless posting, hammering out his wooden, repetitive prose in which he engages in nonstop self-adulation and boasting about the peerlessly accurate nature of his economic predictions, along with vicious attacks on many other economists and political enemies, a cohort that seems to multiply at an alarming rate, as Mr. Krugman goes out of his way to write nasty things about people he's just been with on television, or shared a panel with at an academic conference, or wrote something which challenges one of his cherished Keynesian axioms.

It helps also that Mr. Krugman is for all the Right Things.  The Huffington Post, for example, the liberal riposte to the numerous right wing sites (the Drudge Report, Red State, Powerline) idolizes Mr. Krugman, republishing his columns and blogs and usually including a summary of "Krugman's Greatest Takedowns," a compilation of Mr. Krugman's attacks on arch-villains such as Paul Ryan, Mitt Romney and Chris Christie.  When you read such "classic" takedowns, you're struck by how lame they all are, how anemic in their thrust.  How dull.  Well, you think that way if you're like me.

What I admire is Mr. Krugman's conscious and deliberate construction of his persona as a showman and as the bete noire of the conservative side of politics.  That isn't easy to do if you're an economist, especially if you look rather ill-at-ease in your television appearances.  He won the Noble Prize for Economics (an award which was not part of the original Alfred Nobel will of 1895 but was endowed in 1968 by the Sveriges Riksbank, which funds the award) largely, I believe, because he used his column at the Times to denounce and attack the Bush Administration and the Iraq War from 2003 forward.  This played very well in Europe, of course, and raised Mr. Krugman's visibility markedly.  It appeared to me that the Nobel Committee had to rummage around in Mr. Krugman's back issues to find something that was academically interesting enough to justify the Prize, and came up with something (from 1988, I believe) about international trade.  Mr. Krugman discovered that if a country engaged in international trade establishes an industry (whether or not you might think such an industry is peculiarly suited to that nation's "natural" production), then other supportive industries will spring up around such an "anchoring" industry and give that nation a competitive advantage internationally.  This might strike you as perhaps one notch slightly above obvious common sense, but the Committee, having decided that this worthy American ought to receive the Prize for his outspoken resistance to the despised Bush Administration, needed to find something "original," and this is what they came up with.

I agreed with Paul Krugman's position on the Iraq War, and in those days he was very concerned about budget deficits caused by simultaneously (1) reducing the top marginal income tax rate on the plutocrats while (2) embarking on a large military buildup and invading two Muslim countries. Alas, his critique was no more effective in curtailing the massive American interventions in Afghanistan and Iraq than anyone else in this country; the electorate is virtually powerless to stop the relentless incursions of the American military into any country it chooses.  All such decisions are made in the Emerald City of Washington, D.C., far from any accountability, and when we elect a liberal naif, such as the genial Mr. Obama, to take on the entrenched power of the military-industrial complex, we see how rapidly such an out-of-his-depth personality gets co-opted and turned into another spokesman for the status quo.  Guantanamo remains open, the wars in the Muslim world proliferate and accelerate, Bin Laden is shot with no thought given to his capture, the Obama Administration cooperates in the making of a hagiographic movie about the efficacy of torture in the war on terror.  And moving past the MIC into the rest of our Corporatacracy, the Wall Street banks remain Too Big to Control (let alone dream of prosecuting), Big Pharma runs the medical care industry (and Obamacare), and the "changes" are in rhetoric and in "social issues" such as who can marry whom and who can stay in the country legally, and whether a drug-addled citizenry can be convinced not to shoot each other so much if we reduce the ammo clips from 30 to 10 bullets.

In such a political climate, maybe the smart players, like Krugman and Obama, learn the best way to play the game as a nominal liberal is to make all the right noises (from time to time) while remaining a power player and stalwart supporter of the Establishment.  That is, as a liberal who is for all the right things provided that nothing substantial gets changed in the way we do things now.

As I continue this musing, I will consider the Keynesian economics of Mr. Krugman, and describe how I play one of my favorite intellectual games:  Guess what Mr. Krugman's position will be on this!