March 16, 2013

Saturday Morning Essay: Mr. Krugman's Science, Part 6

Brought to you by Peet's Espresso Blend...

"So, while I was dealing with real life yesterday — sorry about the blog silence, but sometimes other things are more important--"

That's not my line.  Paul Krugman began a blog post with that apology recently.  I think a line like that provides an important insight into Krugman's self-regard: the man blogs all day long, every day, but if he has to attend to some family business which distracts him from his incessant, obsessive "posting," even for a day, he assumes that his audience becomes so emotionally distraught at his absence that he should say he's sorry.  How will people get through the day if Krugman doesn't tell them what to think? 

Yet I'm grateful for Mr. Krugman and his Science, for he is the clearest advocate for a specific economic "theory:"  the Keynesian theory of support for a depressed economy through increased government spending.  The central bank (our very own Federal Reserve, which Mr. Krugman loves with a love that is really more than love, as Edgar Allan Poe loved Annabelle Lee) can sometimes tweak an economy back to life through interest rate manipulation, lowering rates and opening up the lending faucets to get things moving; but when we're "up against the zero lower bound" (as Krugman writes 8 or 9 times a day in the course of his 15 or 16 blog posts), where interest rates can go no lower, then unconventional monetary stimulus is the last resort, such as the Fed's crackpot method called "quantitative easing," that is, money printing ad infinitum

After all, something has to work.  That's how "cyclical" analyses of advanced Western economies roll.  A generic recession occurs in a generic economy, and after a certain amount of time the economy recovers.  How fast this occurs depends on the government's response, according to Keynesian theory; Mr. Krugman has been highly critical of the government's response to the crisis since 2009 - it hasn't been aggressive enough, and this "depression" should already be over.

Notably, Mr. Krugman has been more sanguine about the economy lately.  This is odd, in a way, because both major political parties have been preaching the dreaded doctrine of "Austerity," which to a Keynesian is about as appealing as a necklace of garlic bulbs to a vampire.  Several hundred times a week in his blog posts, Mr. Krugman derides the stupid Europeans for their belief in "expansionary austerity," and points to their misguided penny-pinching as the reason for their economic wallowing.  Yet since 2009, when ARRA was passed and America began paving roads all over this great country like there was no tomorrow, the Congress has not really been into Keynesian overspending of the kind Krugman knows we need.

So how can we be recovering if we're busy "Sequestering" and being all austere and everything?  Well, to answer that question: of course, we're not really recovering at all, but Krugman has other theoretical dragons to slay, such as the Republican doctrine of destroying the entitlement safety nets. So to keep the Republicans at bay, Krugman must now argue that the trillion dollar deficits we're running are not in any sense a problem because they are simply related to the current, and temporary, depressed state of the economy.  Well, half of the deficit is so related, because "automatic stabilizers" such as long-term unemployment and food stamps kick in during down times.  The other half of the deficit is no problem because it's about the right size for a GDP behemoth of America's girth. If this sounds like the deficit was just wished away, those are your words, not mine, although I will concede that Mr. Krugman's science does, on the face of things, seem to involve a little circular reasoning.

It does, of course, unless.....good times are just around the corner.  I had alluded in one of my earlier blogs in the Krugman Science Series to a game I play called "Guess What Krugman's Positions Will Be?"  The way it works is that you figure out what theoretical position this intellectually dishonest man will need to take in order to support his overall theoretical superstructure, place your bet, and then see where he comes down.  Recently, Krugman made passing reference to the work of another economist, Robert Gordon, who has begun to sketch out a "no-growth" scenario for the American economy.  Gordon makes a lot of sense, in the same way that Gail Tverberg on her "Our Finite World" blog makes a lot of sense.  This is not a "generic" economy; it's the economy embedded in a finite world which is now reaching the limits outlined in the seminal work of the Club of Rome in 1972 and their landmark analysis, "The Limits to Growth."  Gail Tverberg understands such reasoning; Krugman does not, or will not, at least, allow it to detract from his academic and intellectual standing among Keynesian economists.

Thus, when Krugman wrote in one of the several million blog posts he submits to the New York Times each year that "Gordon is probably wrong," I was not surprised.  Gordon has to be wrong under Keynesian theory or the whole contraption falls into a smoking pile.  Unless growth in the "medium term" is assured (whenever that is), the idea of pouring on more and more debt, and supporting it by printing trillions and trillions of dollars, is pure folly, the prelude to our own Weimar-style blowout. 

Thus, in Krugman's Science, the world's limits (that is, the real world) must be eliminated from the analysis.  Its hard-to-get-at remaining oil (stubbornly stuck at a price that stymies any recovery), its diminishing fresh water supplies, its eroding topsoil, its 7 billion people, its global warming.  The current downturn must be temporary and cyclical, or else Krugman's ideas are at least as dumb as the Republicans', and probably more so.

Here's an interesting angle you won't find described among the billions of words Mr. Krugman publishes in the Times each week.  From Gail Tverberg:

In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil. Oil is used almost exclusively as a transportation fuel and  in many other applications as well (such as construction, farming, pharmaceutical manufacturing, and synthetic fabrics). Expensive oil is not really a substitute, and neither is intermittent electricity. We are reaching other limits as well. Perhaps the most pressing of these is availability of fresh water. Fresh water can be obtained by desalination, but expensive water is not really a substitute for cheap water, for the same reason that expensive oil is not really a substitute for cheap oil. See my post, Our Investment Sinkhole Problem.

The situation of reaching debt limits because of resource limits is a worrisome one, because it is hard to see a way to fix the situation. People often say that our debt problem arises because we have a financial system in which money is loaned into existence, and as a result, requires growth to pay back debt with interest.  I am not sure that this is really the problem.

We have been used to a financial system that “works” in a growing economy. In such a system, it makes sense to take out loans on new business ventures. In such a system,  money is also a store of value. In a shrinking economy, relationships change. Some loans will still “make sense,” but such loans will be a shrinking proportion of current loans, with long-term loans being especially vulnerable. Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.
This is so much closer to the mark, in my opinion.  It is a theoretical framework in the tradition of the Club of Rome and Herman Daly's landmark work, Steady State Economics.  Mr. Krugman is a carnival barker for the Status Quo and go-go finance, masquerading as bleeding-heart liberal with a "conscience."  As the sweet-shooting Bob Somerby says, "We are where we are because of these people."